Market Overview

GeoInvesting: Fanhua Told Investors An 'Outright Lie'

GeoInvesting: Fanhua Told Investors An 'Outright Lie'

Less than one month after J Capital Research issued a warning about U.S.-listed Chinese company Fanhua Inc (NASDAQ: FANH), another short seller ripped Fanhua on Thursday alleging the company has not been honest with investors about potential conflicts of interest.

J Capital’s Claims

In January, J Capital's Anne Stevenson-Yang claimed Fanhua is simply a complex corporate structure that is intended to serve as nothing more than a shell for executives to use to rip off shareholders.

“We detail how the executives running Fanhua have made undisclosed payments and loans to insiders, used ‘share incentive plans’ to hand themselves cash, and covertly transferred equity in subsidiaries to ensure that investor cash goes into executive pockets,” Stevenson-Yang wrote in January.

On Thursday, GeoInvesting said the complex nature of Fanhua’s business, its documentation and its financial transactions makes it nearly impossible for investors to follow a potential paper trail.

“Without being able to differentiate which companies are performing which tasks and (more importantly) which companies are recognizing which revenue and absorbing which costs, it’s impossible to assign a ‘fair market value’ share price to FANH,” GeoInvesting wrote in Thursday's report.

Flimsy Excuses

GeoInvesting said Fanhua’s attempts to explain the confusion surrounding undisclosed related parties benefiting from recent transactions are an “outright lie.” Fanhua said the confusion stemmed from two alleged company insiders who the company claims have identical names to non-related parties.

“It is possible that two people can share the same name, but not the same ID number. Therefore, we believe that Liu Tingting, the owner of Beijing Ruisike, and Yang Lin, the owner of Sichuan Borui Xinrui, are clearly related parties to FANH,” GeoInvesting said.

GeoInvesting said it has definitive proof of these connections and that it's extremely troubling a U.S.-listed company would deceive shareholders in this manner.

“Until the company makes very clear to its auditors and, more importantly, investors, how FANH is operating, we believe the company is clearly uninvestable and carries substantial risk of having to restate its financials, for example due to non-consolidation of its real estate joint venture that has existed since 2016, but was only disclosed in November of 2018,” GeoInvesting wrote.

Unlimited Downside

Fanhua shares traded lower Thursday by more than 4 percent at $24.45.

J Capital has said the firm expects Fanhua stock to eventually go to $0 and delist and GeoInvesting said it agrees with J Capital’s conclusions. The firm is short Fanhua stock and is predicting up to 100 percent downside from current levels.

At time of publication, a representative from Fanhua has not responded to a request for comment.

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