J Capital is short GDS

Be warned. We are short-sellers. We are biased. We do our best to find and present facts, based on extensive primary research and using public sources. But we will profit if these stocks decline in value. We do not offer advice. We present our views.

Debt Trap

GDS is a fraud. At least 25% of its revenue is fraudulent. Unlike most Chinese companies, GDS creates the fake revenue by round-tripping its own debt and capex. As GDS’s revenue line grows, so does the amount of debt it needs to raise to support the illusion. 

In addition to round-tripping, GDS aggressively recognizes future revenues, a portion of which we believe will never be realized. Faked revenue comes without costs, so the ploy also increases reported EBITDA and reduces optical leverage. Using this and other strategies, GDS has persuaded investors to accept its highly customized metrics and argues that it will be the winner in a take-all market. That is simply not true.

By examining dozens of financial statements submitted to the Chinese government, we’ve identified about ¥1.3 bln in unreported debt. We also question the cash balances. Interest income in 2018 was ¥19.2 mln, for an average 0.9% yield, although fixed-term deposits in China were yielding about 3% in 2018. Meanwhile, the company pays up to 9.7% for loans despite its large reported cash balances. No wonder GDS is “actively” seeking new sources of debt to get through the year.
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After about a year of research, more than 90 interviews, and visits to all but nine of the 70 data centers that GDS has reported in service or under construction, we have concluded that GDS is a sophisticated Ponzi. With financial markets repricing risk in the last few weeks, we believe the debt pyramid could collapse.

Failed data center: Chengdu

Fraudulent acquisition strategy
Oh dear, so embarrassing.
​Cartoon by Johannes Leak

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ENPH NASDAQ

ENPHRainy Days for Enphase

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Photo by Evgeni Tcherkasski on Unsplash
  • Stuffed: We think that Enphase is pulling forward sales and stuffing distribution channels in order to make sales appear better than they are. We have analyzed industry reports and estimate that an amazing seven months of inventory is sitting in distribution channels, versus industry norms of about four to six weeks. We believe Enphase is losing market share in solar inverters.
  • Margin boosting: Inventory build started with the installation of Enphase’s new COO in Q2 2017, who was elevated to CEO in September of that year. Kothandaraman’s arrival coincided with the dizzying ascent of gross margins from 18% to 34% over nine quarters in which ENPH consistently shipped more product than appears to have been installed. Enphase’s disclosures since late 2017 appear to have moved farther and farther from reality. The company has stopped disclosing key metrics and started to stonewall analysts, all the while awarding more shares to top management.
  • Being run for the money: A last-minute bailout by a VC in 2016 ushered in a new set of managers who, in our opinion, focused on cutting pennies from cost and handsomely rewarding executives without regard to company culture or morale. Meanwhile, former employees tell us that Ahmad Chatila, ex-CEO of SunEdison, who precipitated the biggest bankruptcy of 2016, is acting as shadow CEO. 
  • SunPower: Buying a Channel Enphase acquired SunPower’s microinverter business. What they got was a sales agreement that has not helped market share. Management of the two companies are close, and SunPower is a major holder of the stock. 
  • Asymptotic Growth for Management to Hit Targets: Q1 and Q2 2019 is where revenue growth, margin and implied market share have unbelievably shot up, leading the share price to double. Management have sold down shares and hit massive bonus targets. 

