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July 10, 2018 - Short Hosa Intl. (HKEX: 2200)Hosa International Limited (HK:2200) (“Hosa” or the “Company”) designs, manufactures and wholesales swimwear and fitness wear under two primary brand names, Hosa and Water Cube. On June 29, 2018, Hosa’s stock price plunged down 87% from banks selling management’s shares held as collateral from previous margin arrangements.
We were short Hosa into this event. We believe that Hosa management has constructed a fraudulent scheme to bilk unsuspecting creditors and minority shareholders out of their investments using a web of undisclosed related party distributors and suppliers to fabricate reported revenues and profitability. Using Credit Reports from Hosa’s primary distributors, we estimate Hosa fabricated revenues of RMB 685 million and RMB 894 million in 2016 and 2017, respectively, an overstatement of 217%! Additionally, Bloomberg intra-day trading data suggests that Hosa’s stock has been manipulated upward in the last hour of trading for the past 6 months, a tactic we have seen used by other listed companies to artificially inflate the value of pledged shares used as collateral for margin financing.
On July 10, 2018, the Company’s announcement confirmed that 10.966 million shares were sold by the banks on June 29th, a mere 1.9% of the 589 million shares that management pledged to secure margin financing arrangements. Alarmingly a whopping 35.37% of the company’s shares were pledged as collateral for financing agreements!
This means that there are an additional 579 million shares still pledged TODAY as collateral for margin loans, roughly ~35% of the Company’s shares!
In this report we present publicly available SAIC filings, Credit Reports, Chinese court judgements and desktop research to support our opinion that Hosa has reported fabricated its financial performance to investors. Sadly, we think that investors are too late to recoup their investment, as the Shi brothers have already been able to siphon off capital raised into their own pockets via share pledges, undisclosed related party transactions, and stock dividends. We note that on July 5, 2018, Hosa announced it would delay payment of its dividend, increasing our concern that there is very little actual cash for investors to recoup from Hosa during this unwinding process.
We have seen this story before with Tech Pro and Huishan Dairy where management levers up a small operating business in the form of a listed public company, manipulates the stock price higher in the last hour of trading and pledges public shares to siphon funds from unsuspecting investors into management’s own pockets. Once uncovered, these stories have swift endings but unfortunately do not end well for minority investors.
Laden with debt and little cash with a business significantly smaller than reported in its filings, we think the intrinsic value of Hosa’s equity is HKD 0.00.