Miami, FL – October 4, 2018 (EmergingGrowth.com NewsWire) — EmergingGrowth.com, a leading independent small cap media portal with an extensive history of providing unparalleled content for the Emerging Growth markets and companies, reports on ChineseInvestors.com, (OTCQB: CIIX).
- ChineseInvestors.com, (OTCQB: CIIX)
- Broadcom, Inc. (NASDAQ: AVGO)
- Qualcomm, Inc. (NASDAQ: QCOM)
- Nio Inc, (NYSE: NIO)
- Tesla (NASDAQ: TSLA)
- Qutoutiao (NASDAQ: QTT)
- GW Pharma (NASDAQ: GWPH)
With the Midterm Elections just around the corner, and President Donald Trump keen to consolidate support for the Republican Party, the Commander-in-Chief is likely to escalate the ongoing trade war with China. His support base, which is a critical constituency for the Republican Party, overwhelmingly supports higher tariffs on Chinese imports. In light of this, he is likely to maintain pressure on Beijing in the coming months. This not only resonates with his personal convictions about the global trade system, and specifically China’s increasingly powerful role in it, but also serves in the immediate interest of the party that put him in The White House.
U.S.- China trade war: what you need to know
How will a protracted trade war between the two largest economies in the world affect the U.S. markets? Despite alarmist headlines and bold projections, such as UBS’s prediction that 20% of the S&P 500 would be wiped off by a full-scale trade war, the market seems relatively unfazed at the moment.
Major indices, such as the Dow Jones Industrial Average and S&P 500, have been on a solid upward trajectory all through the year, despite the fact that retaliatory tariffs between China and U.S. have dominated financial news headlines over the past few months. Even small caps have seen heady gains in this environment. Pointedly, the Russell 2000 Index, which tracks small caps, has hit repeated highs this year.
Despite the delayed response in the broader market, the trade war will in the longer run materially impact certain U.S. stocks. Firstly, and inevitably, it will impact listed companies that import production inputs such as steel and aluminum from China. With new tariffs, these inputs will cost more, affecting earnings and, potentially, share price performance.
Secondly, the trade war will have an indirect but significantly adverse impact on the movement of Chinese capital within U.S. borders – affecting stocks that depend on this capital directly or indirectly. To understand the logic behind this point, it is critical to underscore the fact that the tariffs on Chinese imports were imposed under the Trade Expansion Act of 1962, which gives the U.S. President the power to unilaterally impose tariffs if it is deemed a matter of national security. In relation to this, Chinese companies have repeatedly been accused of industrial espionage and intellectual property violations, both of which pose a threat to national security.
Consequently, increased control on movement of Chinese capital—in order to complement the national security objective that prompted the tariffs under the Trade Expansion Act—is inevitable and is, in fact, already happening. It is reported that the Committee on Foreign Investment in the United States (CFIUS) has in recent times blocked an increased number of Chinese-led deals involving U.S. companies. The most notable case was the one in the telecoms space where Chinese chipmaker, Broadcom (NASDAQ: AVGO), wanted to merge with U.S. chipmaker, Qualcomm (NASDAQ: QCOM).
Chinese capital within the U.S. is drying up; Source: Rhodium Group
Notably, Chinese foreign direct investment (FDI) in U.S. is declining rapidly. Chinese investment in the U.S. totaled $1.8 billion between January and May this year. This represents a whopping 92% drop compared to the same period in 2017, and the lowest level in seven years, according to a report by Rhodium Group, a research firm that tracks Chinese foreign investment. Beijing’s foreign policy objectives, which include concentrating its foreign spending to developing countries to support the Belt and Road Initiative (President Xi’s legacy project aimed at tightening China’s grasp on global trade by building necessary infrastructure in developing countries), could have contributed to the downturn in U.S.-bound Chinese FDIs. However, the U.S.’s tighter control and scrutiny of Chinese capital flowing within its borders has certainly also played a role – and a fundamental one at that.
How will this hot China-focused stock be affected?
Based on this analysis, it is likely that Chinese’s interest in American companies will continue declining rapidly in the coming years. What will this mean for ChineseInvestors.com, Inc. (OTCQB: CIIX)? CIIX is a financial media company that caters to Chinese-speaking investors in the U.S. Its stock has gained more than 100% since July and it is on the market’s radar at the moment – not for its financial media services, for which it is aptly named, but for its well-publicized foray into the fast-growing cannabidiol (CBD) space—this is the lucrative billion-dollar industry dedicated to the non-psychotic ingredient in marijuana.
CIIX already has online stores for CBD products in the U.S., a physical retail store in California and harbors grand ambitions for China, where it is planning both an online and brick-and-mortar expansion for a wide range of CBD-based products. Naturally, the move into the high-growth CBD space has piqued investors’ interest and led to an explosive rally: at the time of writing, the stock had crossed the psychologically significant (in the OTC markets) $1.0 share price mark, despite having been in the $0.50 – $0.55 range barely a month ago.
