Vimicro International (VIMC), a Chinese company that makes video cameras for spying, has fallen under our surveillance. And investors won’t like what we’ve uncovered.
Founded in 1999 in the People’s Republic of China, the company’s video processing business quickly declined and the focus has sharpened on its lower-gross margined surveillance video systems sold in China.
“It’s a fairly boring hardware business,” yawned an analyst. “There are companies hundreds of times better that are in a better position … And over time, Vimicro’s margins are going to shrink further and further.”
VIMC’s stock gyrations have been anything but boring recently.
In a year of mediocrity, the stock price screamed from a few bucks to the $10 level in a spillover from investor interest in GoPro (GPRO) action camera and the Ferguson incident, as well as some VIMC hype. The stock is now above the sole analyst’s price target of $10, yet analysts we’ve spoken with think the stock is worth half that.
For this company, “A storm’s coming,” as secret agent 007 James Bond said. Here’s why we’re blowing the cover on this company that reported a $56 million net loss over the last three years:
*Insiders racing to sell; millions more shares may be ready to zing investors.
Options for 2.3 million shares at $0.195 expired just last week. That amounts to about 20 percent of outstanding shares.
So that means investors must now watch for massive selling as insiders take advantage of the stock’s blast off from about $3 in September to about $10 now.
Clearly, it makes no sense for insiders to hold onto those shares much longer.
And wouldn’t you know it? Insiders are telling us they’re in the selling mood.
Before those options expired, insiders had begun selling as if they thought VIMC had hit its top - or maybe they began losing confidence in the company’s ability to grow. Over about the past four weeks, company officers dumped nearly a quarter-million shares.
Those sobering insider sales are summarized below, based on Bloomberg data taken from non-electronic Form 144s. Since these forms to register sales of stock are not electronically submitted, it allows companies to temporarily hide stock sales from investors and the Securities and Exchange Commission.
*Management gets outrageous pay – and social achievement - for failing performance
The company rewards pathetic performance, giving away almost 7 percent of the company’s value each year to management.
“The amount of money going to the management team is atrocious,” said an analyst who requested anonymity.
What do investors get in exchange?
Why, VIMC rewards investors by executing money-losing operations in most years.
That’s right. Last year, VIMC’s net loss rose to $8.7 million. And executives received total stock and cash compensation of $3.5 million.
TheStreetSweeper discussed these issues with an analyst who is a native speaker of Chinese Mandarin. He said part of the problem is that the CEO appears most interested in using the company as a step up on China's social and political ladder. Rather than running the company.
The Chinese version of the website backs up the analyst’s view. The site spotlights the CEO and 2007 achievements, while number 1 and number 2 ranked competitors spotlight products and technology.
For example, the photo on the China VIMC homepage, above, shows China’s current president on the left. Shaking his hand is VIMC’s current CEO, John Deng.
For comparison, click on the link to Hikvision, number 1 in market share in China where VIMC plays. Listed on the Hong Kong stock exchange, Hikvision has a $12 billion market cap.
Or click on the link to Dahua, number 2 in market share, also listed on the Hong Kong exchange. Its market cap is $6 billion.
Sadly, VIMC market share is so tiny no one really tracks it. But a couple of analysts estimated that VIMC captures a whopping 2-to-3 percent of the China market.
Considering the company’s roughly 70 percent of $64 million revenue last year is related to security cameras, VIMC looks sick compared to Hikvision’s $1.7 billion in sales and Dahua’s $871 million.
*Confidence killer: Related party deals
We’re hating the related party deals and we always have for doggone good reason.
Complex related party transactions were used to misreport accounting numbers during the Enron scandal that ultimately ripped up confidence in the financial market itself.
TheStreetSweeper warned about Revolution Lighting Technologies’ (RVLT) issues including related party deals. When we wrote our story last summer, RVLT was trading for about $4 but now trades for less than $2.
Indeed, we’ve found VIMC’s related party transactions are among the more complicated and worrisome ones of all those we’ve loved to hate through the years, as the snapshot from an SEC filing indicates below:
VIMC’s ugly financial deals extend beyond related party ones on into audit issues. Despite the customary “nobody’s mad, nothing to see here” language, VIMC apparently ran off auditing firm Ernst & Young Hua Ming and, without bothering to disclose it on the website, hired Grant Thornton, China, a firm that audits problematic companies such as China Finance Online (JRJC ~$47 in 2007, ~$5 now) and e-Future Information Technology (EFUT ~$48 in 2007, ~$4 now).
A recent article, here, nicely describes this issue and others, including VIMC’s increasing days sales outstanding and how the company tried to hide the not-so-glamorous track record of VIMC’s revolving door of CEOs.
*Business deals not quite what they seem
VIMC sometimes spins business deals that don’t turn out quite as expected. Offering a glimpse into the related party issues just mentioned, investors can see that VIMC disposed of its mobile phone multimedia processor biz to a related party, involving two former key employees – plus VIMC’s chief executive Mr. Deng and COO Kevin Jin.
The total amount paid VIMC was to be $4.2 million but VIMC received only $2.9 million. VIMC took an 18 percent ownership but mathematically and logically should have taken 25 percent.
So we’re not sure why VIMC took the $4.2 million restructuring charge. And considering how it forgave more than $1 million, we can’t help but question why VIMC would happily give up company assets.
And today, VIMC announced a contract win for Chenzhou city in Hunan province. However, the company did not provide a timeline, suggesting the contract may stretch out into the next year or so. So it very well may not help much as VIMC tries to meet the 2015 revenue consensus.
Though the press release touts it as a $29.2 million contract, it means only about $14.5 million to VIMC because the company holds just a 51 percent stake in the joint venture that received the contract. So this looks like another primarily promotional effort as the company tries to prop up the stock.
Investors may find more viewpoints on VIMC here.
VIMC has not responded to TheStreetSweeper’s request for comment.
So VIMC insiders have raced to sell this spy company’s stock, millions of additional shares could easily drop onto the market anytime now, and executives are grossly overpaid for distracted management of an underperformer. Also, the tiny company is an underweight compared to giant rivals, it switches out auditors and CEOs as a matter of course, gives away company assets and deals in those hated related party transactions.
Two analysts we spoke with consider this stock worth about $4.
We agree with them and James Bond, who once said quite simply, “Appalling.”
* Important Disclosure: The owners of TheStreetSweeper hold a short position in VIMC and stand to profit on any future declines in the stock price.
Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to email@example.com.