NHTC: Chinese Ponzi scheme or not?

Investment Analysis Clubs Saul’s Investing Discussions
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Somebody introduced NHTC to this board a few weeks ago. Just based on the growth numbers and P/E I bought a small position so that I would be forced to look at it more closely. The 1YRPEG was an amazingly low 0.08, meaning the stock could go up over 1200% and still have a 1YRPEG below one!!

Everything looked good until I started asking people I know in Hong Kong what they thought of it. They did not offer specific information about NHTC, but they did mention that there has been a problem with multilevel marketing in Hong Kong. People in Hong Kong sign up new sellers in China. If I recall correctly, they said it was illegal to do this in China so people use Hong Kong as a place to bring in people from China to sell the products in China. They sign up based on the idea that they will get rich. The companies will require a fee in addition to some minimum level of product purchase. What ends up happening in many cases is that these poor people from China spend what is a fortune to them and then they are unable to sell the products. This is similar to channel stuffing because it wouldn’t represent a level of end user demand that sales suggest. The result can be financially devastating for the people involved. Now, I do not know if this is going on with NHTC but since they are using Hong Kong to sell into China, it sounds somewhat suspicious to me.

I have not verified if NHTC’s products are legitimately sold to willing customers who really demand the products or if their sales people are purchasing product and are then left saddled with the inventory. If it is the former then I think the stock is a great buy. If it is the latter then I think this Ponzi scheme will eventually unravel. If anyone can verify real and strong end user demand for NHTC’s products in China, I’d love to hear about it.

I sold all of my shares for a gain. Since then the stock has run up, maybe because of demand created for the stock because it will be added to several stock indices. I used my gains from the short term NHTC trades to buy some Sept15 $45 calls to be a part of this Ponzi scheme (alleged) just in case it is sustainable through the next earnings release.

Chris

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Chris,

I also bought a tiny position to try that one, but I don’t sell it yet letting it the big run yesterday.

When I read the last conference call the CEO said:

“We currently do not engage in direct selling in China. We sell products for personal consumption from Hong Kong. We have taken great care to make sure that we are not in violation of any Chinese law. The Chinese government knows this well in many jurisdictions at many levels. We put in substantial efforts to develop and maintain good working relationship with pertinent government departments.”

(I don’t know, but it doesn’t smell good to me. Couldn’t be just me. I’ll explain. I live in Spain where political corruption have been overextended for many year as a way of doing business for big corporations, and it’s China you know…)

Then the CFO said:

“We saw a strong growth in Hong Kong with revenues increasing $16.9 million or 83% in the first quarter of 2015 compared to the same period last year. This increase was due to the effectiveness of our leadership development, promotional programs, incentives, new products, training, and event (…) Our active number of distributors increased 14% to over 62,000 at March 31, compared to three months ago. The comparable number a year ago was 35,000 active distributors.”

In case that the distributors had to buy themselves the products they have to sell, most of the increase in sells would be due to new contributors buying. They don’t explain clearly, and it seems to me they are not very trust worthy management team.

Sorry if my English is not good enough to make understand what it’s not much than a personal perception rather than objective facts.

Best!

Maria

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Hi Maria, This is the kind of company I will just pass on. There is too much chance of it all being a Ponzi Scheme, as Chris suggested. There are safer companies all over the place that are growing fast too. This may be okay and honest, so then I’ve missed it but I’ve invested in something else I feel better about.

Saul

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As I read your post I sold out with a little gain.
You’re right. There are better places to put the money.
Thank you Saul!
Maria