BGNE NASDAQ

No Cure

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A BeiGene shell company in Guangzhou
  • We believe that BeiGene has no future, and management knows it. We have clear evidence that the company is faking sales in order to persuade investors that it can develop a successful sales platform in China for pharmaceuticals; we suspect management may also be skimming R&D and capital budgets. At best, this is a poorly managed company pursuing commoditized drugs, with internal controls, even in the context of Chinese companies, that we find to be lax. At worst, BeiGene executives may be robbing shareholders.
  • BeiGene executives keep telling investors they have a once-in-a-lifetime opportunity to invest another round of capital in a native Chinese biotech company. Clearly, they see an opportunity, but not for investors. Top management has sold or registered to sell $322 mln in stock, the founder accounting for $189 mln of that. 
  • BeiGene owns three manufacturing facilities, racking up $157 mln in net fixed assets since 2016, with another roughly $300 mln committed, and has paid $25 mln toward a fourth despite having no drugs to manufacture. Irrational spending of this level in a highly regulated and corrupt environment like China’s is a red flag. BeiGene gave away 10% of what they claim to be one of two coming blockbuster drugs to one of these manufacturers, a joint venture with a Guangzhou government entity.
  • Our extensive interviews in China and review of Chinese Tax Department financial statements that BeiGene has invented over $154 mln in revenues since Q4 2017, when it took over sales of Celgene drugs in China, an overstatement of 133%.
  • Reported staff costs within China are about $65 mln higher than we believe is feasible given staff compensation standards. R&D expenditure overall is eight times higher than the direct competition. Without a single drug approved in its nine-year history, this further strengthens our belief that the company is desperately wasteful or padding expenses. 
  • BeiGene portrays itself as a native-son pharmaceutical company favored by regulators. In reality, BeiGene stands at the back of the line for approvals, with other foreign companies. We interviewed Chinese regulators, who said that BeiGene does not enjoy the privilege of fast-track approval that a fully Chinese firm would. We have confirmed with regulators that trials for BeiGene’s own drugs cannot be completed before the end of this year, meaning there will be no new BeiGene drug in the Chinese reimbursement lists this year. 
  • A BeiGene subsidiary with no address or operations (pictured above)—and which has not been audited—shows $69.8 mln in “costs.” We think that money was used to roundtrip sales.
  • In 2018, BeiGene made a nonsensical decision to purchase a building on which it already had a 10-year lease for R&D in Beijing, spending $38 mln. Based on local comparisons, that price seems to be at least $10 mln too much. There appears to have been zero commercial rationale, and the seller looks suspiciously like a related party.
  • BeiGene has little to show for nine years of operations. With no commercialized IP assets of its own, poor internal controls over huge expenditures, and a sales team that competitors call “weak.” We cannot find value in this speculative bubble of a company and blame market frenzy for driving the company “valuation” to $8.8 bln.

AOS NYSE

 In Hot Water

Pleading the fifth on China operations: Despite never appearing in the financial filings or being mentioned on conference calls, Jiangsu UTP Supply Chain is involved in almost every aspect of A.O. Smith’s China business. UTP’s involvement spans the acquisition of raw materials, the hiring of labor, potentially co-owning factories, marketing, and most notably “accepting” inventory and financing AOS distributors. We estimate that UTP may be responsible for as much as 75% of AOS China sales. 
The UTP relationship has obscured China business performance and financial statements: The UTP partnership has allowed AOS to inflate gross margins and mask the actual China revenue slowdown through distributer-financed channel stuffing. We also believe that the irreconcilable capex, R&D and asset inventory accounts are being used as cookie jars to preserve the “integrity” of the financial statements while hiding UTP’s involvement. Our detailed distributor channel checks indicate China revenue will fall 21% in 2019 vs management’s claims of a 6-8% decline.
Is the cash really there? We believe that A.O. Smith does not actually have access to all of the $539 mln that reportedly sits in China—about 84% of the company’s total cash at yearend 2018. We have conducted dozens of interviews in China and believe that AOS may have used its cash for distributor loans to prop up sales. That would mean the money is in escrow and cannot be touched until loans are repaid. What’s more, distributor loans are at risk in a weakening market. Chinese distributors of AOS products—financially imperiled companies--are being financed at 18% to take AOS inventory, and many are holding six months of inventory. These companies are at risk of default—and AOS could be on the hook.

FANH NASDAQ

Who owns Fanhua? Not the U.S. Shareholders.

Fanhua (FANH) is a U.S.-listed, China-based company that claims primarily to distribute insurance products. Before Q4 2017, most FANH income came from property and casualty insurance. In Q4, the company claimed to divest most of its P&C insurance business, as well as its insurance brokerage business. Currently, FANH is described in its disclosures as primarily a distributor of life insurance. Over the course of our months-long investigation, we concluded that Fanhua Inc. is nothing but a shell game among related parties that allows executives to loot investor cash.
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