Natural Health Trends (NASDAQ:NHTC) reported earnings yesterday and posted great numbers due almost exclusively to their Hong Kong business that gives them an inroad to China. Growth in this segment allowed the company to post Q4 revenue growth of 108% and net income of $1.13 per share, but this outperformance may turn out to be short-lived.
What NHTC didn't mention is a newly published article in Chinese media (linked and translated below) this morning that directly refutes statements the company has made about its Chinese regulatory contact and claims that there is a large, ongoing investigation into the company's business practices.
Chinese media states, in this morning's article and based on eyewitness accounts from the scene of the Beijing office raid:
- That the staff attorney wasn't present during the first meeting as the company claims
- That the government didn't tell staff in their first raid that there was "not enough evidence for an investigation".
- Based on the size of the manpower used in these office raids, that this is a large, serious ongoing investigation.
We would also like to refute the company's claims that we are working with Chinese media. We have never contacted anyone in Chinese media and have not been active in seeking out whistleblowers for NHTC; we are simply reporting on the facts as we see them.
Unfortunately for the company, its entire business hinges on China, where the company operates via an e-commerce platform in Hong Kong because the company doesn't have a Chinese direct selling license. It has been stated by Chinese media that the company is under investigation by various Chinese regulatory agencies. Since 95% of NHTC's business comes from this segment, this puts the entire company at grave risk - if all operations from Chinese consumers came to a halt, the company, and its stock, would collapse. We have posted our firsthand evidence of these investigations, including photos of Chinese government officials on site at NHTC headquarters here.
The company hosted a conference call at 4:30 PM EST yesterday where they said first thing that they are not under investigation by the Chinese government. The company's CEO, Chris Sharng, says in one of his first statements on yesterday's conference call (full transcript here):
We are in regular contact with several government agencies in Beijing and Guangzhou to ensure NHT Global's compliance with the law. We are not under investigation and maintain good government relation.
This is a very key admission for executives to make and we'd like to note that Mr. Sharng is now on the record making this statement. It's especially peculiar because 21st Century (a Chinese media outlet that originally broke the NHTC story) posted another story online last night, claiming that they were on the scene when the company's office was raided, and that there was no indication that it was a routine visit.
Here is the new article from 21st Century, along with our in-house translation.
北京时间2月3日，纳斯达克上市公司然健趋势（Natural Health Trend Co.， NHTC）发布财报称，该公司2015年4季度录得销售额7370万美元，同比增长108%；全年销售额则达到2.65亿美元，同比增长113%。
Beijing Time January 3, 2016 - NASDAQ listed company Natural Health Trends Co., announced its financial results, the company reported 4th quarter 2015 revenues of $73.7 million, year-over-year increase of 108%; full year revenues of $265 million, year-over-year increase of 113%.
Since the end of 2015, the stock price of NHTC almost has been cut in half, from over $40 per share, sliding to current levels of $22.61 per share.
NHTC recently announced that the Board of Directors has increased its previous stock repurchase plan from $15 million to $70 million, and currently $10 million [of the stock repurchase] is completed.
21世纪经济报道1月11日曾独家报道然健趋势旗下主要子公司然健环球（Natural Health Trend Global, NHTGlobal）因涉嫌传销被会员举报。公开信息显示，然健趋势主要的业务收入来自然健环球香港分公司，占比达92%；而香港公司的销售额，则大部分来自中国大陆（详见本刊报道《然健环球遭会员举报'涉嫌传销' 工商、公安部门上门突击调查》）。
21st Century Business Herald on January 11, 2016 exclusively reported that a major subsidiary of Natural Health Trend Global, NHT Global has had whistleblowers alleging suspicions of multi-level-marketing (MLM). Public record shows that the major revenue source from NHTC comes from its Hong Kong company, constituting 92%; and the revenue from its Hong Kong company mainly comes from China Mainland (Details please see [21st Century Business Herald] report <NHTC Whistleblowers by Member as "Suspected Multi-Level-Marketing" SAIC and Public Security Bureau Conducted Investigation>).
On January 13, 2016, NHTC put out a press release stating that when NHTC's Beijing office was investigated by the Public Security Bureau and SAIC, one Beijing office manager and a staff attorney was there and "the outcome of the 'meeting' was that government authorities advised the Company and the accusers that there was insufficient evidence to warrant an investigation of Natural Health Trends."
But the reporter [on site] did not see the so-called staff attorney mentioned in [NHTC's] press release on the scene on January 12, 2016; SAIC officials also simply stated that the case needs more time to collect evidence.
[NHTC's] Press release also stated that several public securities officials from different districts of city of Guangzhou examined the headquarters of NHTC in Guangzhou, but the company attributed [this visit] as part of a "routine examination".
The reporter from 21st Century Business Herald obtained several videos and photos days ago and these documents show that 6 to 7 SAIC and Public Bureau officials investigated the Chinese Headquarters of NHTC in Yuexiu District of city of Guangzhou.
The reporter contacted SAIC in Yuexiu District of city of Guangzhou regarding this matter, and the SAIC official stated that the information of the case cannot be disclosed, but he explained how manpower allocation works for SAIC "routine examinations".
[SAIC official said]: "Because of the headcount limit, a routine examination usually has 2 SAIC officials visit the office. From a standard point of working procedure, usually if it's a large, serious case, SAIC will work with officials from the Public Security Bureau." the SAIC officials stated.
But these information cannot show the aforementioned investigation belongs to the range of "routine examination" or not. Since January 26, 2016, reporter has tried to contact NHTC's Guangzhou Headquarter regarding this question, but until this article release on February 3, 2016, despite that it admitted government officials visited their office, NHTC did not make any further response.
Again, this reporter claims to have been on the scene when the company's offices were visited by Chinese government officials. They are stating not only that the staff attorney wasn't present, but that the government didn't tell staff in China that there was "not enough evidence for an investigation". The reporter seems to think that based on the size of the manpower used in these office visits, that this is a large ongoing investigation. It is now this reporter's word versus the company - who needs desperately for Hong Kong and China to hold up in order to maintain its business.
With regard to reaching out to the company to ask our questions, we had three of our team members on the call on three different lines. All of us got in the queue to ask a question and none of us were chosen, despite the company taking two questions from the same guy (who was basically spending his time congratulating the company and singing their praises). The company then simply told investors the call was over, and disconnected everyone.
Disclosure: I am/we are short NHTC.
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.