r/valueinvesting
The VIE. It's a Trap!
Warns against Chinese ADRs (FINV, WB, TCOM) due to VIE structure risks, lack of asset claims, and WB's deteriorating fundamentals.
- Extremely low valuations with low P/E and P/B ratios across the screened stocks
- High dividend yields offered by FINV and WB
- TCOM possesses the best underlying business fundamentals among the three
- VIE structure means investors do not own actual equity, making asset backing worthless if invalidated
- Regulatory and legal risks in China can completely wipe out shareholder value
- WB suffers from a deteriorating business with declining MAUs, flat revenue, and intense competition
Three stocks in my screening process this month with metrics that looked like extraordinary value:
• FinVolution (FINV): P/E 3.7, P/B 0.53, \~6% dividend yield
• Weibo (WB): P/E 5.0, P/B 0.52, 7% dividend yield
• Tripcom (TCOM): P/E 7.5, P/B 1.38
I would not recommend any of these because they are all VIE's.
A VIE (Variable Interest Entity) is a contractual arrangement used by Chinese companies to list on US exchanges while complying with Chinese restrictions on foreign ownership. When you buy shares in FINV, WB, or TCOM, you're not buying equity in the Chinese company. You are buying equity in a Cayman Islands holding company that has a contract with the operating company.
Graham's margin of safety is built on assets a shareholder can actually lay claim to in a worst-case scenario. If the VIE arrangement is invalidated, by Chinese regulators, by a court ruling, etc..., the asset backing behind your P/B ratio is a piece of paper (well probably many pieces of paper). The 0.52 P/B on Weibo is only a safety net if you can enforce a claim on those assets, which, you can't.
Weibo also has additional issues. Declining MAUs (598M to 567M over two years), flat revenue for three years, and intensifying competition from Douyin. The VIE risk sits on top of a deteriorating business.
Tripcom has the best underlying business but I still wouldn't touch it with a 10 foot pole.
Your P/B point is the strongest part of this, but I'd frame the reason differently. The problem isn't that VIE risk is high. The structure has survived 20+ years and several regulatory scares without being invalidated. The problem is that it's unquantifiable. Graham's margin of safety needs a downside you can actually estimate, so you can judge whether the discount pays you for it. You can't put a probability on a Chinese court or regulator voiding the contracts, so you genuinely can't tell whether 3.7x is cheap or just fair for the risk. It's Knightian uncertainty, not calculable risk, and that's what breaks the framework, not the size of the threat.
On the Weibo dividend someone raised: the yield isn't a counter to the VIE risk, it's the concentrated form of it. Since the discount may never close (the risk never goes away, so the multiple stays capped), your whole return has to come from cash actually reaching you as a Cayman shareholder. And that cash is the single most exposed thing on the page, because it has to clear both the VIE contracts and Chinese capital controls to get out. The payoff and the risk are the same variable. A fat yield on a VIE isn't getting paid to wait, it's getting paid in the exact currency that's at risk.
The honest bull case is the track record: two decades, no invalidation, and Beijing has an incentive to keep the offshore capital window open. But that's a bet on continued goodwill, which isn't the same thing as a margin of safety.
Excellent points. I clearly couldn’t have said it better myself lol
You highlighted the 7% dividend on Weibo. That might be just enough of a reason to ignore your advice - that, and the sky high valuations of many American technology companies. Some might even dismiss one recent massive IPO: 100x sales for a government contractor and telecom company?
The dividend only exists as long as the foreign government allows it too.
I’m not sure why you are bringing up SpaceX. That wouldn’t fit the criteria of a value investment at its current price.
Weibo has been consistently paying their dividend. Addressing your other point: I bring up the example of that SpaceX company to point out how expensive American technology companies have become. The US federal government has also been exercising a heavy hand in the affairs of US companies: imposing tarriffs, taking stakes in private entities, blocking renewable energy projects, curbing free trade.
Dear OP,
Aren’t all Chinese companies like that ? Eg. Baba ?
Are there any exceptions? Perhaps YUMC
Good questions! No not all Chinese companies are like this and YUMC is the perfect name to raise because it's one of the cleanest counterexamples.
The VIE structure exists to get around China's foreign-ownership bans in restricted sectors. Internet content, fintech, media, education. That's why Baba uses it, among the others listed above. YUMC (Yum China) is the example that proves some Chinese companies are "legit". Restaurants aren't a restricted sector, so Yum China owns its KFC and Pizza Hut operating entities directly rather than through VIE contracts. A shareholder has a real equity claim on the business, which provides some margin of safety. Same country, completely different structure, completely different answer.
I wrote an article that details this on my blog!
Thanks!