Internet company "Fried room"

Absrtact: An Internet company that first bought an office building on Wall Street and then bought a hotel in Sanya, Hainan, has spent 73.7 million of dollars on the two investments, but the company is not enough to continue in Shanghai, Beijing and more cities

An internet company that first bought an office building on Wall Street and then bought a hotel in Sanya, Hainan, has spent 73.7 million of dollars on both investments, but the company is not enough to continue buying more real estate in Shanghai, Beijing and more cities. The company says this is because staff training requires a venue.

This company is SouFun (Sfun. NYSE). Their continued acquisition of real estate around the world has recently been questioned by a short institution called the Glaucks Study (Glaucus research Group).

"As an internet company, it is curious to see SouFun frequently buying real estate that is expensive and seemingly useless to us," he said. "Glaucks Research," the founder of Matthew Wiechert in the mail to the "First financial daily" reporter said.

In the Friday short report against SouFun, "Glaucks research" listed seven of allegations, in addition to doubts about the integrity of the founder of the company, SouFun the acquisition of real estate and large-scale dividends, the report is the main two questions. "We are not targeting Chinese companies, but unfortunately there are many cases where the management of Chinese companies lacks respect for shareholder interests and international norms of corporate governance." "Matthew Wiechert said.

In the face of allegations of "Glaucks research", SouFun accused the short report of being misleading in the next day's clarification announcement. Deutsche Bank, which served as SouFun's IPO underwriter, has also been soufun in subsequent research reports. But Fuhaiping, an independent analyst, said: "In terms of corporate operations and corporate governance, the short report actually raises some very well founded concerns." ”

Internet company "Fried room"

One of the strongest questions in the "Glaucks Research" report is why the house-search has shown so much interest in buying real estate and is actively putting it into action.

SouFun the acquisition of the 72nd AIG building on Wall Street at $60.7 million a 2011, and then, in 2012, bought the resort hotel in Sanya------Clarke Quay, House Search in the SEC file, the purchase of real estate is explained by employee training needs.

But Matthew Wiechert and his team find it hard to believe this explanation. For internet companies with light asset models, the practice of buying office space on Wall Street and buying a hotel in Sanya has clearly gone beyond the nominal use of its claimed training grounds-"Why is the house going to buy the world's most expensive real estate in downtown Manhattan to train Chinese employees 7000 of miles away?"

In fact, SouFun, in addition to owning its own commercial properties in New York and Sanya, announced earlier this year that it would take out 800 million yuan in cash to acquire the Baoan mansion in Pudong, Shanghai, which is currently used as an office, retail and hotel building, and will become one of SouFun's training venues after the acquisition.

"The 2010 IPO coincided with an internet-focused light asset company with less than $10 million trillion in fixed assets, but since then, the company has spent 200 million dollars on acquiring real estate in the name of a training facility." "The Glaucks study" was noted in the report. If the above New York, Sanya, Shanghai Three properties added, the total building area has reached 75,000 square meters.

But SouFun also plans to buy more real estate. After communicating with management, analysts at Deutsche Bank predict that the House will continue to purchase price-attractive real estate for the next 3-5 years and enter some of the currently considered Non-core businesses. Deutsche Bank's report acknowledges that this could spark worries about the company in the capital markets and pressure valuations.

"Investors are obviously not happy to see an internet company that is using the money to ' fry the house ', so SouFun will buy real estate as an employee training use. "When an internet company invests money in ' speculation ', it also means that management has encountered problems in its main business engagement," said Changlei, Sohu's focus brand director. ”

Changlei means, soufun rely on urban coverage of the model is currently facing the plight of the expansion of the weak, and then turned to the development of real estate investment, "real estate regulation limited the heat to the three or four-line extension, so soufun if the continuation of the three or four-line urban expansion to establish local stations, from a cost-effective point of view is not Search room has not been able to put home, second-hand housing business, these two reasons cause soufun have a lot of cash in hand, but do not know where to cast. ”

However, "Glaucks research" that soufun not only in the name of the staff training to cover their "speculation", they are more severe questioning. "Glaucks Research" that the transaction is also suspected of listed companies and major shareholders of the transfer of interest.

