foreign listed stocks

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The Fraud Industry part 2: Reverse mergers are scams + shady transfer agents

The SEC has a bunch of rules that make it more annoying to run a pump and dump.  This has spawned a mini-industry of professionals who help pump and dumpers exploit the loopholes in those rules targeting reverse mergers, which is the most common vehicle for pump and dumps to be listed.

The sketchy transfer agents will publish guides on their website about what they are and aren’t willing to do when it comes to their clients getting around regulations such as Rule 144.

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Understanding China

China has a highly unusual business environment- the government is currently holding 2 Canadians hostage to benefit a private company (Huawei).  Those with the right connections regularly use government resources for their own benefit.  As far as investing in Chinese stocks go, it is a trap for foreign capital:

  1. Massive fraud.
  2. The CCP encourages mainlanders to be racist, nationalist, and xenophobic.
  3. Because of state-sponsored racism and xenophobia, there are far fewer (or no) consequences when somebody cheats a foreigner versus an ethnic Han Chinese citizen.
  4. The CCP often exploits foreign capital and sponsors the theft of intellectual property.
  5. Relations between the CCP and most developed countries will deteriorate because the CCP has been increasingly antagonistic towards other countries.  The resulting trade wars will hurt China’s economy and make the environment sketchier for foreign capital.

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CNIT’s market cap jumped to $81M

For those of you interested in Chinese reverse mergers… CNIT’s share price jumped by around two-thirds today.

Back in 2013 and 2015, I wrote about the company.  In 2015, CNIT bought a company called Biznest.  Apparently they did not own Biznest already… despite CNIT email addresses showing up on Biznest’s domain registration and despite having the CNIT logo on Biznest’s website.

*Disclosure:  I am short CNIT.

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The China hustle lives on

There are reasons as to why Chinese stocks on non-Chinese exchanges have been a problem in the past:

  1. The VIE structure used for many China stocks is dubious.
  2. China is an easily-marketable theme that attracted the pump and dump industry.
  3. No repercussions for egregious accounting fraud.

Have investors learned their lesson?  Apparently not!  More Chinese stocks with VIE structures are being IPOed.  This is despite the VIE structure becoming even more dubious.  China Law Blog has an excellent post explaining why the VIE (should have) died on January 19, 2015.  Go read it.

Draft makes clear that the State Council understands how VIEs work and that their sole function is to evade the requirements of Chinese law. The Draft makes clear that such evasion is illegal and will be prohibited upon the effective date of the new investment law.

I hope that the investors who buy into the newly-minted Chinese VIEs lend their shares out.

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Chinese companies with poorly executed websites – 3 years later

3 years ago, I wrote about Chinese companies with poorly executed websites.  Specifically, I pointed out that YONG and CXDC didn’t have great websites.  (For your information: CXDC has a market cap of $235M and the borrow is about 7%.)  Let’s revisit these companies.

  1. YONG:  Back then, I took a large position in YONG put options, betting on the Yongye takeover bid failing.  Unfortunately, the takeover bid did go through and I lost money.  Fast forward 3 years, their websites have disappeared.  Yongyeintl.com was the website aimed at investors.  It went dark on or before September 14, 2014 according to archive.org, shortly after the going-private transaction.  China-yongye.com was the Chinese language website.  It went dark on or before February 28, 2017 – the website is currently an error page (in Chinese).  So now you understand my irritation with losing money betting against YONG.  While I don’t know what happened to this company, I think it’s safe to say that their website execution got worse.
  2. CXDC:  Back then, they did not seem to have paid for their stock photography.  Now, they have rectified that.  However, the copy on this website is pretty awful.  The copy on the top of the website (archive.org) reads: “Welcome to China XD Chinese website”.  Those are the exact words… in English.  The copy on the bottom reads: “In case of information discrepancy between the Chinese website and English website of the company, the English website shall prevail”.  That’s quite the paradox- we’re welcomed to the Chinese website but apparently it is the website that will prevail in case of [sic] “information discrepancy”.  On top of that, a lot of the links on the website do not work (e.g. I could not figure out how to watch their corporate video).  But hey, at least they paid for their stock photography.

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Hollysys: these guys are really good at putting up phenomenal numbers

(*Disclosure: I am short.)

Hollysys is a Chinese company that designs high-tech stuff.  Interestingly enough, they were able to grow revenues, profits, and operating cash flow without having to increase capex.  See the chart on the left from page 31 from the latest investor presentation:

investor-presentation-page-31

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Ever-Glory (EVK) – Domain registration + web footprint

EVK’s English/investor website is at everglorygroup.com.  The site’s domain registration shows the Registrant Organization as “JIANGSU EVER-GLORY INTERNATIONAL GROUP CORPORATION” and “JiangSu Ever-glory Group Co., Ltd.”.

According to EVK’s 10-K, this does not seem to correspond to any of EVK’s subsidiaries or the parent company (see the subsidiary diagram in the 10-K).

image21i subsidiary chartevk-domain-registration

It does seem to correspond to Jiangsu Ever-Glory International Group Corporation (“Jiangsu Ever-Glory”) [emphasis mine].  The 10-K describes this related-party entity as follows:

Jiangsu Ever-Glory International Group Corporation (“Jiangsu Ever-Glory”)

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Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang.

This is a little strange.  Normally companies put their own information in their own domain registrations.  (To be fair, you can put in whatever you want for a domain registration.  One benefit of accurate domain registration information is that following ICANN rules can help companies in ownership and trademark disputes over a domain name.)

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