"All lies are powerless in the face of truth."
Linklogis (9959.HK) issued its clarification announcement, calling our logic flawed and allegations baseless. But a closer look into their responses you will find that instead of answering our questions and allegations head-on, the management has chosen to beat about the bush and avoid providing any further clarification on the issues at hand. The bankers that defended the company had also vigorously tried to cover up the facts but avoided going deep into the key issues around tax evasion and the overstatement of revenues. Maybe they do not understand the China tax regime and perhaps it is best to let sleeping dogs lie.
1) High concentration on real estate is NOT addressed
2) Management is obviously confused and contradicting themselves on financial risk
3) Why is a tech company getting into a debate with gearing ratios?
4) Overstatement of revenues: a convenient deflection to the accountants
5) Still trying to prove you have good tech?
6) Linklogis’ tax evasion issue might just open the biggest can of worms
The company must really be spooked by all the talk about using investors’ money towards massive financing activities that they announced a US$ 100 million share repurchase yesterday.
That being said, we seek the truth and demand the management to face the music and start providing actual facts!!
1) High concentration on real estate is NOT addressed
The company claims “financial institutions and anchor enterprises accounted for approximately 40% and 60% of the total number of the Group’s customers, respectively”, and that “among such anchor enterprise customers, approximately 25.5%, 24.8% and 10.6% of them belong to the manufacturing, real estate, and construction industry sectors, respectively”.
Under an untrained eye, one may think that we are actually wrongfully accusing the company of its high real estate concentration – but if you look closer at how the company has categorized and chosen its words, you will find that they are just distorting the truth and making the water “muddy”.
Management has categorized its customers by anchor enterprises and financial institutions, we would like the management to please simply clarify:
Out of the anchor enterprises and financial institutions, how much (in RMB) of those transacted are in real estate? Given the government’s recent move towards limiting ABS issuances in the real estate segment, we believe that the volume of these transactions would definitely be of interest.
Our analysis is based off publicly available information and sources such as the People’s Bank of China’s Unified Registration Portal 中登网“. Is management saying that these sources are not accurate and cannot be relied on? In management’s words: “Actually, most of the ABS/ABN offerings are sold as private placements in China and relevant information of such offerings, such as issuance sizes, names and industries of anchor enterprises, etc., are not accurately and completely recorded in public databases”. In that case, could you clarify what transactions are these? How big are they and how much of these are in real estate?
2) Management is obviously confused and contradicting themselves on financial risk
The management first said that “warehousing is not a financing business…” then it later said that they “may be subject to risks in connection with the warehoused accounts receivable in the securitization offerings enabled by ABS Cloud”??
Make up your minds! So what exactly is warehousing and is it a financial risk? How big exactly is this risk?
When management says “such risks are subject to robust risk management measures…” what are the measures to reduce these risks?!
Instead, they have simply covered this up by quoting the “AAA credit rating” of anchor enterprises such as China Evergrande and China Fortune Land Development, who are apparently some of Linklogis’ biggest clients in the real estate segment. Look at how these companies are doing today.
Management also says that the warehousing process is done in a “short period of time” and that the financing is “of a very short-term in nature”. Are they conflating short tenors with lower risk? Can management please disclose the size of these loans and the provisions? Short-term loans can prove to be very fatal if the amounts are very huge especially if we are talking about RMB 45 billion.
What is the nature of the related party transactions at the subsidiaries’ level which in the Company’s words: “not reported on a standalone basis in the consolidated financial statements of the Group.”?
3) Why is a tech company getting into a debate with gearing ratios?
So the management say that we are not calculating the leverage ratio correctly. Fine, then what is it? 50x? 30x? Why are you not giving us the answer here? Is management absolutely sure that they have not breached the regulatory limits? Note that the gearing ratio of 10x applies throughout the year at any point of time and not simply just the year end number.
You know someone has something to hide when they are intentionally not answering the question at hand.
There is absolutely nothing wrong with warehousing and it is perfectly ok to get into the lending game, but please play by the rules. Regulatory compliance will eventually catch up and history will re-enact itself, just like Ant Financial.
4) Overstatement of revenues: a convenient deflection to the accountants
Again, the management has conveniently chosen not to provide more colour to the quality of its revenues and deflected this to the auditors.
Given that this issue is out in the open, would KPMG openly support and sign off on the next financial statements?
Why was KPMG brought into the IPO process at the last minute when a number of the key subsidiaries were audited by PwC? Did PwC choose not to sign off after an intimate understanding of the risks involved?
We are also all too familiar with what happened to Luckin Coffee and Wirecard. Both were listed companies. Both were audited by Big Four accounting firms. Look at where these companies are at now.
What we really want to know from the company is: how much of revenues are attributed from professional third parties and how much of it is your own technology?
5) Still trying to prove you have good tech?
We understand that applying for these patent require a bit of time, but management did not address the points of why they had only started applying for patents just before IPO.
Nor did they address the lack of experience that the CTO who happened to intern/or work at Tencent for a month. We’re sure those were intense 30 days that helped him build the technology behemoth that Linklogis is today.
Perhaps the company should organize an Open Day so that investors can visit the premises and its technology. We will not be surprised if we see a call center filled with hundreds of people.
Multi-tier AR. So transaction volume increased by over 150% and you found 20 new customers in its Multi-tier AR Transfer Cloud. How much has it translated to in revenues or profits?
Based on our interviews with industry experts, very few or none of the clients are actually using this and also, there is still much manual labour that goes into handling the entire process. So really, who are the new customers?
We all know that spending more on R&D does not translate to better technology and higher revenues. It is often a good story to say that you’re still ‘burning cash’ to build the best tech in the world.
But the bigger question remains: Are you a balance sheet-driven business or a tech-driven business. If so, then how has the RMB 4.8 billion raised in the 3 years prior to IPO been used? We’d like to know breakdown of the absolute numbers.
6) Linklogis’ tax evasion issue might just open the biggest can of worms
Does submitting true and complete tax data automatically mean you’re complying with the rules? We would like to politely invite the tax authorities to check (Oops! We heard that they are already checking and a review might be imminent)
We would like to remind the company that the Chinese government has zero tolerance for massive tax evasion and off balance sheet financing for real estate.
IN SHORT:
Linklogis is in deep trouble and this is further proven by the quality of responses to our first report (link). If there is nothing to hide, why is the company not providing the real answers to our so-called ‘false allegations’?
We are happy to submit all of our evidences / work upon request that support our allegations, are you?
After all, you are merely a heavy asset lending business trying to fit into a nimble fintech outfit. Oh, did we forget to tell you that your belly is showing?
