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CIFS Stock Down 90% Months After Short-Seller Claims, China's Lending Regulations

Shares in CIFS were trading at $2.70 apiece intraday Monday, down more than $30 from their April price.

Anna Vodopyanova
    Oct 15, 2018 11:57 AM  PT
CIFS Stock Down 90% Months After Short-Seller Claims, China's Lending Regulations

The stock of China Internet Nationwide Financial Services Inc. (Nasdaq: CIFS) tanked an additional 24 percent intraday Monday, trading at $2.70 per American depositary share, down more than 90 percent from its price in April.

While the company made no announcement that would explain its significant drop today, the Beijing-based company has been struggling after a short-seller's allegations in the past few months. In addition, China has implemented new regulations in lending practices recently that affected firms across the industry.

Allegations of Fraud

CIFS' downfall occurred within a year after the noted short-seller Muddy Waters Capital LLC published reports where it alleged CIFS was "a complete fraud, total zero."

The researcher released its full report on CIFS in December. Among other things, the report, which was based on financials from the State Administration of Industry and Commerce (SAIC) and other sources, claimed "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%."

Muddy Waters said it found that "zero to almost none of CIFS's purported business is real," and that the company's loans, revenue, and profit, as well as the deals with its counterparties, appeared fabricated. For example, the report included photographs taken at a non-functioning business address of Beijing Ailirui Trading Co. Ltd., one of China Internet's purported borrowers.

The company, which reached its peak going over $60 per share in November, dropped briefly after the short-seller report but retained a near-$40 average.

In April, Muddy Waters reminded investors on Twitter about its negative view of the company. "Full disclosure, we're still short," it said, sending the stock of CIFS down 18 percent in following days to near $20 per ADS.

CIFS went on the defensive, asking investors not to trust the media and "malicious investment institutions." 

"The company hereby declares that it strongly condemns this use of conspiracy means, stealing information, pulling information out of context, and making up false accusations, and will continue to take legal sections to protect the interests of the company and all shareholders," CIFS said.

The company did not release any more objective statement following its internal investigation.

New Policies for Lenders

Further, as Chinese lenders suffered from regulatory changes in Beijing's attempt to control risks, CIFS, which provides financing solutions to small- and medium-sized enterprises (SMEs), got a share of the industry's turbulence. Its stock continued to slide.

In September, the stock of CIFS was trading at $9 per ADS after the company posted its first half financials. It said its income declined 17 percent from the same period a year ago. Its revenue for six months increased to $11.4 million from $8 million a year ago.

The company said it financed 30 percent more projects during the period and grew its client base. It also announced several new partnerships as it transitioned from a "traditional" financial services provider to a FinTech company. Its chairman and CEO, Jianxin Lin, said in a statement at the time that he expected strong demand for CIFS's services to benefit the company in the future and expressed a positive outlook.

Today, shares in CIFS were trading below $3 apiece, making it a 91-percent plunge that the company's stock took in six months since April.

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Shares in CIFS were trading at $2.70 apiece intraday Monday, down more than $30 from their April price.

(Source: Thomson Reuters Eikon)

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