Hexindai = Fraud

We believe that Hexindai has executed a fraud using fabricated financial statements to siphon all of its cash from the pockets of Unites States investors into the hands of China-based Hexindai insiders.

In our experience, when revenues are fake, profits are fake, transaction volumes are fake, and cash is fake, minority shareholders are victims of a financial crime which coincides with a worthless stock.

Hexindai Inc. (US: HX) (“Hexindai” or the “Company”) operates an online consumer finance marketplace facilitating peer-to-peer (“P2P”) lending between borrowers and investors in the PRC. With China’s consumer lending market estimated to grow at a CAGR of 49% from 2016 to 2020 and investor demand high, Hexindai completed a US$50 million Nasdaq initial public offering (“IPO”) equity listing in November 2017.

Evidence from local PRC filings, including Credit Reports and annual filings of Hexindai’s most significant guarantee insurance supplier, suggests to us that Hexindai lied in its Prospectus about the size and scale of its operations during its track record period to attract capital from US investors. Established in 2014, we estimate that Hexindai overstated its cumulative profits since inception by 1,343% and overstated its cumulative revenues since inception by 195%!

In its Prospectus, Hexindai claimed that it was going to use its IPO proceeds to grow and invest in its core business, an online consumer marketplace where borrowers are lent cash from independent lenders, not cash from Hexindai. However, once the IPO proceeds were deposited into its accounts, Hexindai immediately decided to change its use of the cash proceeds. Cash exited the business via a special dividend to shareholders (mostly insiders) and with Hexindai unexpectedly launching a direct lending business of unsecured loans nearing ~US$ 1 million in size to a few hundred Chinese individuals and/or businesses. We believe that the US$ 43 milion in net cash proceeds is gone, and we suspect all of it went to China-based insiders who live outside the jurisdictional reach of the United States.

As part of our diligence, we opened accounts on Hexindai’s online marketplace to confirm the user experience with what Hexindai described to investors. In January 2019, we spoke with Hexindai IR who confirmed to us that Hexindai is processing new borrower loans and that Changan is still providing default risk guarantee insurance for Hexindai’s platform lenders. Both of these statements are lies. As of today, Hexindai borrowers can no longer access Hexindai’s online marketplace borrower app and Hexindai’s default risk insurance partner has been forced to stop underwriting P2P guarantee insurance since December 17, 2018.

As with many previous examples of US-listed Chinese frauds, a large amount of the assets were ultimately held outside the jurisdictional reach of our US court systems, leaving little recourse for shareholders to recoup any value from their investments. This is why we think Hexindai is a zero.

For convenience purposes only, we have provided a Chinese translation of this report on our website.

We are short Hengan because we believe Hengan has fabricated RMB 11 billion of net income since 2005 which has manifested itself as fake cash on its balance sheet. Laden with debt, we assert that Hengan’s equity is ultimately worthless.

Hengan International Group Company Limited (HKEx: 1044) (the “Company” or “Hengan”) is best known for its “Space 7”, “Anerle” and “Anle” branded sanitary napkins (think maxipads) in China. In a very saturated and commoditized industry, Hengan claimed to generate 51% operating margins for its sanitary napkin segment in 1H’18, while its competitors are striving to generate 15% operating margins. Hengan’s reported historical return on assets for its sanitary napkin segment are equally questionable, claiming to achieve a remarkable peak return on sanitary napkin assets of 72% in 2016!

We believe the scheme was orchestrated using a web of inter-company related transactions to artificially inflate profits and conceal fake cash balances. Despite boasting cash and bank balances of RMB 19.8 billion and a working capital balance of RMB 7.6 billion as of June 30, 2018, Hengan has been aggressively raising debt to support its operations. In the five months from August to December 2018, Hengan issued six separate tranches of debt to investors raising a total of RMB 7.5 billion with a majority of the proceeds earmarked for working capital!

Characteristically with frauds, insiders create sham transactions with related parties to create illusory transaction volume, revenues, or profits depending on the fraudster’s desired outcome. Often these sham transactions are only on paper, and the fabricated buying and selling activity appears on the balance sheets of the counterparties as receivables and/or payables. We suspect this is how Hengan insiders have historically concealed dubious activity from auditors.

The scheme’s orchestrators have already been handsomely rewarded with significant cash dividends. Since 2005, Hengan has paid out RMB 18.6 billion in total dividends, which means at least ~RMB 7.8 billion has been pocketed by Hengan insiders from dividends. Our research has uncovered an undisclosed nefarious disposal of a Hengan revenue stream to Hengan’s CEO’s private family business at the bargain basement price of 0.7x 2016 net income! In addition, we found that Hengan’s insiders have undisclosed private businesses that claim to have transacted with Hengan on a Fujian real estate investment, increasing our suspicions that additional undisclosed benefits have been siphoned from Hengan to enrich insiders at the expense of investors.

So how do investors value a public company operated by unscrupulous insiders who use inter-company sham transactions to generate and conceal fabricated profits and cash? We think as long as Hengan’s insiders continue to be family relatives, Hengan’s cash and assets will be siphoned out to benefit insiders at the expense of creditors and shareholders. And if Hengan’s operational control was to change, we suspect the new team would find Hengan’s books to consist of overstated growth rates and profitability coupled with highly overlevered inflated asset valuations.

As this saga unwinds, we suspect defaults on debt covenants, increased costs of capital, increased leverage ratios, and reductions to dividend payments. Considering Hengan’s June 30, 2018 short-term financial liabilities balance of RMB 17.8 billion, and that Hengan raised additional short-term debts of RMB 7.5 billion in the last five months, we believe it is possible that creditors scramble to get repaid and settle debts for less than par value, leaving Hengan’s equity ultimately worthless…

For convenience purposes only, we have provided a Chinese translation of this report on our website.

Blue Sky Alternative Investments Limited (ASX: BLA) (“Blue Sky” or the “Company”) is an Australian fund manager with a purported $3.9 billion of fee earning assets under management (“AUM”) as of December 2017. Blue Sky also claims to have achieved a 15% Internal Rate of Return (“IRR“) net of fees since inception. Driven by the supposed rapid increase in ‘fee earning’ AUM and fantastic reported performance, Blue Sky’s market capitalization has grown exponentially to nearly $1 billion.

But all is not as it seems. We believe that Blue Sky is significantly overstating its fee earning AUM by reporting the gross value of certain assets as AUM instead of the fair value of the capital invested. Based on our analysis, we estimate that Blue Sky’s real fee earning AUM is at most $1.5 billion, 63% less than Blue Sky’s reported figure.

We believe Blue Sky compensates for its overstated AUM by charging clients egregious management fees, which can reach up to 17% of the capital invested in Blue Sky funds and are charged irrespective of the performance of the underlying investment. Because investors will soon wise up, we view Blue Sky’s fee revenues as inherently unsustainable. In other cases, such as private equity, we present evidence that Blue Sky has overstated its returns on many investments (a practice we believe is systematic). Through the overstatement of AUM and returns, Blue Sky inflates its current revenue and profits, driving up its stock price and attracting further capital.

Blue Sky’s main broker, Morgans, claims that AUM is the key driver of revenues and ultimately the share price of the Company. Blue Sky likes to compare itself to US-listed alternative asset managers; Apollo, KKR and Blackstone have an enterprise value which is on average 13% of their fee earning AUM. If we apply the same ratio to Blue Sky, and factor in a corporate governance discount, we estimate that the Company’s shares are worth at most $2.66 per share.