Shorting reported that the founder of the SouFun, after the acquisition of the AIG Building, set up a private non-profit organization, responsible for arranging the relevant training. The 2011 Annual report showed that SouFun paid more than 2 million dollars to the Wall Street Global Training Center. But according to the IRS, the agency received less than 50,000 dollars for all payments from May 1, 2011 to April 30, 2012. The report suggests that the 2 million of dollars paid by listed companies could be largely channelled into the founder's private-sector pockets.

This is a stern but unproven allegation.

Dividend dispute

Ironically, listed companies targeted by short institutions tend to gloss over bad results on suspicion of financial fraud, but SouFun is challenged because they used to be "really good" – 109% of capital gains and 28% dividend rates since September 2010, And 2010-2012 years of profitable composite annual growth rate reached 55%--then, management made some "nouveau riche" will have "enthusiastic" move.

In addition to investing in real estate, the SouFun in 2011 and 2012 have carried out three large-scale dividend, a total of 270 million U.S. dollars, which also became a short report strongly questioned. The "Glaucks study" argues that the soufun dividend approach is costly and unsustainable, and in the long run is detrimental to shareholders.

The report quotes a transcript from SouFun's 2012 three-quarter conference call. One analyst asked the management why the company's cash rose by 94 million U.S. dollars in the three quarter, while short-term debt grew by 81 million dollars. Management explained that the growth in these two financial data was due to the funds that the company needed to raise dividends through the "internal security loan" approach. This means that SouFun is mortgaging renminbi deposits in China to a domestic bank and then receives a dollar loan from a foreign branch of the bank to pay dividends.

This kind of "dividend lending" approach, Paul Gillis, a professor at the Guanghua School of Management in Peking University, appears to have a considerable risk: "Internal-security lending" is becoming the modus operandi of the founders of some VIE structures, which can circumvent foreign exchange controls and tax avoidance, but because of this, This is likely to cause vigilance on the regulatory authorities.

"[SM] The biggest problem is how a listed company can repay a dollar loan abroad." With foreign exchange controls always present, renminbi cash in the territory has always faced difficulties in moving beyond its borders, in which case those dollar loans will never be repaid. In the event of a future loan default, domestic collateral is confiscated by the bank, and public shareholders abroad will suffer losses. Paul Gillis on his personal website. Fuhaiping to reporters: "Gillis's point of view is clearly applicable to the search house." (Note: Fuhaiping is a Gillis student)

In the short report, "Glaucks study" pointed out that the adoption of "internal insurance outside the loan" SouFun will face three choices: either take the domestic renminbi cash, repay the foreign dollar loan, according to the Chinese Exchange control regulations, the transfer of funds from the territory to the overseas process, will face the 15%~25% of heavy tax; Either through the issuance of debt abroad to borrow the old, but the current situation in the credit environment is deteriorating, in fact, it is difficult to issue debt financing in the United States, the last option, that is, soufun through the allotment method financing debt, which will dilute the interests of existing shareholders. According to the Glaucks study, large-scale dividend-search is costly and unsustainable.

But SouFun's response was simple: when the company's cash reserves reached 100 million ~1.5 billion, it would consider giving dividends to shareholders. For the whole short report, the house search gives a "misleading" evaluation.

Matthew Wiechert told reporters that he and his team are currently working on a clarification bulletin for the management of the search house. The firm, which is based in California, has been targeted at a number of Chinese companies listed in the US and Hong Kong, including China's Renewable metal Resources (00773.HK), Western Cement (02233.HK), Shougang Resources (00639.HK) and China Medical Technology (cmed). NASDAQ), Dragon Mining (Llen. NASDAQ), Gulf Resources (Gfre. NASDAQ), the Journey of the World (UTA. NYSE).

Most of the time, the "Glaucks study" of shorting has succeeded, but this one has so far not been successful. The share price of the house was only slightly down 2.75% on the day the short report was released. "We understand that in some cases the market may take some time to digest our research, but we believe that in the long run the company's share price will ultimately reflect our judgment," he said. Matthew Wiechert said.

Deutsche Bank, which houses the House, has the opposite view: in the long run, the company's valuations will rise gradually over time.