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:
- Massive fraud.
- The CCP encourages mainlanders to be racist, nationalist, and xenophobic.
- 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.
- The CCP often exploits foreign capital and sponsors the theft of intellectual property.
- 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.
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.
There are reasons as to why Chinese stocks on non-Chinese exchanges have been a problem in the past:
- The VIE structure used for many China stocks is dubious.
- China is an easily-marketable theme that attracted the pump and dump industry.
- 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.
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.
- 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.
- 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.
(*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:
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).
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”)
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.)
To search for other websites with a particular image, right-click the image in Chrome or Firefox. Then click “Search Google for this image”.
This can be used to:
- Stalk individuals.
- Find a foreign-listed Chinese company’s other websites. It can also find other Chinese websites that talk about a particular company.
Open SEO Stats is a handy little extension for the Chrome Web Browser. Here are some mildly useful things you can glean from this tool.
Generally, key executive officers and insiders of a publicly-traded company do not register their company’s domain. They let an IT person or web designer handle the task. Domain registration records tend to be a reflection of what the lower-level employee thinks who actually owns a particular domain name.
Looking at domain registration records can potentially be a useful tool for detecting frauds. Insiders may be lying about the ownership of a particular company or subsidiary. Fraudsters may unintentionally fail to cover their tracks because many people do not realize that domain registration records are public. The domain registration records may tell a different story than a company’s SEC filings. That is why I look.
A British Columbia Securities Commission (BCSC) panel dismissed fraud allegations against Jon Richard Carnes.
While Carnes theoretically won, the panel’s written decision was very biased against short sellers. Firstly, the BCSC failed to realize that they went after the wrong people (this is a pattern that repeats through history with many regulators… it’s nothing new). However, the panel did not see value in creating an environment where people can expose fraud without fear of repercussions and nasty legal bills from regulators.
More importantly, one of Carnes’ researchers (Huang Kun) was wrongfully imprisoned in a Chinese jail and suffered abuse while detained. Money is one thing. Having your human rights violated is another. I believe that Carnes’ lawyer(s) presented newspaper articles that describe Kun’s story. Exhibit EX00344 (a BCSC webpage lists the hundreds of exhibits filed) seems to be a Globe and Mail article that describes what happened to Huang Kun in China. The panel’s written decision does not seem to mention Huang Kun at all. His name does not appear in the decision anywhere. I am very disturbed at what appears to be the panel white washing the abuses that have occurred.