On April 16, 2013, we released a follow-up report on SouFun Holdings Limited ("SFUN", "SouFun" or the "Company"), available here. In this, our third report, we present new evidence of yet another undisclosed related party transaction between SouFun and Chairman Vincent Tianquan Mo ("Chairman Mo"), this time involving Shun Cheong Holdings Limited ("Shun Cheong") (HK: 0650), the Hong Kong listed company majority owned by Chairman Mo and his wife.
I. The Missing Link. According to Shun Cheong's public filing, Beijing Pukai Shijie Investment Consultancy Company ("MoCo"), an entity 80% beneficially owned by Chairman Mo, provided consulting services to SouFun in 2011. SouFun failed to disclose this related party transaction to investors, which we believe is a clear violation of SEC rules.
- Consultancy Services to 72 Wall St. According to the public filing, which is dated December 14, 2011, MoCo "provided consultancy service to the existing owner during the acquisition of 72 Wall St." SouFun completed the purchase of 72 Wall Street by October 2011, just months before these "consultancy services" were disclosed to the shareholders of Shun Cheong. While the amount that SouFun paid MoCo for 'consulting services' is not disclosed, no-one works for free, so it is not a stretch to presume that SouFun paid MoCo for participating in the project. There is no mention of MoCo or the consulting services it supposedly provided to the Company in SouFun's 2011 20-F, making this, in our opinion, an undisclosed related party transaction.
- Training Center, Mansion, or Hotel? In SouFun's December 2010 SEC filing announcing the purchase of 72 Wall Street, it is clearly stated to shareholders that SouFun's intention is to use the property for "training purposes." In fact, in SEC filings between December 2010 and today, the Company reiterates that the property is to be used for training. However, according to the Shun Cheong filing in December 2011, MoCo "evaluated the possible options for subsequent redevelopment or conversion of 72 Wall Street Mansion, into training center or hotels." The filing goes on to state that "the concrete plan for said conversion has not yet been finalized and is subject to further evaluation by [SouFun]." SouFun tells its investors that it bought 72 Wall Street for training purposes. Shun Cheong, Chairman Mo's other company, tells investors that SouFun was deciding whether to leave 72 Wall Street as a training facility or convert it to a hotel. Both cannot be true.
- The Big Picture. In our initial report, we expressed skepticism as to why a capital-light Internet business had recently "accumulated nearly $200 million in high-priced real estate across the globe, supposedly to serve as 'training' facilities." Now we have the common thread: the Sanya property ($14 million), the newly purchased Shanghai Bao'An complex ($127 million), and 72 Wall St. ($61 million) are either already hotels or, in the case of 72 Wall Street, have been recently evaluated for conversion into a hotel.
- According to the Shun Cheong filing, MoCo is "mainly engaged in hotel investments, investing management, consultancy, securities investments and business services." MoCo is also connected via a JV to one of the Chairman's hotel management websites. Chairman Mo's hotel business makes us suspicious of SouFun's acquisitions of hotel properties. Is SouFun buying hotel properties and properties which it could convert into hotels for the benefit of MoCo? Has the Company paid MoCo for hotel management or consultancy services in connection with the acquisitions of the Sanya property or Shanghai Bao'An complex?
II. What Happens in Sanya, Should Not Stay in Sanya. In our April 16 follow-up report, we presented smoking-gun evidence which, we believe, showed that Chairman Mo orchestrated a series of undisclosed related party transactions to siphon $14 million out of the Company in connection with SouFun's acquisition of hotel rooms in Sanya ("Sanya") and, in the process, violated US and Hong Kong securities laws. SouFun's response was evasive and contradictory.
- Glaucus Was Right. SouFun admitted that Chairman Mo and CEO Richard Dai were the previous owners of the Sanya Property SPV from which SouFun purchased the Sanya Property, but pleaded to the market that "all [such transactions] have been disclosed." We found this curious, because SouFun had most certainly not disclosed to investors that SouFun's Chairman and CEO sold the special purpose vehicle which owned the Sanya property, Beijing Hengxinjahua, to Chairman Mo's university buddy (Deng Wei) three months before the transaction.
- SEC Correspondence Revealed. This week SouFun admitted that in "our response to SEC staff comments on our 2011 20-F in November 2012, we provided the … clarification of our Hainan Sanya property transaction." To our knowledge, SouFun has never disclosed to the market that the SEC inquired about Sanya property purchase. Simply put, neither Glaucus nor, to our knowledge, any other public investor was ever aware before last week (4/16/2013) of any such correspondence with the SEC. We believe that in the interest of transparency, SouFun should disclose any and all inquiries or correspondence from the SEC.
- Liquidity Crisis Seems Unlikely. SouFun claims that it loaned $15 million to Deng Wei to enable him to buy the Sanya Properties, immediately after which, Deng Wei experienced "liquidity issues and as a result was unable to repay the Company's loan." We find nothing credible about this explanation. Deng Wei is the president of Century Bridge Capital, so it is safe to assume that he is financially sophisticated, making it unlikely that he was dumb enough to borrow $15 million to buy a property only to teeter on the edge of insolvency three months later. Moreover, if he was such a credit risk, why is SouFun lending him $15 million only to see him default in less than 3 months?
Ultimately, investors can choose between two competing explanations with respect to the Sanya Transaction:
- SouFun's explanation is that it just happened to loan $15 million to Chairman Mo's university buddy who, coincidentally, just happened to buy a holding Company from Chairman Mo and CEO Richard Dai. That university buddy then just happened to use that same holding company to buy hotel rooms, Chairman Mo's specialty. And, as luck would have it, immediately after all these coincidental transactions, the university buddy runs out of cash, and, what do you know, his BEST OPTION was to sell that same property to none other than SouFun at, of course, a below-market price, which just happened to be valued at almost the exact amount of the original loan.
- Isn't the more likely explanation (and the one that we believe) that the plan all along was for SouFun to front Deng Wei the money to buy the Sanya properties from Chairman Mo and CEO Richard Dai and then to have SouFun buy the properties from Deng Wei, effectively allowing SouFun to purchase the hotel rooms from the Chairman and CEO without disclosing to shareholders their interest in the transaction.
If you buy the Company's explanation, please contact us because we have some ocean front property in Arizona to sell you. If you buy that, we'll throw the Golden Gate Bridge in for free.
III. Release SEC Correspondence. We reiterate our call on SouFun to make public any and all previously undisclosed SEC correspondence and questions from the SEC. If the Company has done nothing wrong, this should not be a problem. Investors, long or short, deserve to know.
Disclosure: I am short SFUN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We are short SFUN. THIS RESEARCH ARTICLE EXPRESSES OUR OPINIONS. Use Glaucus Research Group California, LLC’s research opinions at your own risk. You should do your own research and due diligence before making any investment decision with respect to the securities covered herein. This is not investment advice nor should it be construed as such. We are short SFUN and therefore stand to realize significant gains in the event that the price of the stock declines. Please refer to our full disclaimer, which we hereby incorporate fully by reference, in our report at glaucusresearch.com.