Initiation: January 17, 2019
J Capital Research ("J Cap") is an investment advisor to private funds. J Cap has analyzed the U.S.-listed company Fanhua, Inc. (“FANH”) 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 FANH, and, for this reason, there might be a conflict of interest.
In a major restructuring last year, Fanhua claimed to have sold its P&C division. Actually, the company simply robbed public shareholders. It gave 11 of the 19 companies targeted for sale to a Fanhua executive and misreported the transfers as a sale to a third party. The remaining companies are either mere shells or were transferred to a company we suspect is related to Fanhua executives.
We estimate that Fanhua moved at least $136 mln in 2017 revenues off the books but still under executive control.
In its life as a public company, Fanhua has regularly enriched its executives by buying companies from individual managers then divesting them again or simply gifting companies to managers, all without disclosure. In our report, we detail more than a dozen such cases, but there are many more.
A new share compensation scheme, the 521 Scheme,
has been used to justify paying $250 mln to company co-founder Lai Qiuping. We believe the plan is simply a diversion. It closely resembles the scheme that collapsed the company’s share price in late 2010.
Our interviews in China indicate that Fanhua has guaranteed
around ¥1 bln in financial products sold by Lai’s privately owned company. We believe these are undisclosed related-party transactions.
Fanhua developed a huge commercial real estate project in the founder’s hometown for more than two years without telling investors. Fanhua has been pre-selling residential units there for delivery in 2020—which puts the company on the hook to spend to build out those units. The project was finally mentioned, in passing, on a November 2018 company conference call.
Investors are skeptical that regulators are doing their job in
China—how much of this company’s value has been stolen? Based on the evidence, we believe this company is uninvestable.