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.

J Capital is short WiseTech (WTC AU, WTCHF US)

WiseTech’s response to our first report follows a well-worn playbook by cherry picking immaterial points to refute, remaining silent on major points, and taking a high moral tone about “short sellers.” Tellingly, the company failed to provide any information on the abrupt resignation of the head of the Audit Committee, and it confirmed that, indeed, key subsidiaries with the majority of profit are not individually audited.
  • Overstated profit: We estimate that overstated profit in the three years since WiseTech listed may be as high as $116 mln.1 That would be an overstatement of 178%.
  • Overstated organic growth: Using the company’s own numbers, we estimate WiseTech’s underlying, organic growth rate at 10% not the 25% claimed. That means an estimated 80% of the company’s top-line growth is from purchased revenue.
  • Suspect European revenue growth: We estimate that European revenues were overstated by as much as $48 mln in FY 2018. We have obtained financial fillings of European subsidiaries that showed declines in revenue and that support our estimates, and we have spoken with former employees who reported much lower organic growth.
  • How do they get away with it? WiseTech is able to shield subsidiaries from audit scrutiny through an Australian peculiarity called the “deed of cross guarantee.” Simply put, the auditors aren't looking at the numbers closely enough. WiseTech’s Australian subsidiaries, through which much of the international revenue has been channeled, have been shielded from audit scrutiny.
  • Chair of Audit Committee resigned: On Tuesday, Christine Holman, who joined the board only 10 months ago, in December 2018, and is chair of the Audit and Risk Management Committee, resigned.
  • IPO magic: Prior to IPO, WiseTech profit growth was around 6%, but it soared by 1,100%, from $3.4 to $44.2 mln, in FY 2017. We find this suspect, and a number of changes to financial oversight seem suspicious: the CFO was swapped out for someone who had been at GE for 24 years and had no software experience. The lead audit partner changed.
  • Paying more for less: Since its public markets debut, WiseTech has spent $400 mln acquiring 34 companies. We do not think the acquisitions have been great logistics software companies that can gain from being part of the WTC network. Instead, WiseTech’s acquisition spree looks like a frantic effort to maintain the narrative that this is a fast-growing technology business.
  • Poorly integrated, underperforming acquisitions: Our interviews with 18 former employees and competitors show that most acquisitions remain stand-alones two years post acquisition, as WiseTech fails to devote resources to integration. When WiseTech does attempt to integrate these businesses, it usually raises prices on existing customers, and they tend to go elsewhere. 
  • Stock promote: You may be forgiven for thinking that WiseTech, trading at 30x revenue, is an Australian tech darling like Atlassian (TEAM US), built by two coders in their garage, that has become a global behemoth. WiseTech is more of a clunker. It began life in 1994 as Eagle Developments International and was unspectacular for 20 years. The company has been cobbled together through hasty acquisitions. Its core product is held in low regard by clients. Revenue grew at a 12.5% CAGR in the six years before listing. After listing, revenue growth leapt to 40% annually. We have spent months analyzing the company and concluded that WiseTech is manipulating its accounts to make growth and profit appear higher than they really are.
  • Who’s making the money? The insiders are cashing in on the story that WiseTech is pushing out to investors. Management and directors have sold $259 mln in stock since listing. Public investors will not be as fortunate. That is why we are short the stock.
  • Paying more for less: Since its public markets debut, WiseTech has spent $400 mln acquiring 34 companies. We do not think the acquisitions have been great logistics software companies that can gain from being part of the WTC network. Instead, WiseTech’s acquisition spree looks like a frantic effort to maintain the narrative that this is a fast-growing technology business. 
  • Poorly integrated, underperforming acquisitions: Our interviews with 18 former employees and competitors show that most acquisitions remain standalones two years post acquisition, as WiseTech fails to devote resources to integration. When WiseTech does attempt to integrate these businesses, it usually raises prices on existing customers, and they tend to go elsewhere. 
  • Desperate? WiseTech has been offering virtually free access to the CargoWise platform. In two interviews, we learned that these price cuts are measures to counteract decline in WiseTech’s home market, Australia.
  • Faltering: We believe WiseTech is misleading investors that the customer attrition is less than 1% on its CargoWise One platform. The company fails to mention the huge churn in acquired customers who are not converted to the CargoWise platform. Not only do many of these customers fail to convert, but in many cases, they look for alternative platforms. We commissioned a third-party survey of 13 customers featured on WiseTech’s website and found that 25% of them are looking to switch.
  • Cashing out: Management and directors who have sold $259 mln since listing have no incentive to slow down the pace of acquisition, because the perception of fast growth supports a high share value.
  • Exaggerated claims: We found that WiseTech has misrepresented its client relationships. They claim 25 of the top 25 freight forwarding companies as “customers,” while we found only seven use CargoWise One. We commissioned a survey of companies WiseTech touts on its website as model clients. Half said WiseTech’s service was terrible, and 25% wanted to switch providers.

More

BGNE NASDAQ

Picture
A BeiGene shell company in Guangzhou

No Cure

  • 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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