Initiation: November 14, 2018
J Capital Research ("J Cap") is an investment advisor to private funds. J Cap has analyzed the U.S.-listed company China Customer Relations Centers (“CCRC”) and is hereby publishing the outcome and the conclusions of our analysis, based on publicly available information. We or our clients may be short shares of CCRC, and, for this reason, there might be a conflict of interest.
CCRC, a call center operator, has had its share price propped up by a buyout offer that we think is completely implausible. The business itself is being run by managers who have not disclosed their stakes in related companies.
Bad bid: We think the recent $16 take-private bid was an
attempt to prop up share value. Our interviews in China and
the company’s own Nasdaq prospectus suggest that Guangzhou Cornerstone, the company that says it will raise the money for the bid, has little capability to come up with the funding required.
Low profits: We think this call center operator is improperly
inflating profits by diverting costs into undisclosed related
parties. This could drive up optical results while leaving the
shareholders’ cupboard bare. CCRC reports 26% gross margins to U.S. investors and just 12% to its Chinese regulators. The company also reports lower revenue in China than it does in its SEC filings. Net profit reported in China in 2017 was just one-third of that reported in the U.S.
Shockingly bold: Company managers have established
an undisclosed set of companies that transact with CCRC
and may tap into shareholder assets. Without disclosing
their stake, individual managers own the parent company of
CCRC’s VIE, giving them effective control. Unsurprisingly, cash flows in only one direction in this company: from U.S. shareholders into the Chinese entities.
Making capital disappear: Capital appears to have been
diverted into other companies owned by management. That
would allow the undisclosed companies to absorb losses that
otherwise would show up in CCRC. CCRC management has
even established an offshore subsidiary of the VIE that could
potentially pull capital out of the China business into the
hands of management.
CCRC has lied to Chinese regulators. In 2016, the company
was sanctioned for making false reports to the local government, probably about the company’s financial situation, though the records do not specify what was hidden.
Listing just for show. Chinese tax records indicate that
CCRC’s shareholder-owned entity is an empty vessel, with no
revenue and only a small portion of the cash CCRC reports
holding. This is very different from the big U.S.-listed Chinese internet companies; the legitimate ones use their VIEs as pass-throughs. For CCRC, all the revenue sits in a complex, opaque VIE company. We believe shareholders will not see a penny.
Low-end underwriting team: Investors shouldn’t be
surprised that a company of this nature would choose to list
with some of the weakest underwriters and auditors on the
street. In our opinion, ViewTrade Securities and MaloneBailey LLP are about as barrel-scraping as they come. ViewTrade is a stock promoter that has brought nine Chinese companies to market since 2015. With very dubious businesses, all but two of these companies are trading far below their IPO prices. As for MaloneBailey, the PCAOB cited this company as auditor of the most Chinese reverse mergers, a record which speaks for itself. And CCRC has its own expert in questionable financial statements. The company’s “senior accounting consultant” in charge of financial reporting for CCRC was formerly the CFO
of Tianli Agritech (OINK), a Chinese reverse merger widely
suspected of fraud.
Tall tales: We found the recent first-half report, showing
90% revenue growth, laughable despite the big bump it
achieved for the share price. It’s easy to book revenue if the
clients don’t actually pay.
76% over-valued. We are short CCRC and value the company
at $2.87 per share, a 76% discount to the company’s
current traded value. We assign the company a 15x multiple
of 2017 profit reported in China, which is about $3.5 mln, as
opposed to profit reported to U.S. investors. We consider the
multiple very fair: we do not believe shareholders will ever
retrieve the assets this company claims to have.