Key insights
- The article highlights the risks associated with Chinese Variable Interest Entity (VIE) stocks listed on US exchanges, using FinVolution, Weibo, and Trip.com as examples. The author argues that the contractual nature of VIEs, rather than direct equity ownership, makes traditional value metrics like low P/E and P/B ratios unreliable due to regulatory and legal uncertainties in China. This structural risk, coupled with deteriorating business fundamentals for some like Weibo, suggests potential downside for investors in these specific names and could create broader caution around Chinese ADRs.
Three stocks in my screening process this month with metrics that looked like extraordinary value:
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FinVolution (FINV): P/E 3.7, P/B 0.53, ~6% dividend yield
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Weibo (WB): P/E 5.0, P/B 0.52, 7% dividend yield
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Tripcom (TCOM): P/E 7.5, P/B 1.38
I would not recommend any of these because they are all VIE's.
A VIE (Variable Interest Entity) is a contractual arrangement used by Chinese companies to list on US exchanges while complying with Chinese restrictions on foreign ownership. When you buy shares in FINV, WB, or TCOM, you're not buying equity in the Chinese company. You are buying equity in a Cayman Islands holding company that has a contract with the operating company.
Graham's margin of safety is built on assets a shareholder can actually lay claim to in a worst-case scenario. If the VIE arrangement is invalidated, by Chinese regulators, by a court ruling, etc..., the asset backing behind your P/B ratio is a piece of paper (well probably many pieces of paper). The 0.52 P/B on Weibo is only a safety net if you can enforce a claim on those assets, which, you can't.
Weibo also has additional issues. Declining MAUs (598M to 567M over two years), flat revenue for three years, and intensifying competition from Douyin. The VIE risk sits on top of a deteriorating business.
Tripcom has the best underlying business but I still wouldn't touch it with a 10 foot pole.