We conclude that China Internet Financial Services Inc. (NASDAQ:CIFS) is a King Zero – just another worthless China fraud.
- We believe zero to almost none of CIFS’s purported business is real. PRC financials show that CIFS overstated its 2016 revenue by 5x.
- Every one of the purported borrowers to which CIFS disclosed having made loans (accounting for 84.2% of loan balances) appears to be a sham counterparty. (The purported borrowers of the remaining 15.8% of reported loan balances were not disclosed; however, we strongly suspect that most – if not all – of these loans and associated income are also fabrications.) Therefore, the associated loans, revenue, and profits appear to be completely fake.
- CIFS has disclosed doing business with two related parties, and even those loans and associated revenue appear to be fraudulent.
- CIFS’s recently announced “big data” company purchase also appears to be a lie. It is from sham counterparties, and therefore a fraudulent purchase of an empty box, rather than of a real or even promising company.
- 47.3% of CIFS’s reported 2016 net income purportedly was generated by its Kashgar subsidiary; however, that subsidiary existed for only two days in 2016. Further, Kashgar, accurately in our view, reported in its PRC financials zero revenue and income.
- CIFS is too good to be true – claiming to turn a seeming commoditized business model into an overnight juggernaut with purported gross margins over 97% and net margins over 70%. However, Chairman Lin seems to be an obscure and fairly unsuccessful businessman, which in our view makes him about number 450 million in line to pull off a business miracle like this. CIFS is therefore one of the most implausible – if not the most implausible – China fraud stories we have ever come across.
- CIFS’s corporate structure ensures that not only does Chairman Lin get to keep investors’ money, not have to worry about prison or any legal repercussions, but the ownership of his company is not the least bit at risk. In other words, this structure is the coup de grace of the numerous middle fingers he’s extending at U.S. investors.
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