CIIX’s stock price has exploded over the past month
Before discussing what the company is doing in CBD, and why investors are so excited, let us look at its financial media business, which is not only its main revenue earner (despite the buzz about CBD), but also vulnerable to the effects of the ongoing trade war.
CIIX is modelled like any other financial media company such as The Street (NASDAQ: TST), but caters to Chinese-speaking investors in the U.S. It generates revenue primarily through subscriptions and advertising on its Chinese-language financial media website. Headquartered in California, the business has been in continuous operation since 1999 and has gained credibility among the Chinese investment community in the U.S. It has leveraged on this strong credibility to launch investor relations and public relations services targeting mostly Chinese companies requiring Mandarin language support.
The company’s primary sources of revenue are subscriptions, advertising, investor relations and professional services fees. To get a clear sense of what the business does, below is an excerpt from its most recent 10-K for the fiscal year ended May 31, 2018
“The Company continues to derive a material portion of its income from various subscription services it offers to its customers. We offer subscription services to provide education about investing and news and analysis on the stock market as well as news about particular stocks that we are following. Nevertheless, we do not provide our subscribers with individualized investment advice and never have investment discretion over any subscribers’ or site visitors’ funds…providing investor relations services for other companies, especially those requiring Mandarin language support, now account for our most significant revenue sources.”
It is important for long-term investors to thoroughly review SEC filings and not just rely on press releases – otherwise it is simple to miss the fact that, at its core, CIIX is still a financial media business, despite its well-publicized entry and, indeed, fast growth in CBD (as we will see later).
Because its business is focused on Chinese investors in the U.S., the rapid evaporation of Chinese capital in the U.S, which has been clearly articulated in the previous section of the article, could eventually lead to stagnation or contraction of its media business. CIIX may not be a direct recipient of Chinese capital, but it will nonetheless be affected by the reduced flow of Chinese capital in the U.S. since its tracks investments that interest the Chinese. However, the business won’t grind to a halt as a result; it will be more of speed bumps instead.
We need to give credit where its due. CIIX’s media business has been in continuous operation for close to two decades. It has strong brand equity, as demonstrated by the fact that, according to the June 2018 Web Trends Report, the company experienced over 91,000,000 impressions and 52,757 unique visitors represented by just under 292,622 visitor sessions. The average site visit lasted just over 35 minutes. As of May 31, 2018, CIIX had over 759 active paying subscribers, approximately 70,333 free subscribers and 96,900 valid email addresses, according to SEC filings.
Rather than implode, CIIX will likely experience challenges growing its media revenues, especially from subscriptions. It is difficult to transform viewers into paying subscribers in an environment where fewer Chinese investors are looking for U.S. investment opportunities. Generally, most viewers pay for financial media content when they want to make a related investment decision in the near-future. If the information won’t directly translate into an investment, they would rather access it for free elsewhere on the Internet than pay for it. This could impact subscription revenue. Advertising and investor relations service revenues from Chinese companies in the U.S. may also be impacted due to the likely reduction in the number of Chinese businesses operating in the U.S.
Evidently, the trade war is a fundamental part of CIIX media business’s risk landscape—despite the fact that it is a small company with limited chances of ever appearing on President Trump’s briefing notes on the impact of the China trade war. While the outlook isn’t fatal, CIIX needs additional high growth revenue streams to hedge against the headwinds that will imminently rock its core financial media business – and this is precisely what it hopes to achieve with its foray into CBD, where it intends to sell a wide range of CBD products ranging from oils to infused-liquor.
Chinese CBD market promising… BUT
CBD is quickly emerging as the one of the most profitable segments in the legal marijuana space. It is widely accepted in North America, particularly for its medicinal value. It can be used legally in the 50 states of America, and can be exported to 40 countries, including China. To get a sense of the prospects in this space look no further than GW Pharma (NASDAQ: GWPH), which recently surged to a record high of $174.50 against a 52-week low of $98.06 after the Drug Enforcement Agency (DEA) softened its stance on its CBD drug, Epidiolex, which is treats epilepsy. Epidiolex is the first and only Food and Drug Administration (FDA) approved drug, underscoring the possibility of more CBD-based drugs coming to market in future as well as the tremendous potential of the CBD market.
This explains why CIIX’s plan to get into the space have been positively received by the market, as signaled by the ongoing rally. As previously mentioned, the company already has a digital and physical footprint in California and is currently planning a grand online and physical entry into mainland China. Its revenue breakdown for the past fiscal year shows that it is already gaining traction in the CBD space, despite its relative newness in the space.
