TIL: Variable Interest Entities (VIE)

What is it?

Investopedia

https://www.investopedia.com/terms/v/variable-interest-entity.asp

What Are Chinese VIEs in the U.S.? More than 100 Hong Kong- and Chinese-based corporations are structured as VIEs in the United States. These include well-known companies like Alibaba, Tencent, Baidu, JD, and NetEase, among others. Business Insider. "Assessing Variable Interest Entity Risk in Your China Portfolio." The VIE structure allows these firms to get around Chinese regulations that prevent foreign capital investments in certain types of Chinese companies (e.g., those involved in telecommunications or media).

100 tickers is quite some presense, so I decided to dig a bit deeper.

ELI5 by gpt-4o

Where did I come across this company structure?

After a beautiful 30% drop of the infamous $PDD (Temu) from ~$140 to $100.00 (yes, .00), I started to look for a list of Chinese stocks listed in the US to avoid. Some of them are ADRs, some are gappy, and they tend to drag each other down. Plus, I don't like how they treat their workers like trash.

The USCC List

Introducing the USCC list, from the US-China Economic and Security Review Commission, a department I've never heard of before:

https://www.uscc.gov/sites/default/files/2024-01/Chinese_Companies_Listed_on_US_Stock_Exchanges_01_2024.pdf

The largest Non-VIE structured US-listed Chinese company is BeiGene ($BGNE, biotech, oncology) with a market cap of $18 bln as of Jan 2024 (this belongs to the mid cap class).

I knew Chinese companies do everything they could to get around CCP's regulations, such as get listed in HK and US, changing corp structure (learned that today!), and even split a company into tWo (ByteDance) and found itself in a situation no companies founded in a sane environment would ever be in.

After some chart-flipping thru the tickers in the list, I found that:

• None of the biggest companies on the list outperformed the market (S&P 500). $PDD seems to be the best performing one, closely following $SPY on the 5 year timeframe. That bubble blowed today. :)
• Many are looking very bearish long-term:
  • $BABA / $BIDU: Still big, but it basically moves the opposite direction of the market (which goes up). Is it a big pharma (they tend to ignore the market) in disguise? Sadly FDA never proved any of its drugs or trials.
  • Stocks at the end of that list are all very close to 0 as of Jan 2024.

I wanted to find stocks that got trapped in an extremely long term trading range / compression, like the broad Chinese market, but I don't think it's worth my time to keep flipping. I'm sure there are many.

FinViz List w/ Country Filter

https://finviz.com/screener.ashx?v=111&f=geo_china&o=-marketcap | https://archive.li/ZNkCj

How's this useful as a day / swing trader?

Add them to your DNT (Do not Trade) list, or scanner blacklist. :)

Some common DNT list members are: $BA, $ABBV, according to other people.

Also it's good to refresh your memory because some of the names of the biggest companies in that list are not intuitively linked to their actual names.

For example, $VIPS "Vipshop Holdings" showed up on my scanner a few days ago, I did not link it to this (https://ir.vip.com/ | https://archive.li/VnigC). The domain, the company name and the ticker are all extremely misleading, and I thought it was a small-time American retailer before I saw it on that list.

In the screenshot of the list above, PDD has been renamed to PDD Holdings, making it less obvious what it actually is for some people.

Interesting Finds

• $PDD gapped down (see above) and go, and spent the latter part of the session today in an extremely tight trading range of just ~0.23%, from ~$99.78 to ~$100.03, which was amazing. Neither side had an upper hand during the compression, and wicks and tails are not very long. Was it just programs testing bids and asks?
• Many of these companies in the list do not have a accessible homepage, some have only IR page, while some have neither (!!).
  • $YMM (cap: $7.2 bln), https://ir.fulltruckalliance.com/ is accessible, while https://fulltruckalliance.com/ is not. Expired certs? (After clicking "Proceed" despite invalid certs, I was presented with a 404 page. :) ) This is so Chinese. It's possible that the website is hosted on a Windows XP computer in a dusty server room somewhere, using some Java 8 framework. Oh, and the Windows copy is not licensed.
• 34 of them in the list have market cap (as of Jan 2024) of >$2 bln, I familiarized myself with them already - the rest won't show up on my scanners.