Research

ACCOUNTING & GOVERNANCE SCREEN

Our latest version

Gillem Tulloch · 20 June 2017

Please download the latest version of our Accounting and Governance Screen by clicking on the link provided below. This screen is an excel-based spreadsheet linked into Bloomberg which means that subscribers can check any company globally for more than 60 potential accounting and corporate governance red flags. Importantly, it not only quantifies whether a ratio is unusual relative to its global industry peer group, but whether the one or three year change in that ratio is unusual. After all, incremental changes are arguably more important than the outstanding number. It incorporates well-known mathematical models aimed at highlighting profit manipulation (Beneish’s…
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ASIAN SHORT-SELLERS

The Bogeyman Is Coming…

Gillem Tulloch · 15 June 2017

The number of anonymous short-seller reports targeting Hong Kong listed companies is likely to rise, primarily due to their low quality which is, in part, a result of regulatory shortcomings. While the win rate of short-sellers is very high, not all are equal. Investors should be particularly concerned with Emerson and Glaucus given the high quality of their research and level of success. However, there is some hope for investors: Companies accused by short-sellers of Fake Cash Flow Fraud all score poorly under our scoring system and we urge investors to check their stocks with our Accounting & Governance Screen….
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MAN WAH (1999 HK)

Comfortably profitable or heavily padded?

Mark Webb · 9 June 2017

Sofa maker Man Wah has been targeted by short-seller Muddy Waters over its profitability, taxes, export sales and debt. So far, the main publically available accusations levelled (via twitter) concerning undisclosed debt appear to lack credibility. In management’s favour, it has lifted the stock’s suspension after issuing a speedy and robust rebuttal. Furthermore, the amounts of cash Man Wah has returned to shareholders via dividends and share buybacks are inconsistent with past frauds. However, our Accounting & Governance Screen reveals some fraud like traits within its financials, such as the build-up of non-production assets, window dressing of heavy trading activity,…
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COGOBUY (400 HK)

Cause for Concern

Gillem Tulloch · 31 May 2017

Blazing Research may be a newcomer to the anonymous short-selling game, but its report on CogoBuy has credibility in key areas. The company’s founder has been accused of asset stripping his NASDAQ listed company, Viewtran, to the detriment of minorities, and then re-listing the assets in Hong Kong as CogoBuy. He is also accused of perpetuating Fake Cash Flow frauds at both CogoBuy and Viewtran. We have been able to verify the sequence of events that allowed Mr Kang to legally, if somewhat unethically, transfer these assets. The company’s rebuttal failed to address concerns. What’s to say he won’t repeat…
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AAC TECHNOLOGIES (2018 HK)

Dissecting Gotham

Nigel Stevenson · 24 May 2017

Gotham Research has followed its initial teaser on AAC Technologies (May 11th) with a more detailed report (May 19th) alleging the use of undisclosed related parties to overstate profits, smooth earnings and evade Apple’s labour standards. The evidence that AAC has overstated its profits is circumstantial and, in our view, not entirely convincing. Nonetheless, AAC needs to explain its relationship with these parties even if there is nothing untoward. We have found no major issues from our analysis of AAC’s financials although certain items (such as loans to suppliers) require further explanation. The company announced that it will release a…
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NEWSLETTER 14:

CHINA GREENLAND (1253 HK): How Bizarre, how bizarre...

Gillem Tulloch · 24 May 2017

The problem with companies recognising profits well ahead of payment is that you’re never really sure if the money’s going to turn up. Take China Greenland Broad Greenstate (CGBG) for example. It looks like a no-brainer…Who wouldn’t want to invest in a company with 30% operating margins and profits forecast to quadruple over the next few years? But scratch below the surface and it gets murkier. How can a gardening company generate such high margins which have somehow bucked industry trends? And it never seems to get paid. In fact, we estimate cash sales in 2016 to be 25% of…
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ZTO EXPRESS (ZTO US)

SELL: 1Q17 – Downgrades to continue as margins fall

Mark Webb · 22 May 2017

Parcel courier company, ZTO, delivered another disappointing result in 1Q17 with further gross profit margin declines, driven by falling unit prices and rising transportation costs. We estimate recurring EPS rose a paltry 9% y-o-y. Given that the base period – 1Q16 – was comfortably the weakest quarter of that year, we expect margin pressure to continue for the rest of 2017. Guidance suggested 31% revenue growth in 2Q17, well below the 38% consensus expects for the whole of 2017. A combination of weaker than expected unit pricing and falling underlying margins mean lacklustre EPS growth for 2017 and further downgrades…
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FAKING CASH FLOWS

Investor Relations Respond (well, sort of...)

Gillem Tulloch · 18 May 2017

There was an underwhelming response from Investor Relations to concerns raised in our recent report, FAKING CASH FLOWS: And How to Spot it. Of the twelve companies highlighted as possible frauds, six failed to respond whilst one chickened out of a conference call. This leaves five responses of varying quality (see correspondence within). Well, they had their chance. Also, don’t forget to download our spreadsheet which helps hunt for potential fake cash flow frauds globally, and our updated Accounting & Governance Screen. Finally, Gillem gives a succinct summary of his report in this four-minute video. GET PDF In our report,…
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AAC TECHNOLOGIES (2018 HK)

Gotham Strikes

Nigel Stevenson · 11 May 2017

Gotham Research’s short-seller’s report on AAC Technology (2018 HK) sent the latter’s shares tumbling 10% in Hong Kong today. The company is accused, amongst other things, of using undisclosed related party transactions to overstate profits. Our quick analysis of AAC’s financials failed to find a significant build-up of non-production assets which would normally be associated with this type of fraud. There is a slight build-up of some questionable assets but it is not possible to determine if this is in the normal course of business or some small-scale profit padding. Perhaps the biggest risk is not profit inflation but AAC’s…
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FAKING CASH FLOWS

And How to Spot it

Gillem Tulloch · 10 May 2017

It’s every fund manager’s nightmare to discover that a holding has been targeted by a short-seller alleging fraud. Our analysis of over 80 previous fake cash flow frauds shows some recurring similarities, such as superb profitability and yet a stingy attitude towards dividends and an inability to secure debt. In this report, we discuss our scoring system that correctly identifies 73% of historic frauds but is triggered by less than 1% of all listed companies globally – except for China and Hong Kong where it is 6-7%. Our short list of 25 potential frauds (excluding A-Shares) discussed in this report…
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