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Thursday, December 2, 2021

How can Chinese tech giants cash out at the right time

In China, there is no clearer sell signal than Chinese President Xi Jinping began to personally attack an industry.

Therefore, when Xi Jinping complained in March that ruthless family education was a “stubborn disease” that put too much pressure on Chinese children and their parents, at least two heads of Chinese tuition companies began to sell them in New York. Of shares.

In a previously unreported transaction, a shell company held shares for GSX executives who had a market value of approximately US$24 billion in New York at the time. It was sold only three days after Xi Jinping’s speech. Stocks worth up to 119 million U.S. dollars.

The sale is one of hundreds of records reviewed by the Financial Times, and these records provide one of the first insights into how and when executives of China’s largest New York-listed technology company conduct stock transactions.

In public, Larry Chen, the CEO of GSX, does not seem to have any contact with the shell company sold. He expressed his confidence in his business and promised to use his money to buy 50 million US dollars at the end of March. Stock.

But a person close to GSX said that at the time of the transaction, its leaders realized that Beijing was considering stricter regulation of the industry.

By July, the Chinese government banned the entire industry from making profits, causing the stock prices of all major tuition companies to plummet. Today, the value of GSX shares listed for sale in March is only US$4 million. Chen seems to have not fulfilled his 50 million dollar pledge.

GSX (later renamed Gaotu Technology) declined to comment on the stock sale and stated that any stock purchases made by Chen will be noted in public documents. It hasn’t happened so far.

On the eve of the profit ban in July, the executives of another Chinese education company also cashed out their shares listed in New York.

The husband and wife team that co-founded 51Talk, an online English tutoring platform, began selling stocks on April 1st, and sold stocks approximately every other day until the end of June. Their sales accounted for half of the stocks traded in a few days. By the time Beijing announced the new regulations, they had cashed out $4.3 million. 51Talk did not respond to repeated requests for comment.

Documents reviewed by the British “Financial Times” show that Chinese executives have also conducted dozens of timely sales. Although there is no evidence of insider trading, many transactions were conducted before regulatory actions or disappointing earnings reports were released.

Some executives seem to have reached the peak of the market. Ten executives and directors of VIPshop, an online discount shopping site, sold approximately $527 million in stocks in March, almost three-quarters of all the stocks they sold in the past 18 months, which was triggered by the collapse of Archegos Capital Management Before the sell-off-close its shares. Its share price is currently down 70% from its March level. Vipshop declined to comment.

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Chinese executives’ transactions are rarely noticed because they abide by the different reporting rules of the US Securities and Exchange Commission, which insists that US executives must report stock sales within two days. In Hong Kong, directors have three days to report, while executives of listed companies in Mainland China must give 15 days’ notice before they can sell.

In contrast, executives of foreign companies listed in the United States tend to report their total holdings once or twice a year, or not at all, depending on the size of their holdings.Companies including online shopping giant Alibaba have used the opportunity of their listing in the United States to obtain exemptions in Hong Kong, arguing that any additional disclosures are “Overburdened” About its “corporate insider”.

In the United States, according to Rule 144, foreign executives must report by uploading documents to the main disclosure system EDGAR or by mail when starting a plan to sell restricted stock.

Almost all of these documents were submitted by mail in history. The US Securities and Exchange Commission allowed access to these documents in its Washington, DC reading room, but did not upload them to EDGAR. Since April last year, the SEC has also accepted email notifications, but has not uploaded them to EDGAR either. A private company digitized the documents and sold them to institutional investors and banks.

“This system does not exist because some people say, yes, we don’t think foreigners need to report their insider trading — it exists because people don’t realize the asymmetry of the disclosure rules,” said Daniel Taylor of the Corporate Finance Department. . An expert at the Wharton School of Business.

Estimated Alibaba executive stock sales

He added: “When I tell people that the transaction has been reported but submitted to the SEC by mail, few people believe me until I show them the actual mail file.”

The SEC is considering changing its rules to force all 144 forms to be submitted to EDGAR.

Some Chinese technology executives also use shell companies that conceal their identities. An Alibaba executive used a shell company in the Bahamas called Sky Scraper Enterprises Ltd to launch a plan to sell shares worth hundreds of millions of dollars.

One plan is to sell up to US$155 million in shares within a few weeks of Alibaba’s sister company Ant Group’s plan to go public. After Beijing intervened to prevent the IPO, the plan failed.

Although the identity of this executive cannot be confirmed, there are some clues: He or she has won more and more shares in the past ten years and is one of the company’s highest paid leaders. The British “Financial Times” pointed out that with the exception of CEO Zhang Yong and Ant Financial Chairman Eric Jing, almost all Alibaba executives use different shell companies.

Alibaba stated that it “has established strict policies and strict procedures to ensure that all our employees, especially our directors and executives, fully comply with all applicable securities laws.” The spokesperson added that all executives must sell shares under a passive plan, and there is a 30 or 60 day cooling-off period before the transaction is automatically executed. Ant declined to comment.

The planned trading plan is ostensibly to prevent any illegal insider trading, but Taylor’s research suggests that they may be abused. Several Chinese executives made timely transactions based on the plan passed at the end of the company’s financial quarter, which raised concerns that they could have done the transaction with knowledge of the upcoming quarter’s earnings.

Alibaba insiders plan to sell around Ant IPO

In 2016 and 2017, the CEOs of Cheetah Mobile and Tarena International, which are listed in New York, began to sell shares worth up to US$31 million and US$10 million in the weeks before their quarterly results, causing their stock prices to fall by 30% and 24%, respectively. . Points, respectively. Both adopted a trading plan at the end of the quarter.

“This is a big red flag. The fact that these plans were passed at the end of the quarter and started trading before the earnings announcement is very worrying,” Taylor said.

Cheetah Mobile did not respond to repeated requests for comment. Tarrena declined to comment.

Additional reporting by Hudson Lockett in Hong Kong

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