Getting into China, as CIIX is doing, could help drive even more robust growth in CBD, offsetting the projected weakness in the media business. The company has already launched ChineseHempOil.com, Inc and CBD Biotech in the Pudong Free-Trade Area in Shanghai. A key product it is looking to launch is a CBD oil targeting skin care. China is a promising market. The population alone, which is close to 20% the total world population, presents a mouth-watering opportunity for any consumer business. Moreover, the Chinese are getting richer due to Beijing’s current emphasis on building a consumption-led economy, which has seen wages rise. Clearly, CBD oil and products could easily sell like hot cake in China. Importantly, China grows roughly 50% of the world’s hemp and cannabis, meaning that CIIX will be able to source input in this market cost effectively.
There are, however, two significant risks that dampen the forecast for CIIX’s CBD plans in China. Firstly, the fact that building a retail and distribution business of any kind from the ground up requires heavy capital outlay. The marketing and distribution of hemp will require capital that CIIX may not have at the moment. The company posted a Net Loss of $7.4 million for the fiscal year ending May 31, 2018. Further, revenues from its media business will not be sufficient to meet the liquidity demands of a high growth CBD business, heightening the possibility that it will raise capital through sale of securities such as convertible notes and equity, which may dilute stockholders. Routine sale of dilutive securities is the route that most cannabis companies have taken to raise capital, earning them a regrettable reputation for diluting stockholders.
The second risk confronting CIIX’s CBD plans in China is the reliability of data about Chinese companies, industries and even the economy. China is still very opaque so it will be hard for U.S. investors to trust numbers coming out of the market. Chinese companies have historically and to the present moment found it very hard to convince American investors about the credibility of their numbers.
For example, electric carmaker Nio Inc, (NYSE: NIO), which has been dubbed China’s Tesla (NASDAQ: TSLA), has come under criticism from the analyst community in the U.S. after the IPO of its ADR this September. Analysts from Bernstein, in particular, say that while many things “intrigue” them about the company, “they are unconvinced Nio’s shares represent a sound investment.” The key reason: the projected sales numbers of 50,000 Electric Vehicle units by 2020 in the Chinese market don’t add up. Nio plans to have 12 store locations in China by end of 2018 compared with Tesla’s more than 30; yet Tesla sold only 17,800 units in the market last year, making it hard to comprehend how Nio will sell close to four times that in less than 24 months yet it has a smaller store footprint.
Another Chinese IPO worth mentioning is mobile news and video aggregator website, Qutoutiao (NASDAQ: QTT). The ADR opened trading on September 14 at $7 but more than doubled to $16 on the first day. At the time of writing, it was trading at $6.6, which is below its IPO price. This wild seesawing in its share price has characterised the ADR since its debut, demonstrating that its market value is largely the function of speculative trading. The current volatility exists because the market hasn’t fully understood the underlying business. Two years ago, QTT had fewer than 2 million Monthly Active Users (MAU) but, by July 2018, this number had ballooned to 48.8 million MAUs, making it the second largest news aggregator in China. This seems rosy until you consider the inexplicably huge cost of acquiring users. QTT’s net loss widened from 28.7 million RMB ($4.8 million) in the first half of 2017 to 514.4 million RMB ($74.89) in the first half of 2018, underlining outrageously heavy spending to acquire and retain new users. The lack of a clear narrative to justify this spending and explain how the bottom line will improve going forward makes it difficult for investors to understand an otherwise straightforward business model—digital news and mobile advertising. Investors don’t trust QTT and the share price volatility underscores this: investors are speculating and no one is certain about the company’s future.
In view of this, the inability of China-focused businesses to earn the trust of U.S. investors could dog CIIX once it establishes itself more prominently in China. This is a risk that hasn’t been priced into the stock at the moment.
CIIX has a solid media business, despite the prospect of slower and unpredictable growth going forward due to the trade war. Its prospects in CBD are also strong. However, key risks have not been priced into the stock—the impact of the trade war on its media business, the capital needed to set up a viable CBD brand in China and negative perceptions about doing business in China among U.S. investors. For traders, who view the stock market like a cold shower where one can make a fortune with a quick in and out, the current trading price of $1.0 (at the time of writing) presents some window of opportunity. CIIX could easily reach $1.5 in the near-term, considering this is close to its 52-week high of $1.57 and market sentiment is positive due to the company’s expansion to new, promising lines of business. However, long-term investors should be cautiously optimistic. This is a business that has potential, but one that also needs to battle headwinds in its core media business, clarify where it will get capital for its CBD expansion as well as give a clearer sense of its projections for its CBD business in China. Only then will investors be able to get a clearer sense of this company’s earnings and revenue potential, which is critical in arriving at a solid valuation and making a long-term investment.
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