Graphic Evidence: AutoChina Lost in Translation


by Paul Springer

Commercial vehicle financer AutoChina International Ltd. (AUTC) started out the year with extreme volatility driven by accounting questions, and now the liquidity of the company’s trading is drying out.

AutoChina shares plunged 39% Tuesday on news of a delisting notice from Nasdaq. Sometimes these notices are not the end of the world, and when stock price is the issue, the regulator sometimes allows issuers extra time to let the price rise.

In this case, the situation is more dire. The company sought more time to file its already late annual report for 2010, and Nasdaq said no dice. In addition to the late report, Nasdaq says, the company has another problem in the way of an SEC investigation.

AutoChina said in a release that the Nasdaq determined that the request for more filing time “ was not warranted and that the Company’s securities would be delisted from Nasdaq on September 19, 2011 unless the Company appealed the determination.”

The company said earlier in the summer that it would have to restate its 2009 earnings.

Trading volume has already been falling off for months before the advent of the delisting notice. The situation presents a twist on the numerous others where China-based companies were accused, rightfully or not, of having no real business operations.

The company is a real company with ongoing operations. In the case of AutoChina, it seems, the problem is that no one really knows what’s going on.

In June, the company’s notice of an SEC investigation came with the statement that the classification of earn-out shares as derivatives would affect reporting to an unknown extent. “The Company has not yet determined the exact effect of this potential change to its previously reported financial statements,” AutoChina said in the regulatory filing.

In February of this year, AutoChina shares fell 10%, The Motley Fool says, after a critical Forensic Factor report was linked by Zero Hedge.

About a month later, Seeking Alpha described a volatility rollercoaster ride in which AutoChina stock fell after another Forensic Factor report, then rose about 60% in a two-week short squeeze.

In addition to confusion generated by accounting for vehicle revenues and the situation with the earn-out shares, some questions lingered after the company announced changes to its structure in this regulatory filing:

As previously disclosed, AutoChina is in the process of converting its corporate structure from a variable interest entity, or VIE, structure to a direct ownership structure.  In September 2010 and in connection with this restructuring, AutoChina established a new wholly-foreign-owned enterprise in China, named Ganglian Finance Leasing Co., Ltd., or Ganglian Finance Leasing.  Ganglian Finance Leasing is in the business of leasing commercial vehicles.

What was that? Allow the company to explain:

In December 2010, AutoChina increased the paid-in capital of Ganglian Finance Leasing through its VIE, Hebei Shijie Kaiyuan Auto Trade Co., Ltd., or Kaiyuan Auto Trade, and converted Ganglian Finance Leasing from a wholly foreign-owned enterprise to a Chinese-foreign joint venture.  . . .Thereafter, Ganglian Finance Leasing obtained the business licenses required to engage in the vehicle leasing business and commenced to lease commercial vehicles directly.   On May 31, 2011, Ganglian Finance Leasing was converted back to a wholly foreign owned enterprise and is currently 100% owned by Fancy Think Limited, a Hong Kong company and AutoChina’s indirect wholly-owned subsidiary.  In addition, on June 30, 2011, Hebei Chuangjie Trading Co., Ltd., or Chuangjie Trading, was converted from a VIE to an indirect wholly owned subsidiary of AutoChina, and is currently 100% owned by Ganglian Finance Leasing. . . .

There’s more, but no one’s listening. The company may have had some accounting issues, but initially the conversation over accounting and the company’s valuation was a spirited one with plenty of participants on both the long and short sides.

Now the company is having trouble doing its own accounting and explaining its baroque corporate structure. The conversation is dying down, and apparently few traders feel comfortable with any trading thesis for the company.

AutoTune has been on Nasdaq’s list of volume decreases day after day now, and with daily volume down to the thousands or even hundreds, delisting might be moot.

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