Fanhua Shares Fall Despite Response to Short-seller Report

Before the market opened today, Fanhua released another, more-detailed response to the short-seller allegations, claiming J Capital "lacked basic knowledge of the insurance industry" and "misrepresented facts so as to mislead the public."

Shirley Tian
    Jan 22, 2019 2:50 PM  PT
Fanhua Shares Fall Despite Response to Short-seller Report
author: Shirley Tian   

Shares of Fanhua Inc. (Nasdaq: FANH) slid more than 5 percent today to $21.75 per share in New York despite the company issuing a strong response to short-seller allegations and a promise to increase the dividend for 2019.

The company was hit by a short-seller report published by J Capital a week ago. Fanhua immediately issued a rebuttal, saying the report included groundless accusations and deliberate out-of-context misinterpretations. 

Before the market opened today, Fanhua released yet another, more-detailed response to the short-seller allegations, claiming J Capital "lacked basic knowledge of the insurance industry" and "misrepresented facts so as to mislead the public."

In the 50-page report, J Capital analyst Anne Stevenson-Yang claimed Fanhua was uninvestable because it "robbed public shareholders" by claiming to have sold its property and casualty insurance division to a third party, Cheche, and J Capital suspected "the new company is related to Fanhua executives."

Fanhua, however, argued that "the company's divestiture of its P&C insurance subsidiaries is a correct and proper strategic decision," and "neither Fanhua nor Fanhua's management team has any prior ties to or equity interest in Cheche." 

But Fanhua admitted the two companies do have a close connection. Fanhua maintains business cooperation with Cheche in the way that Fanhua introduces user traffic to Cheche, while Cheche is responsible for transaction processing for which Fanhua charges Cheche certain platform service fees based on transaction volume. 

Stevenson-Yang also alleged Fanhua "developed a huge commercial real estate project in the founder's hometown for more than two years without telling investors."

In response, Fanhua said it "had neither a license nor interest in real estate development." But in 2016, Fanhua established a joint venture with an independent third-party real estate developer, Sichuan Tianyi Real Estate Development Co. Ltd. 

"Under this arrangement, Sichuan Tianyi would be responsible for developing the land and providing all funding for the development and bear all loss or profits that potentially could derive from the development, while Fanhua would have a right to purchase certain properties at a discount," Fanhua explained. "Fanhua would not provide any loan, guarantee or other funding for the development."

To show management's full confidence in achieving solid growth in the company's operating profit in 2019, Fanhua said "our management will submit a proposal to the board to increase the dividend per [American Depositary Share] for fiscal year 2019."

Just three months ago, the stock of Fanhua plunged nearly 10 percent after an asset-management firm, Seligman Investments, alleged the financials of the Chinese insurance company, including recent second-quarter results, showed signs of fraud.

Seligman, based in Menlo Park, Calif., claimed that Fanhua transferred cash to insiders through related-party transactions, inflated the scope of its operations, reported questionable financials and discrepancies between earnings and cash flow, and has been involved with individuals linked to embezzlement, de-listing, or SEC prosecution, among other things.

Fanhua responded a day later with an announcement very similar to today's press release, saying "the allegations in the report are false and groundless, reflecting the author's lack of knowledge about the company's fundamental business. The report is misleading and reflects the author's intention to cause panic among investors and profit from the decline in the price of the company's stocks."