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VIMC Investors Hold a Worthless Bag VIMC Investors Hold a Worthless Bag WWW.TRINITYRESEARCHGROUP.COM DECEMBER 8, 2014 VIMC INVESTORS HOLD A WORTHLESS BAG DECEMBER 8, 2014 DISCLAIMER Use of research from Trinity Research Group (“Trinity”), which includes this report, is limited by the Terms of Service on our website—www.trinityresearchgroup.com. To be authorized to access this report or any of Trinity’s research, you must agree to those terms, regardless of whether you have downloaded the reports or accessed the research directly from our website or someone else has supplied the report or our research to you. By reading this report, you agree that use of Trinity’s research is at your own risk. In no event will you hold Trinity or any affiliated party liable for any direct or indirect trading losses caused by any information in this report. This report is not investment advice or a recommendation or solicitation to buy any securities. 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Our research and report includes forward-looking statements, estimates, projections, and opinions prepared with respect to, among other things, certain accounting, legal, and regulatory issues the issuer faces and the potential impact of those issues on its future business, financial condition and results of operations, as well as more generally, the issuer’s anticipated operating performance, access to capital markets, market conditions, assets and liabilities. Such statements, estimates, projections and opinions may prove to be substantially inaccurate and are inherently subject to significant risks and uncertainties beyond Trinity’s control. This report and our research therein expresses our opinions, which we have based upon generally available information, our own proprietary research, third-party broker research, and analysis through our due diligence and investment process. 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PAGE 2 / 37 VIMC INVESTORS HOLD A WORTHLESS BAG DECEMBER 8, 2014 TABLE OF CONTENTS Disclaimer ....................................................................................................................................... 2 Executive Summary ........................................................................................................................ 4 List of Exhibits ................................................................................................................................ 5 Introduction ..................................................................................................................................... 6 The Government Giveth… ............................................................................................................. 7 Government Corruption in the Chinese Technology Sector ..................................................... 7 Shanxi, a Hotbed of Political Corruption .................................................................................. 8 One of VIMC’s Government Sugar Daddies Sacked ............................................................... 8 Hidden Assets ........................................................................................................................... 9 Insiders Taketh Away ................................................................................................................... 13 It’s (Related) Party Time! ....................................................................................................... 13 EmbezzleCo ............................................................................................................................ 15 Step 1: Carve the Operating Value Out of the Business ......................................................... 17 Step 2: Relist the Valuable Operations Where US Investors Can’t Find You ........................ 20 Step 3: Pillage the Land .......................................................................................................... 22 Step 4: Bait and Switch US Investors ..................................................................................... 27 Pump and Dump ........................................................................................................................... 32 Conclusion .................................................................................................................................... 37 PAGE 3 / 37 VIMC INVESTORS HOLD A WORTHLESS BAG DECEMBER 8, 2014 EXECUTIVE SUMMARY SELL — Target Price: $0 Ticker: Nasdaq:VIMC FD ADS Outstanding (mn): 23.8 Last Close: $6.41 Free Float (mn): 15.025 52 Week Range: $1.70 - 11.79 Ave. Daily Volume (ADS): 669,000 Market Cap (mn): $160 Short Interest (mn): 1.778 Over the past four years, assets we estimate to be worth over $600 million (4x the market cap of VIMC) were embezzled from VIMC into privately held related parties controlled by VIMC’s co-founders and other insiders. After looting VIMC of all its intrinsic value, insiders further enriched themselves by falsifying VIMC’s financials and issuing numerous press releases to pump and dump the worthless US-listed shares. Consequently, VIMC’s US investors now unwittingly hold shares of a worthless company, with no legal recourse to claim what was embezzled from them since it is now privately owned in China by the co-founders. Although US investors will never recover what is rightfully theirs, some justice may ultimately be served as the family of VIMC’s chairman is being investigated in a famous case of graft involving a government official named Shen. We believe Shen, who is close to VIMC Chairman Deng, was one of several government sugar daddies VIMC used to illegally obtain valuable assets from the government to transfer to the co-founders. PAGE 4 / 37 VIMC INVESTORS HOLD A WORTHLESS BAG DECEMBER 8, 2014 LIST OF EXHIBITS 1: VIMC’s Major Dealings with the Government (Page 10) 2: VIMC Organizational Chart of All Historically Owned and Controlled Entities (Page 11) 3: Current VIMC Organizational Chart (Page 12) 4: Related Parties Disclosed in 2010-2013 20-F Filings (Page 13) 5: Related Party Transactions Disclosed in 2010-2013 20-F Filings (Page 14) 6: Flow Chart of Asset Transfers Disclosed in 2010-2013 20-F Filings (Page 16) 7: VIMC’s Major Disposals, 2010-2013 (Page 17) 8: 2010-2012 Summary Financials for Vimicro Wuxi from SAIC Filings (Page 17) 9: Vimicro Wuxi’s 2010 Financials Filed with the SAIC (Page 18) 10: Vimicro Wuxi’s 2011 Financials Filed with the SAIC (Page 18) 11: Vimicro 2012 Wuxi’s Financials Filed with the SAIC (Page 19) 12: Vimicro Shenzen’s SAIC-Registered Business Scope Includes Real Estate Rental (Page 21) 13: Model Picture of Vimicro Shanghai’s Commercial Real Estate Project (Page 22) 14: Current Pictures of Vimicro Shanghai’s Real Estate Project (Page 23) 15: Shenzhen VMC Plaza Project Details (Page 25) 16: Construction of Shenzhen VMC Plaza, an EmbezzleCo Project (Page 26) 17: VIMC’s Quarterly AR and Net Cash after Establishment of Zhongtianxin (Page 28) 18: VIMC’s Revenue and Sequential Increase in AR from Related Parties, Q1 2013-Present (Page 28) 19: VIMC’s Net Cash Position, Q1 2013-Present (Page 28) 20: Zhongtianxin’s Liabilities and Equity (Page 29) 21: Zhongtianxin’s Related Party Transactions (Page 30) 22: 2011 Press Releases (Page 32) 23: 2012 Press Releases (Page 33) 24: 2013 Press Releases (Page 34) 25: 2014 Press Releases (Page 35) 26: USD Value of Insider Sales, 2008-Q3 2014 (Page 36) PAGE 5 / 37 VIMC INVESTORS HOLD A WORTHLESS BAG DECEMBER 8, 2014 INTRODUCTION It is no secret that corruption runs rampant within the Chinese government, where many senior officials have historically used their positions of power to enrich themselves and their cronies at the expense of the Chinese populace. One of the hallmarks of PRC President Xi Jingping’s first two years in office is a solemn campaign to crack down on the highest levels of this corruption. Even senior government officials have not been immune to this crackdown, as evidenced by the recent investigation of Zhou Yongkang1. Many companies affiliated with corrupt government officials have lost much of their value as anti-graft investigations reveal the
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