At first glance, Chinese microcap shipping concern Sino-Global Shipping America (Nasdaq:SINO) has a lot going for it.  The chart looks like it will at least retest highs around 5, which would be a gain of over 40% from here.  The stock has a small float, over $6 million in cash on the balance sheet, and a miniscule enterprise value-to-revenue ratio of 0.19 (smaller is better).  While Sino-Global is still losing a bit of money, it looks like it will generate positive cash flow in the near future.  Typically that fundamental setup is a great place to enter a microcap stock.  

So what gives me pause?   The company structure.   A careful read of Sino's reports indicates that Sino-Global America, the company that US investors can buy under the ticker SINO, doesn't really own the shipping business.  Instead that is owned by a separate company called Sino-Global China, in which American investors have no stake.  The American company only has a contractual relationship with the Chinese shipping concern, and that contract only entitles the American company to revenues if the Chinese company earns net income:

 Our principal geographic market is in the PRC. As PRC laws and regulations restrict foreign ownership of shipping agency service businesses, we operate our business in the PRC through Sino-Global Shipping Agency, Ltd. (“Sino-China”), a PRC limited liability company wholly owned by our founder and Chief Executive Officer, Cao Lei, and Chief Financial Officer, Zhang Mingwei, both of whom are PRC citizens.

***

Sino-China is considered to be a variable interest entity (“VIE”) and we are the primary beneficiary. On November 14, 2007, our company through Trans Pacific entered into agreements with Sino-China, pursuant to which we receive 90% of Sino-China’s net income. We do not receive any payment from Sino-China unless Sino-China recognizes net income during its fiscal year. These agreements do not entitle us to any consideration if Sino-China incurs a net loss during its fiscal year.

Looks like a great deal for the insider-owned Chinese entity, not so great for American investors.

DISCLOSURE:  No position  

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