The curious case of Glory Star Media

Maybe Chinese readers can help out here?

Near the end of 2022 I said to myself, Chinese companies trading on US exchanges will be the place to be in 2023. Cheap valuations paired with inflated valuations of similar assets on Chinese exchanges. Creating an incentive for buyouts to happen. They are very hated by Western investors and the Chinese government wants to move these companies home since there is a shortage of stocks to invest in on Chinese exchanges (which partially contributes to the real estate bubble in combination with capital controls). And a new cold war with the US probably makes it awkward to have so many of your country’s companies trade on your adversaries' stock exchange. 

The two big ones I am in now are 111 inc (YI) and Hollysys (HOLI). But there is another one that caught my eye that is puzzling to say the least: Glory Star Media (GSMG). I will say in advance, I own no shares in this stock. 

This company was going to be bought out and a definitive agreement was signed in July 2022. The special committee even upped the price from $1.27 to $1.55, despite buyers already owning a controlling stake. Shah capital, which seems like a competent outfit, was going to roll over its shares and participate in the merger. Then for a long time, no news until in April this year the company announced a termination of the merger agreement. Which is highly unusual even for Chinese mergers. And usually an indication of fraud.

I was tempted to enter this trade several times, but what held me back was the almost total lack of information provided about the business. They supposedly have some sort of app called Cheers that they earn the bulk of their income with. But I couldn’t find any proof of its existence and popularity. Even though the company claims that their Cheers video app has over 300 million downloads. I have searched both Baidu and Google. Their customer base (advertisers mainly) is suspiciously concentrated, revenue/employee is off the charts and receivables turnover is way too low for a company in this kind of business. 

So I kind of forgot about this stock, until things got weird after the merger broke. As the share price had cratered to below $0.5, the company announced a $60 million private placement priced at $2.48/share! This company has a large net cash position, it did not need the cash at all. 

Then when I saw who bought most of these shares I was even more puzzled, it was Zhong Sheng Ding Xin Investment Fund. The same party that was going to provide part of the financing for the $1.55 buyout with $8.7 million. Then recently another $20m share placement was announced, again for $2.48/share. No info yet on who these shares were sold to though. But it appears to be another institutional investor.

On top of that Shah capital has increased its stake by about a third as well. But they seemed to have paid market prices. 

So what the hell is going on here? Do I have Chinese readers who can shed more light on what this company does? Is their Cheers app real? You would say that it would be easy to dig up info given that GSMG claims 43 million monthly active users. That is about 1 in 30 Chinese people who supposedly use this app. And they manage all of that with only 144 employees.

And the above funds should know better if this really was a fraud? Hard to believe that possibly three different funds would blindly sink millions of dollars into this without doing some minimal due diligence. Given that at least one of them is Chinese. Are they preparing for another buyout and did the financing parties decide they wanted a bigger piece of the company? Because that is the only reasonable explanation for this share issuance, they want a bigger piece and then float it on a Chinese exchange for a big profit at a much higher valuation. And they could not do this in the open market due to lack of liquidity.

Also strange that if this is a fraud, the company is defrauding Chinese institutional investors. Usually the playbook for Chinese frauds is that they defraud Western investors and then hide in China with their ill gotten gains. Not defraud a potentially well connected Chinese investor.

Currently the stock trades for about 50% of the cash it just raised. And for about 25% of its total reported net cash value. I am kind of tempted to buy a small stake if the share price sinks into the $0.3’s. But no position for now.