This week, low float U.S. listed China stocks (ChinaHybrids) such asSkyPeople Fruit Juice Inc. (SPU) continued to heat up. We are currently cleaning up a list of low-floaters that we published a while ago. Since then there have been additional stocks that have undergone reverse splits, qualifying them for our list.
SPU Lit the Candle
Skypeople Fruit Juice Inc. (NASDAQ:SPU), a producer of various concentrated fruit juices sold mainly in China, lit the candle. On July 13, 2016 SPU closed at $2.95 compared to its current price of around $13, after reaching a high of $20.95 in yesterday’s trading session. The stock is pumping on a delayed reaction to an 8k released on June 21, 2017. The filing disclosed that the company reached an agreement to sell 51% of one of its leading subsidiaries to Shaanxi New Silk Road Kiwifruit Group.
“On June 15, 2016, Hedetang Holdings Co., Ltd. (the “Hedetang”), a wholly owned subsidiary of SkyPeople Fruit Juice, Inc. (the “Company”) entered into a Share Transfer Agreement (the “Agreement”) with Shaanxi New Silk Road Kiwifruit Group Inc. ( the “NSR”), a limited liability corporation registered in China.This Long/ Short Equity Firm Sees A Time-Arbitrage Opportunity In This Pest Control Merger
Yost Partners was up 0.8% for the first quarter, while the Yost Focused Long Funds lost 5% net. The firm's benchmark, the MSCI World Index, declined by 5.2%. The funds' returns outperformed their benchmark due to their tilt toward value, high exposures to energy and financials and a bias toward quality. In his first-quarter letter Read More
Pursuant to the Agreement, NSR will acquire 51% of the equity shares of Shaanxi Guoweiduomei Beverage Co,. Limited, a wholly owned subsidiary of Hedetang (the “Shares”).
What I find interesting is that NSR is a state-owned enterprise (SOE) and will have to pay $46 million to complete the transaction if certain “conditions” are met.
“The tentative total transfer price for the Shares is 300 million RMB (approximately $46 million) and is subject to and will be settled according to the final price in the valuation report to be issued by an appraisal firm jointly engaged by both parties.
NSR shall pay the total transfer price to Hedetang within six months of the effective date of the Agreement. If NSR fails to pay the total transfer price within 6 months due to the delay of the approval process from the local authority, NSR can receive a payment extension for up to twelve months from the effective date of the Agreement upon the negotiation and agreement by the parties. Because NSR is a state-owned enterprise (SOE) in China and its investment needs to be approved by a higher level administrative authority in China, NSR has the right to terminate the Agreement unilaterally if it fails to receive the approval from such administrative authority within one year from the date of this Agreement.”
It’s All About Trust
Investors have been waiting for a reason to be optimistic about investing in seemingly undervalued U.S. listed China stocks. The group began losing its swagger in 2010 due to numerous proven cases of fraud that seemed would never end. A good chunk of these frauds initially went public through reverse merger transactions. Consequently, many microcap U.S. listed China stocks that may now look good on paper have not been able to regain investor trust. This is a large reason why several of these stocks are trading at ridiculously “low” P/E ratios and well under their reported “book value” per share.
If you are a new to the GeoInvesting community, you may not be fully aware of the role we play to protect investors from fraudulent management teams. I recently published a small piece, “The Evolution of U.S. Listed China Based Frauds,” to give investors a quick glimpse into how this role has grown over time, from being decidedly bullish to bearish to more balanced:
“Initially, we attempted to work with investor relations firms and investment banks to clean the space up. They soon balked on us. We would later learn that the majority of the reverse mergers that these firms were conducting business with were earning them large fees, so we surmised that they just decided to hide behind disclosures and earn fees for as long as they could before the space totally blew up.
We set on a crusade to write hard hitting due diligence pieces, calling out management teams and protecting investors from fraud. Our work outing deceptive Chinese management teams speaks for itself:we are one of the only organizations that got management teams to admit their deceit and subsequently be jailed. Because of our work 12 ChinaHybrids were either halted and/or delisted.”
Building That Trust
- SPU went public in 2008 through a reverse merger with an over the counter shell company.
- In 2010 Sky People gained approval to list its shares on the AMEX, before uplisting to NASDAQ.
- In 2011 allegations of fraud at SPU surfaced, such as management lying about sales, earnings and production volumes in SEC filings.
- In 2012 SPU reached a settlement in a defamation law suit it brought against one of its accusers.
- The stock effected a 1 for 8 reverse split on March 16, 2016 to maintain its listing on the NASDAQ.
In the case of SPU, the key factors that are portraying a “perception of legitimacy” to investors include the potential $46 million payment and the involvement of the state-owned enterprise (SOE). The $46 million price tag for a piece for SPU’s business implies a valuation of around $100 million. This probably has investors thinking that past fraud accusations are false or exaggerated.
When I first read the SPU 8K detailing the share transfer transaction I had a hard time convincing myself that the SOE is going to fork over $46 million. I have dabbled and lost money in similar ChinaHybrid scenarios where a potential deal keeps getting delayed until it just disappears. I surmised that this is just another one of those “technically” legal mechanisms the “China Cabal” uses to orchestrate a pump campaign. The game is simple: entice investors with a deal that appears to add legitimacy to a dying ChinaHybrid, but make the deal predicated on conditions that will never be met.
In this case “NSR has the right to terminate the Agreement unilaterally if it fails to receive the approval from such administrative authority within one year from the date of this Agreement.” Furthermore, even if the deal is approved NSR has to still come up with the capital to complete the transfer within 12 months of the effective date of the agreement. I am sick of these companies putting extension clauses in these deals.Either you have the money or don’t!
Whatever the case, I still have to respect the process. If SPU miraculously pulls off this transaction some trust could be restored in the ChinaHybrid space and breathe some life into microcap ChinaHybrids listed on the NASDAQ or NYSE. An atypical scenario will have arisen where reverse merger style transactions occur on a major exchange, increasing the value of ChinaHybrids. A high premium will be paid for knowledge of:
- Which ChinaHybrids may have some degree of legitimacy
- When the parties involved in the transaction are legit
- The recent decision by the China Securities Regulatory Commission (CSRC), making it more difficult for companies to go public in China. We wrote about this on May 5, 2016. This will force Chinese companies that want to go public to look outside China.
Deploying the Troops for SPU On-The-Ground Due Diligence
We are not endorsing the U.S. listed China stock space without proper diligence, but momentum investors might find the low float U.S. listed China stock index we have created helpful. It monitors companies with low outstanding share counts and displays P/E and Price to Book data points.
If you are a long biased investor you may find value in this screen by identifying stocks pre-pump. If you prefer to short stocks that pump irrationally you will also find value in this screen if you gain knowledge of potential wrongdoing or if you just don’t believe the hype.
In the meantime, our on-the-ground China team is performing diligence on SPU and other companies on this list. We want to determine which firms may be ideal candidates to follow a similar path as SPU, if the SPU deal actually closes. First on our list are companies on which we have performed due diligence in the past that we thought were legit to some degree. To find out what companies these are and to get access to our ongoing research, join our GeoInvesting community here.