Chinese Tech Rotation
When stocks capitulate, the initial reversion to the mean often is a lucrative bounce.
Chinese tech stocks are going through that honeymoon process right now.
After being targeted systematically, the Chinese communist party changed its tune.
A clearer and more defined regulatory framework around these internet businesses is a definite positive.
There is a growing consensus that the “worst is behind us” for Chinese tech stocks and investment banks have been shooting out stock upgrades.
However, I would recommend readers to never touch Chinese tech stocks like your life depends on it.
Having traveled and lived in the country numerous times, I can say that the foundations are rotten to the core there causing buildings literally to fall over and balance sheets even more rotten than the felled buildings.
Even more damning is that locals assume that everyone else is being shady as well which they feel justifies themselves to participate in less than stellar business practices.
So when I read a report of Chinese EV maker NIO (NIO) denying a report published by short-seller Grizzly Research claiming the company is exaggerating revenue and profit margins, I am not surprised.
Grizzly Research said that NIO is playing “accounting games to inflate revenue and boost net income margins to meet targets.”
The report examined the company’s creation of Wuhan Weineng Battery Assets Company.
The company was created in 2020 and includes NIO, EV battery giant Contemporary Amperex Technology.
The business owns the batteries that NIO drivers can, essentially, pay a monthly fee for in what NIO calls BaaS, short for battery as a service.
NIO pioneered separating the car purchase from the battery purchase. A NIO buyer can choose to buy an EV for a lower price and then pay for the battery on a monthly basis. It’s a way to lower the cost of an EV and make it more comparable to buying and filling up a gasoline-powered car.
NIO recognizes sales when it sells batteries to Weineng. That’s the issue Grizzly has with the company.
Plastering fake sales on the balance sheet that are in effect a sale to oneself and clocking that as gross income is not a shocker.
In fact, I would be surprised if that is all they are doing behind the scenes. Usually, it’s a million times worse in China.
At least there is a product and it’s not a Potemkin product!
Chinese tech companies are not beholden to the same accounting standards as United States registered companies.
They are not GAAP-stamped companies and more or less just fill out their balance sheet as they see fit.
They then register on America’s public exchanges as an American Depositary Receipt (ADR) which doesn’t stringently check the financial health to the same degree as if an American company went public in New York.
Even more bonkers, Chinese management isn’t exposed to any criminal or civil liability which emboldens Chinese tech firms listed as ADRs to lie and cheat as much as possible to boost the share price.
It is now fashionable to say investors are rotating back into China after a year of heavy selling that wiped out almost $2 trillion.
Just be aware that your money could experience a covid zero reaction from the Chinese government and these companies are all dealing in fake numbers to a substantial degree.
That is why I can never recommend buying any Chinese tech stock.
There are so many better opportunities in America.
