VNET And CIS - Brothers In Fraud?

Oct. 02, 2014 9:08 AM ETVNET
Chilyvily profile picture
Chilyvily's Blog
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Contributor Since 2014

Junior PM at a Russian family office with interest both is long-short fundamental-driven ideas in stocks and algo-trading.

This short article deals with unusual similarities between (exceptionally legitimate and respectable Chinese company) and CIS (third rate IT-Chiscam). Coincidentally the companies have some overlap in management/board of directors - VNET's current CFO. Author believes they might be due to both being equally fraudulent businesses.

Camelot Information Systems (CIS) is a Chinese provider of enterprise IT information services formerly listed in US. It is most known for the accounting scandals that have destroyed its reputation and led to share price to falling from almost 27 USD at the peak in 2011 to around couple dollars at which it was taken private this March. Are the two companies (CIS and VNET) similar from an industry point of view? Sure, they have quite a lot in common:

1. Chinese stocks with listing in US

2. IT companies

3. B2B business models

The three mentioned similarities are by themselves a reason to tread carefully since it is usually easier to forge revenues when it comes B2B IT services compared to other companies and Chinese stocks do have a higher chance of being scams than US ones. This similarity is however not enough to make any fraud claims. So let's dig deeper and try to uncover more substantial details by asking what exactly were the troubles with Camelot, identified by analysts? Well, here is a short list that one can get from the Seeking Alpha article:

  • Unusually high revenue per employee. Thankfully Vianet is fine - it just has unusual growth of revenue per employee
  • Very high number of days outstanding for receivables. Phew, again absolutely nothing in common with VNET and its healthy DSO above 110!
  • Questionable acquisitions of clearly undercapitalized and asset poor companies. Nothing to see here again except for those baseless accusations of Trinity - we all know Aipu and iJoy were great investments together with another gem bought by VNET - Fastweb.
  • Relationship with reputable companies like IBM that is really not that important to US counterparties as company would like investors to think. How could this apply to VNET when has made PR releases about partnership with IBM that are for strange reasons absent from IBM web-site.
  • Shenanigans with currency. This time really nothing in common.

So now we have two similar companies that are not only alike in terms of business models but also share similar red flags (4 out of 5).

"What else they share?", you may ask. Well, the answer is rather "who". Meet Mr. Shang Hsiao who has been a CFO of VNET starting from June 2010. Company's own website proudly mentions the following:

"Mr. Hsiao is currently an independent director of Camelot Information Systems Inc. (NYSE: CIS), a leading provider of enterprise application services and financial industry IT services in China listed on the New York Stock Exchange".

Well, what if he came to CIS after all those nasty accounting shenanigans have happened? Unfortunately for VNET longs this is not the case. Mr. Shang Hsiao has been with CIS from 2008.

To wrap this up: acting CFO of VNET has been involved with a clear Chiscam that had to go private at laughable price (90% below valuation before accounting scandals) and overlooked the fact that books have been cooked. Coincidentally he has been with VNET since 2010 - right when the accounting "magic" started to take place in the company according to Trinity. And even more bizarre is the fact that both companies were accused of almost the same revenue inflation schemes. Coincidence? I believe not.

Stay tuned for more reports on this glorious company as the more you look at VNET - the more questions you start asking about it.

Disclosure: The author is short VNET.

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