We conclude that China Internet Financial Services Inc. (NASDAQ:CIFS) is a King Zero – just another worthless China fraud, says Muddy Waters Research.
- We believe zero to almost none of CIFS’s purported business is real. PRC financials show that CIFS overstated its 2016 revenue by 5x.
- Every one of the purported borrowers to which CIFS disclosed having made loans (accounting for 84.2% of loan balances) appears to be a sham counterparty. (The purported borrowers of the remaining 15.8% of reported loan balances were not disclosed; however, we strongly suspect that most – if not all – of these loans and associated income are also fabrications.) Therefore, the associated loans, revenue, and profits appear to be completely fake.
- CIFS has disclosed doing business with two related parties, and even those loans and associated revenue appear to be fraudulent.
- CIFS’s recently announced “big data” company purchase also appears to be a lie. It is from sham counterparties, and therefore a fraudulent purchase of an empty box, rather than of a real or even promising company.
- 47.3% of CIFS’s reported 2016 net income purportedly was generated by its Kashgar subsidiary; however, that subsidiary existed for only two days in 2016. Further, Kashgar, accurately in our view, reported in its PRC financials zero revenue and income.
- CIFS is too good to be true – claiming to turn a seeming commoditized business model into an overnight juggernaut with purported gross margins over 97% and net margins over 70%. However, Chairman Lin seems to be an obscure and fairly unsuccessful businessman, which in our view makes him about number 450 million in line to pull off a business miracle like this. CIFS is therefore one of the most implausible – if not the most implausible – China fraud stories we have ever come across.
- CIFS’s corporate structure ensures that not only does Chairman Lin get to keep investors’ money, not have to worry about prison or any legal repercussions, but the ownership of his company is not the least bit at risk. In other words, this structure is the coup de grace of the numerous middle fingers he’s extending at U.S. investors.
The Farce Awakens: China Internet Nationwide Fncl Srvcs Inc (CIFS)
A long time ago (in many investors’ minds) in a country far, far away, literally hundreds of tiny, failing businesses were packaged up as fast-growing, dynamic companies and sold to unsuspecting Americans. The country was China, and the toll was staggering – literally hundreds of frauds that listed in the U.S. through reverse mergers, sold billions of dollars in stock, and then went dark. Almost without exception, these companies’ “chairmen” got away scot-free with their stolen money.1
Thanks to the comically named 2012 JOBS Act, the “Reg A+ offering” offers a way for dog shit companies to go public while avoiding the stigma of a reverse merger listing. In another depressing sign of the decay of America’s institutions, the once-venerable New York Stock Exchange is now even promoting this type of IPO.2,3 And now…
PRC Financials Show CIFS Overstated its 2016 Revenue by 5x PRC financials make clear that CIFS is a fraud. We obtained the SAIC financials for CIFS’s operating entities, Sheng Ying Xin (Beijing) Management Consulting Co. Ltd. (“BJ SYX”) and Kashgar Sheng Ying Xin Enterprise Consulting Co. Ltd. (“Kashgar SYX”). These two entities account for all of CIFS’s reported revenue and profit.4 CIFS is such a lazy and / or stupid fraud that it harkens back to the early days of shorting U.S.-listed China frauds.
Corporate entities in China are required to file summary financial statements with the State Administration of Industry and Commerce (“SAIC”). Muddy Waters, LLC began the wave of exposing China frauds on June 28, 2010 by shorting Orient Paper Inc., and using its SAIC financials to help prove that it was a fraud. After our Sino-Forest exposé one year later, China frauds began also filing fraudulent financials with SAIC. As a result, it became fairly rare to find the smoking gun in SAIC financials. We suppose we owe thanks to CIFS for setting its fraud time machine far enough back that it did not submit fraudulent financials to SAIC.
BJ SYX 2016 SAIC financials are below.5 Kashgar SYX was formed only two days before the end of 2016, and reported to SAIC zero assets, liabilities, equity, revenue, and net income. (Note that as we discuss in a later section, CIFS’s fraudulent SEC filings imply that Kashgar SYX generated 47% of CIFS’s 2016 consolidated net income during those two days.)
It is not surprising that there is a tiny amount of revenue in the VIE. All of these China frauds have a kernel of truth. That said, we suspect that the character of the revenue is quite different than CIFS’s purported business. As we discuss in a later section, Chairman Lin has a (likely illegal) P2P lending business. We suspect that the BJ SYX financials show a part of this P2P business. (Note that the P2P business appears to lose significant amounts of money based on SAIC financials of one of the two main entities.)
The Purported Borrowers CIFS Discloses All Appear to be Sham Counterparties The backbone of China fraud is creating fake customers and suppliers. We understand that out of the literally hundreds of China stock frauds perpetrated on U.S. investors, only one company chairman has ever gone to jail for these crimes. There is absolutely no disincentive for a buddy of a chairman to help him out by creating fake counterparties. They get paid a little bit of money, and probably sit around laughing with the chairman over beers and bai jiu at the gullibility of U.S. investors.
CIFS discloses the identities of four of the six purported borrowers to which it lent money in 2015 and 2016. Purported loans to these four purported borrowers equaled 84.2% of the combined loan balances CIFS shows on its 2015 and 2016 balance sheets. We conclude that each of these four purported borrowers is a sham counterparty, and that the loans are therefore fake. The sham counterparties are: Beijing Ailirui Trading Co. Ltd., Xiamen Jingsu Trading Co. Ltd., Fujian Jin Xin Import Export Trading Co. Ltd., and Cai Long Ge.
Note that as of December 31, 2016, the loans CIFS claims to have made account for 64.2% of its assets.
I. Beijing Ailirui Trading Co. Ltd. appears to be a sham counterparty, and therefore a fake loan. CIFS purports to have loaned it $23.1 million.6 This alone equaled 77.3% of CIFS’s purported 2015 assets. We believe Ailirui is a sham counterparty because a) its SAIC financials show that it is a tiny company that could not conceivably have received such a loan (hint: zero revenue), b) our fieldwork shows a vacant office typical of the ghost offices we saw for Sino-Forest’s purported counterparties (and in many other China frauds), c) CIFS appears not to have had the cash on hand to make the loan at the time it purports to have made the loans to Ailirui, and d) its SAIC file also shows it is almost certainly effectively controlled by Chairman Lin, reaffirming our view that it is a sham counterparty.
Ailirui’s SAIC financials (converted to USD) are below. They show effectively zero revenue, zero net income, and de minimis assets. The SAIC files also show that Ailirui’s shareholders had not registered their expected capital contributions of approximately $795,000 with SAIC by December 31, 2016, making it likely that there had been no money ever injected into the company. (We theorize that the assets in 2014 and 2015 were receivables for the expected capital contributions.) Finally, CIFS’s purported loans are not shown on the balance sheet.
Article by Muddy Waters
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