The Hong Kong-listed company has concocted a phantom Malaysian tax benefit despite almost no evidence of any material assets in, or shipments through, Malaysia, in order to conceal the fake profitability, the short seller noted.
“We also found a rotten pattern of undisclosed self-dealing,” Blue Orca pointed out. “Chinese FDA records indicate that contrary to the Company’s claims, CMS appears to be secretly funding research expenses for the chairman’s private companies.”
Evidence shows that the chairman’s private businesses are co-located at CMS facilities, use CMS staff, use CMS email addresses, and use company resources to invest for his personal benefit in biotechnology startups, the short seller added.
“We believe that through this rotten self-dealing, the chairman siphons ever-shrinking profits away from the struggling business,” Blue Orca said.
The evidence suggests that CMS exaggerates its financial performance, inflates profits and conceals that dwindling Company profits are used to privately enrich its chairman, the short seller noted.
“If we value the company on the profits CMS discloses to Chinese authorities and apply a modest 25% corporate governance discount to its P/E multiple, we value CMS at HK$3.95 per share, a 62% downside from its current price,” Blue Orca said.
“Given overwhelming evidence suggesting that CMS misleads investors, we believe that CMS is simply uninvestable,” the firm added.