We conclude that China Internet Financial Services Inc. (NASDAQ:CIFS) is a King Zero – just another worthless China fraud.
- We believe zero to almost none of CIFS’s purported business is real.
- PRC financials show that CIFS overstated its 2016 revenue by 5x.
- Every one of the purported borrowers to which CIFS disclosed having made loans (accounting for 84.2% of loan balances) appears to be a sham counterparty.
- (The purported borrowers of the remaining 15.8% of reported loan balances were not disclosed; however, we strongly suspect that most – if not all – of these loans and associated income are also fabrications.)
- Therefore, the associated loans, revenue, and profits appear to be completely fake.
- CIFS has disclosed doing business with two related parties, and even those loans and associated revenue appear to be fraudulent.
- CIFS’s recently announced “big data” company purchase also appears to be a lie. It is from sham counterparties, and therefore a fraudulent purchase of an empty box, rather than of a real or even promising company.
- 47.3% of CIFS’s reported 2016 net income purportedly was generated by its Kashgar subsidiary; however, that subsidiary existed for only two days in 2016.
- Further, Kashgar, accurately in our view, reported in its PRC financials zero revenue and income.
- CIFS is too good to be true – claiming to turn a seeming commoditized business model into an overnight juggernaut with purported gross margins over 97% and net margins over 70%.
- However, Chairman Lin seems to be an obscure and fairly unsuccessful businessman, which in our view makes him about number 450 million in line to pull off a business miracle like this.
- CIFS is therefore one of the most implausible – if not the most implausible – China fraud stories we have ever come across.
- CIFS’s corporate structure ensures that not only does Chairman Lin get to keep investors’ money, not have to worry about prison or any legal repercussions, but the ownership of his company is not the least bit at risk.
- In other words, this structure is the coup de grace of the numerous middle fingers he’s extending at U.S. investors. The Company has responded on their website. It is below.
BEIJING, April 30, 2018 /PRNewswire/ -- China Internet Nationwide Financial Services Inc. (NASDAQ: CIFS
) ("CIFS" or the "Company"), a leading financial advisory services company, today announced that the independent special committee of the Board of Directors of the Company, comprising three independent directors of the Company, Ms. Sheve Li Tay, Mr. Buting Yang and Mr. Hong Huang (the "Special Committee"), has completed its investigation into the allegations raised in the report issued by Muddy Waters LLC dated December 20, 2017 (the "Report"). The Special Committee commenced its investigation in January 2018 and was assisted by a global law firm that served as independent legal counsel and by the forensic auditors that its counsel retained. Summary of Major Findings
The Report made allegations against the Company and below is a summary of the major findings of the investigation generally keyed to those allegations:
1. No material inconsistency between the gross revenue in the Company's books and records and the revenue reported in its SEC reports. Gross revenue in the Company's books and records showed no material inconsistency with the gross revenue reported in its Registration Statement on Form F-1 filed with the Securities and Exchange Commission ("SEC ") on April 17, 2017. It was determined that the Company had underreported its revenue to the PRC's State Administration of Industry & Commerce ("SAIC").
2. Loans were verified. The loans to Beijing Ailirui Trading Co., Ltd, Xiamen Jingsu Trading Co. Ltd, Fujian Jin Xin Import Export Trading Co. Ltd and Cai Long Ge (the "borrowers") were in fact made and were repaid with appropriate interest. The borrowers were not "sham" parties.
3. Transactions with Xiamen Beiruichen Trading Co. Ltd and Xiamen Luye Trading Co. Ltd verified. The transactions with Xiamen Beiruichen Trading Co. Ltd and Xiamen Luye Trading Co. Ltd have been verified and the Company reported the relevant revenue in its SEC filings.
4. Acquisition of Beijing Anytrust Science & Technology Co. Ltd ("Anytrust") was a valid transaction. The Company asked Beijing Tianhuang Tongda Technology Co. Ltd to acquire the "big data" company Anytrust and then, for an additional fee, sell it to the Company because the Company did not want to reveal its identity to the seller of Anytrust for fear that the latter would demand a higher selling price for Anytrust if it knew that it was negotiating with a public company.
5. Kashgar Sheng Yingxin Enterprise Consulting Co., Ltd. ("Kashgar SYX")'s 2016 revenue verified. Although Kashgar SYX was only incorporated on December 29, 2016, its reported revenue was significant because customers of its parent, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd ("SYX") in the latter half of 2016, replaced their contracts entered with SYX with Kashgar SYX once Kashgar SYX was incorporated to benefit from certain preferential tax treatments. The revenue from these customers was then booked under Kashgar SYX.
6. The Company's net profit margin compared. In order to establish whether the Company's 2016 profit margins were plausible, the Special Committee compared the Company's net profit margin to the net profit margin of two PRC financial services companies listed on the NASDAQ – one had higher margin and the other, lower.
7. Wealth products services business was sold. The Company's former wealth products services business, described in the Report as a "P2P business," was sold to a third party approximately 2 years prior to the Company's IPO. Accordingly, the Company did not mislead its investors by not disclosing its prior sold business.
8. Internet Content Provider ("ICP") license and the Company's Variable Interest Entity ("VIE") structure verified. The Company's ICP license has been verified and its use of the VIE structure is consistent with its strategy to pursue a line of business where foreign ownership is restricted by China's Ministry of Commerce.
The Special Committee recognizes that its investigation was tailored to investigate the allegations made in the Report, and was not designed to be the equivalent of an audit conducted by the Company's independent auditors. As a result of its investigation, the Special Committee, on behalf of the Company, has adopted, and the management will in the near future implement, a series of measures intended to improve the Company's operations, compliance and internal controls. These measures include, among other things, enhanced corporate policies and practices governing the management of acquisitions and requiring the reconciliation of reports filed with the SAIC and reports filed with the SEC.
An interesting note is that, effective 02-27-2019, the Short Interst in CIFS is only 1.7% - less than 2%.