Anonymous Analytics is out with a new short report on Credit China FinTech Holdings – see all the details below
Credit china fintech holdings
Credit China FinTech Holdings is a US$2 billion company engaged in the provision of traditional short-term loans and internet-based financial transactions. Credit China is currently listed on the alternative board of the Hong Kong Stock Exchange, but is looking to be promoted to the Main Board, which the Company claims can happen as early as this month.
Based on our research, we believe that Credit China has misled investors by engaging in a number of questionable or otherwise undisclosed related-party transactions designed to funnel money out of the Company and/or inflate earnings. Among them:
The Acquisition of Shanghai Jifu: The largest acquisitions in Credit China’s history as a publicly-traded company occurred in April 2016 when it acquired a 35% stake in a company called Shanghai Jifu for cash and stock consideration of RMB856 million. The Company claims Shanghai Jifu was an acquisition from independent third-parties. However, our research suggests that it was an undisclosed related-party transaction involving a key individual of Credit China.
The Shanghai Property Purchase: In December 2013 Credit China purchased a property in Shanghai for RMB396 million from a purportedly independent borrower who had defaulted on a loan. In the three weeks following the foreclosure but prior to year-end 2013, Credit China recorded a revaluation gain of approximately RMB76 million. This gain represented 37% of Credit China’s 2013 reported pre-tax profit of RMB207 million.
Credit China claims that it arrived at the RMB396 million valuation through an internal credit assessment. However, SAIC filings show that the property had been valued at RMB244 million only six months prior by an accredited national class one property valuer. Based on the fact pattern, we believe the property was purchased at an inflated price as a means of funneling money out of the Company, while the revaluation gain was recognized to inflate earnings.
The 30-Minute Trade: Credit China trades at a comparatively nose-bleed multiple of 45x 2017 earnings, while its closest competitor trades at less than 10x. Inspired by the Financial Time’s analysis of Hanergy’s unusual trading patterns, we have conducted an analysis of the intraday trading patterns of Credit China shares for the past six months. According to our analysis, a strategy of buying Credit China shares at 3:30pm and selling at 4:00pm would have seen HK$100 grow to HK$219.31 versus a buy-and-hold strategy over the same period of HK$128.62. There were only two other stocks in our review of Hong Kong-listed companies that performed better in the last 30 minutes of trading.
Accordingly, we think Credit China FinTech Holdings is just another company with a share price value dictated more by end-of-day trading manipulation than business fundamentals.
Conclusion: Given the evidence in this report, we believe Credit China FinTech Holdings has a better chance of attracting the attention of the SFC’s newly established GEM team than it does being promoted to the Main Board.
Based on fundamentals alone – to make no mention to the issues we’ve raised – we believe Credit China should trade more in-line with its peer at 10x 2017 earnings, or HK$0.17 per share. With shares of Credit China currently trading at HK$0.75, this would suggest potential downside of 77%.
A review of sell-side research reports makes it obvious that Credit China is not an easy company to value. Moreover, we think analysts are reactively chasing the Company’s share price and working backwards with their valuation models rather than proactively forecasting a target price based on fundamentals.
To be fair, Credit China’s earnings are difficult to forecast given the Company’s acquisition spree and high volatility. Further compounding the difficulty is the fact that there are almost no publicly-traded Chinese FinTech companies to use as peer comparables.
Fortunately, late last year Yirendai had its IPO debut on the NYSE. Yirendai describes itself as a leading online consumer finance marketplace in China connecting investors and individual borrowers.21 Yirendai is the closest peer comparable we can find to Credit China (and the main comp used by Macquarie Research).22 However, the valuation between the two companies is completely unhinged:
Credit China trades at a comparatively nose-bleed multiple of 45x 2017 earnings, while Yirendai trades at less than 10x.
We have not been able to find a coherent and reasonable explanation (based on fundamentals) as to why Credit China is trading at such an extreme valuation. However, it may have something to do with the stock’s last 30 minutes of trading.
Inspired by the Financial Time’s analysis of Hanergy Thin Film’s (566.HK) unusual trading patterns, we have conducted an analysis of the intraday trading patterns of Credit China shares for the past six months (127 days of trading) from 6 June 2016 to 7 December 2016.23
According to our analysis, intraday trading over the past six months in Credit China shares has abided by some relatively consistent patterns in the last 30 minutes of trading. Even as the stock has fallen over the recent months, the last half hour of trading has provided consistently positives returns:
Based on our analysis of the track period, the last 30 minutes and the last 10 minutes of trading has provided a significant return versus the buy-and-hold return over the same period:
In fact, a strategy of buying Credit China shares at 3:50pm and selling at 4:00pm would have seen HK$100 grow to HK$204.24 versus a buy-and-hold strategy over the same period of HK$128.62. The effect is even more pronounced if one was to buy at 3:30pm and sell at 4:00pm, whereby HK$100 would have grown to HK$219.31.
And sure, all of this could be a coincidence.
But, we performed a similar analysis on the returns of the last 30 minutes of trading for all Hong Konglisted stocks with a market capitalization above US$1 billion with available trade data and found that the cumulative returns of Credit China over the period are highly abnormal. As compared to the aforementioned set of stocks, Credit China Fintech ranks in the top three largest returns for the track period, behind Luen Wong Group (8217.HK) and China Jicheng Holdings (1027.HK):
Both Luen Wong Group and China Jicheng Holdings are noted bubble stocks of comical proportion
Sadly, the Hong Kong market is no stranger to this type of manipulation, with unusual trading activity a hot topic covered extensively by journalists and market commentators alike. Based on our analysis, we think Credit China is just another company with a share price value dictated more by end-of-day trading manipulation than business fundamentals. And given what we’ve seen in the market recently, manipulated stocks have a tendency to end in spectacular collapse.25,26,27
See the full report below