Shineco Inc.

The ‘China Hustle’ was a 2017 documentary that showcased the frauds perpetrated by Chinese companies taking over publicly listed US ‘shell’ companies and raising money from the public. Their financials were exposed as fraudulent when compared with videos of factory activity and filings with Chinese regulators (SAIC).

Shineco wasn’t named specifically in the documentary and is listed on the NASDAQ. It processes Chinese herbal products. It listed in 2016 and is currently selling at under $12m or $0.43 per share.

It appears to be extremely cheap based on the financials – selling at just 24% of net current asset value (a proxy for liquidation value) and less than 2x average earnings. The current assets are primarily comprised of cash of $42m, supposedly entirely in Chinese banks.

Despite having $42m in liquid cash deposits (and supposedly generating net cash flows of $6.1m in the last six months), the company has embarked on three equity raises since September 2018 aggregating to over $4m from ‘selected’ investors. Closer reading of the rise in administrative expenses in the last six months reveals most of the last equity raise of $1.5m were issued to management at the paltry price of $0.52 per share (the previous issue was priced at $1).

These equity raises combined with write-offs of: investments ($2.1m), uncollectable supplier advances ($2.4m), and bad debts ($5.6m) within the last two years raises questions on the fidelity of management.

NASDAQ sent notice to the company to bring the share price above $1/share. Management are now pursuing a reverse stock-split (due for a shareholder vote) only after an extension of the deadline (to June).

It appears as if these entities are mocking the US regulatory system by complying in form but ripping off minority shareholders. The SEC ought to be more aggressive in pursuing these cases to restore public confidence.

We are prepared to purchase distressed stocks when the price is low enough in relation to investment value. But the sheer disparity between the $42 million in cash and the multiple equity raises aggregating to a paltry $4m - raises serious questions on the validity of the cash balance, and hence, the investment value of the stock.