Potential Chinese Fraud - Wins Finance Holdings

| About: Wins Finance (WINS)
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Summary

Catalysts which could cause the stock to go to $0:

Market should eventually recognize that WINS is overvalued based on valuation and recent 93% discount (to current market price) purchase of a controlling stake by a public company.

Possible lawsuits / SEC investigations of manipulation by insiders and management would lead to a sharp selloff.

There's an ongoing risk that someone like Muddy Waters or Citron Research could hit the stock with a negative report.

Vesting/exercise of insider stock options by management should cause shares to sell off.

Elevator Pitch

Wins Finance Holdings is a former acquisition of Chinese SPAC, Sino Mercury Acquisition Corp. which was done at $168m or 0.76x book in Apr 2015. The stock is up 2800% in the past 52 weeks without any fundamental changes, trading at close to 16.9x of likely overstated book value. The CEO and CFO of the company have significant track record of destroying shareholder value, alleged fraud and history of stock manipulation. 67.1% of the stock was recently bought in a closed deal at 90% discount to today's closing price.

On Dec 13, 2016 Freeman Fintech (279 HK) announced that they intend to purchase a controlling stake of Wins Finance. The Purchase Price represents ((i)) approximately 67.1% of the audited net asset value of the Target Group Companies as of 30 June 2016 times a multiple of 1.58 and ((ii)) a discount of approximately 88% of the average closing price of US$159.87 per share of the Target Company on NASDAQ for the five trading days immediately preceding the date of the Acquisition. This represents a maximum of $19.80 compared to today's close of $290, a 93% discount.

Company Description

Wins claims to be a "diversified investment and asset management company headquartered in New York … focused on identifying value accretive investment opportunities and assets in China and the United States that can be enhanced through the strategic involvement of Wins established management team and its familiarity with the Chinese investment community to help generate long-term value for shareholders. … With over 8,500 guarantee companies, 7,000 micro-lending companies and 1,200 financing leasing companies…Wins will provide a solid platform for future strategic acquisitions at attractive prices in order to expand our capacity to provide lending solutions."

To sum up, WINS charges fees to guarantee small-business borrowings in Shanxi, a northern Chinese province. Even if this company has a legitimate business model other than to defraud investors, it will attempt to profit by assisting the high risk Chinese small and medium sized enterprises with limited operating history, who have next to no access to financing because traditional banks will not touch them due to their substantial default risk.

Thesis of Why Wins Finance is an alleged Fraud

The company is possibly a sham created to enrich its management. Jianming "Jimmy" Hao, who became the CEO of WINS after the merger, had previously run a firm called Deyu Agriculture Corp. (DEYU US) later changed to (LUCC US) which was a vertically integrated producer/processor/marketer and distributor of organic and other agricultural products - after Mr. Hao became its CEO and President in Apr 2013 the stock had no upticks (see picture below) despite paying several third-party penny stock promotional companies to promote the stock.

The CFO of Wins, Junfeng Zhao, served as the financial controller of Agria Corporation (NYSE:GRO) which was delisted from NYSE after it was learned that various executives and intermediaries were manipulating the stock to keep it in compliance.

Further as Barrons' notes "Manhattan HQ address that Wins lists in filings is the same floor of a Times Square tower occupied by Forefront Capital, an investment bank that employed Wins' founding president and director Gang "Richard" Xu. His boss at Forefront was another Wins founding director, Brad Reifler, a controversial financier whose grandfather founded Refco, a futures broker that collapsed in 2005."

Not only is the unethical track record of this management transparent by looking at the past, it is evident at Wins as Mr. Hao increased his monthly compensation in 2016 from $13,000 to $50,000 and the company granted options to purchase 1,450,000 shares of common stock to top management at an average exercise price of $12 per share with the options vesting in three installments starting last year. Given current spot price this is an incredible kickback to management. Co-CEO also purchased convertible notes with 4% coupon at the start of the year which have a $12 conversion price. The self-dealing transactions are all over the filings, however calls to management to comment, with phone numbers listed on Bloomberg and on the company's website went unanswered, as did the emails. One can simply look at the volumes going through WINS when there was no news, but prior to the stock skyrocketting to see what is likely a classic pump-and-dump behavior.

Valuation

According to their financials WINS has $312.3m of assets, including $8.7m of cash. Their debt is at $65.7m, leaving $246.6m of stockholders equity. Further in the filings it states that the company provides guarantees on behalf of borrowers to help them obtain loans from banks, which is naturally an off-balance sheet arrangement to the tune of $86.3m.

Company's financials speak for themselves:

Short term investment

"We make short term investments in asset management products issued by banks and financial institutions with original maturities of one, three or five years but which could be redeemed at any time. Annualized interest rates of the short-term investments ranged from 5% to 15%. … Interest on short-term investments was $13,958,540 for the year ended June 30, 2016"

Revenue via Commissions and Direct Financing Leases

"Our net revenue, which consists primarily of guarantee commissions, direct financing lease interest income, and financial advisory and lease agency income, was $5,508,284 for the year ended June 31, 2016, representing a decrease of $9,338,191, or 62.9%, from $14,846,475 for the year ended June 30, 2015."

Even these anemic numbers substantially trail off when we look at 1+ years out, but frankly given the size of company's Net Income to their Market Cap, it's almost irrelevant what they do.

Is this potential fraud with glaring self-dealing, insider manipulation and off-balance sheet risk on Chinese SMEs truly worth 480x net income and 24x book value?

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in WINS over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.