China Harmony Auto (HKEX: 3836)

China Harmony Auto Holding Limited (HKEX: 3836) (“Harmony” or the “Company”) operates ~75 car dealerships in China, distributing mid- to high-end luxury car brands including BMW, Lexus, Land Rover, Rolls Royce, & Ferrari. Harmony is also an after-sales service partner of Tesla (Nasdaq: TSLA) in China which drives additional investor interest.

Evidence revealed that Harmony’s Chairman Feng defrauded investors and fabricated Harmony’s financial statements.

First, Chairman Feng stole RMB 1 billion from Harmony. At the end of 2019, Harmony offset a RMB 1 billion cash loan to Chairman Feng using an abusive tax liabilities transfer. This transaction had serious negative repercussions for Harmony minority shareholders as it effectively erased the contractual obligation for Chairman Feng to repay RMB 1 billion to Harmony.

Second, Harmony generated fake cash from fake share sales. Harmony claimed to receive RMB 192 million in cash from selling shares of Henan Hexie Automobile Aftersales Services Co., Ltd. (河南和諧汽車維修服務有限公司, “IAC”) in April 2019. This never happened, and this was not the first time Harmony lied about cash receipts. In addition, Chinese filings revealed that Harmony never received RMB 347 million in cash from the sale of Green Field Motor Co., Ltd. (浙江绿野汽车有限公司, “GFMC”). To us these findings suggest that Harmony’s cash balance has been fabricated since 2015.

Third, Harmony lied about its profits in two ways: by failing to consolidate operating expenses from primary subsidiaries, and failing to write down losses from bad investments. In this report we highlight three separate entities which Harmony used to generate fake profits.

On January 7, 2020, Ernst & Young resigned as Harmony’s auditor. For its 2019 Annual Report, Harmony paid a different auditor, Zhonghui Anda CPA Limited, who resigned shortly thereafter in July 2020. We suspect both resignations were related to the write-off of the RMB 1 billion loan to Chairman Feng.

CCASS data shows that 94% of Harmony’s shares are in circulation despite Chairman Feng’s reported 44% ownership, suggesting undisclosed share pledges.

We are short Harmony and believe its stock is worthless.