The Case for Selling and Short Selling Hong Kong’s ILAS Industry, Especially Convoy Financial Services Holdings (1019.HK)

Greetings Fund Managers:

I am writing to inform you of an opportunity, one that could perform a public service while at the same time earn you a hefty profit. I will argue my case from two perspectives, first the practical, and then the moral.

ILAS is an acronym for Investment-Linked Assurance Scheme, but I personally like to call it an Investment-Linked Assurance Scam. In other parts of the world, it is known as Investment-Linked Insurance. I’ve been told that it was designed as a tax-avoidance scheme for Westerners, but in Hong Kong, its main purpose is to rip off uninformed local investors. The evils of this product have been abundantly publicized, so I will not bother going into much detail. I’ll simply recommend that you Google it and also look at the following article which headlined the business section of The South China Morning Post’s website all of last week:

http://www.scmp.com/business/money/investment-products/article/1262327/hong-kong-consumers-angry-after-being-sold

I also recommend that you read my comments below the article. 

The Hong Kong government has been under public pressure to crack down on the sellers of this product, and the pressure has only intensified. Regulators have begun the process of implementing stricter regulations, but those regulations do not go far enough to effectively protect the public. I believe there will be no end to the abuses and complaints until this product is completely banned from the market, and the sooner this happens, the better. I’ve already come to know more than 20 people within my network of friends in Hong Kong who have fallen victim to this product, so I view this issue very personally. But you probably don’t care. You want to know how you can make money. So I’ll tell you. ILAS is a multi-billion dollar industry in Hong Kong, and if the government is pressured to get its act together, the whole industry could disappear overnight. You might argue that the probability of this happening is low, but it doesn’t matter. Even regulatory half-measures will put downward pressure on the industry’s revenue. It’s also clear that those revenues are already starting to dry up as the media continues to report on abuses and the public becomes increasingly educated about what is going on. Less and less people are buying ILAS, and more and more people who have bought it are getting angry. I urge you to read about the Hong Kong businessman Jeremy Hobbins who sued his financial adviser last year. I predict that this is the first of many high profile lawsuits concerning ILAS that we’ll be seeing in the not-distant future.

You can capitalize on these trends by short selling the stocks of publicly listed companies whose business is heavily reliant on ILAS sales. There are none more dependent on ILAS than the insurance broker, Convoy Financial Services Holdings (1019.HK). Convoy claims to be the market leader in their sector (although this shouldn’t be something to brag about). According to their 2012 Annual Report, 89.9% of their revenue came from ILAS commissions. This puts them in a precarious position. If ILAS sales plummet, their stock will plummet. It seems to me that there is little risk of Convoy’s stock going much higher, and a lot of risk that it will go much lower. In 2012, they increased their marketing expenses by 17.9%, and they increased consultants’ sales incentives (commissions) by $7 million HKD, but ILAS sales in Hong Kong still fell 0.4% from the previous year. I interpret this as a sign that ILAS sales have peaked.  If I owned Convoy’s stock, I’d be selling it, and if I had some money, I’d be short selling it. I think it’s a low risk way to potentially make a lot of money. 

At the beginning of my email, I mentioned that there is also a moral reason to be short selling Hong Kong’s ILAS industry. It’s probably already obvious to you. Once you have on your short position, you’ll have an incentive to “talk your book”, which will create a virtuous cycle. As you talk your book, especially to the financial media, you’ll be raising public awareness about the evil nature of ILAS, which will save people from being taken advantage of, which will choke off revenue to companies like Convoy, which will send their stock price down, which will earn you money. With ILAS receiving more and more negative publicity, legislators and regulators will feel increasing pressure to do what they should have done many, many years ago: ban the damn thing. This would drive the nail into the coffin of companies like Convoy, making your short position a perfect trade. You profit as thousands of innocent investors are saved. The ILAS industry would receive long overdue punishment that regulators and the courts haven’t had the courage to deliver on their own. Ideally, such a crushing blow would come as quickly as possible, so executives don’t have time to cash out and run before their stocks tank. It should also be done before companies like Convoy have a chance to implement their Plan B, which is to start pillaging the Chinese mainland.

So, fund managers, I urge you to put on your short positions and join the growing chorus of angry citizens who are advocating for the ban of ILAS. 

I spent a couple of hours searching on the internet for the email addresses of different funds. If I found your address, then you’re getting this message. Please help me by forwarding this email as widely as possible to other players in the fund industry. And please note that I currently have no position in any stocks. I am doing this because it’s the right thing to do. 

Convoy was down 3.74% last Friday with trading volume at less than 10% of its average. This is likely because few people are interested in buying the stock after last week’s negative publicity. If everything I’ve said in this message makes sense, it should be evident in Convoy’s stock price over the coming months.

I’m forwarding this email to a few journalists. I hope they’ll keep their eyes open for cowardly executives trying to cash out before the potential tsunami. 

Lindell Lucy

[Note: After I wrote this, I learned that Convoy’s stock (1019.HK) cannot be short sold because SFC regulations disallow the short selling of stock of companies that have a market cap less than $10 billion HKD. At the time of writing, Convoy had a market cap slightly less than $1 billion HKD.]

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