Research

CHINA EVERGRANDE (3333 HK)

Valuing Empty Properties

Nigel Stevenson · 22 March 2017

In our opinion, CBRE has gone to extremes to give Evergrande’s property assets the most favourable valuation. Its methodology allows Evergrande to increase valuations by simply revising up planned floor space, even at projects which our site visits demonstrated were failed developments. Furthermore, the lack of rental income on investment properties means CBRE has adopted a comparable transaction approach as opposed to income capitalisation. This produces a stellar valuation despite a pathetic rental yield of just 0.1%. In our report, CHINA EVERGRANDE: Auditors Asleep, we estimated these properties could be worth less than half their RMB122bn balance sheet value and…
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FOREIGN DEBT

Chinese Currency Manipulators

Nigel Stevenson · 9 March 2017

A large number of overseas-listed Chinese companies have been able to avoid recognising foreign exchange losses on their foreign debt by adopting what we think are inappropriate functional currencies. The culprits include major tech stocks, such as Alibaba, Baidu, Tencent and Ctrip. Based on our analysis, 80% of Hong Kong and US-listed Chinese companies have some form of foreign currency debt. Of those that do, for nearly a quarter it represented more than 90% of their total borrowings. A significant minority have foreign currency debt greater than their market value which makes them extremely vulnerable to even a moderate decline…
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ZTO EXPRESS (ZTO US)

SELL: 4Q miss, downgrade risks rise

Mark Webb · 1 March 2017

Management had led the market to expect inflated returns from ZTO Express, presumably to help support a grossly over-priced IPO. However, the company failed to meet expectations, with 4Q16 EPS coming in 4% below consensus forecast. Along with tepid guidance for 1Q17, this calls into question highly over-optimistic consensus forecasts. As a result, we expect the market to rapidly downgrade profit expectations. The stock remains overpriced on 31x 2016 trailing PE. We think ZTO is worth less than US$10 per share. With downside of at least 22%, we recommend SELL/SHORT. DOWNLOAD PDF What’s happened? ZTO delivers parcels in the highly…
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ZTO EXPRESS (ZTO US)

SELL: Damaged Goods

Mark Webb · 22 February 2017

Parcel company, ZTO Express, delivers supernormal returns despite no apparent competitive advantage in an intensely challenging and commoditised industry. Alibaba accounts for 75% of its business but is building out its own delivery network and has invested in competitor YTO Express, which threatens longer-term prospects. Meanwhile, three-quarters of the delivery value chain is operated by ZTO’s related partnership networks that we think are barely profitable. Finally, a third of its trucking fleet is held by ZTO appointed employees but not consolidated. Overpriced at 32x 2016e PER, our conservative target price of US$10/share implies downside of 29%. Sell or Short. GET…
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GRADING FINANCIALS

Is Hong Kong Asia’s ticking time bomb?

Gillem Tulloch · 10 February 2017

Where globally are you likely to find the most problematic financial statements and where will you find the best…and which companies are they? Where are companies most likely to be manipulating profits, or least likely? In which markets are companies looking the most financially distressed? In developing our newly launched Accounting Screen, we scored 3,000 companies in Asia and 16,000 globally using traditional mathematical models such as Beneish’s M-Score, Altman’s Z-Score, etc. It may be surprising that Hong Kong scores the worst globally, closely followed by China. Of greater comfort is that Japan, Thailand and Indonesia all score well. GET…
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ACCOUNTING SCREEN

Launching of our βeta model

Gillem Tulloch · 25 January 2017

We are pleased to launch the βeta version of our Accounting and Governance Screen which is an Excel-based spreadsheet linked into Bloomberg. This means our subscribers can now 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 to highlight profit manipulation, such as Beneish’s M-Score and…
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NEWSLETTER 12: CHINA EVERGRANDE

Are its Auditors Asleep?

Nigel Stevenson · 17 January 2017

It’s almost impossible for China Evergrande (3333 HK), the world’s largest property developer, to make a loss. Properties it can’t sell are simply held indefinitely on the balance sheet. Those it classifies as “investment” properties are revalued, with any increase reported immediately as a profit, even though most are empty. Interest costs on its growing mountain of debt can be largely ignored as they are capitalised. But the consequence is that its balance sheet is being swamped with dead assets earning little or no income. We estimate that around a quarter of the properties it has ever completed remain unsold….
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MANIPULATING PROFIT

Pou Sheng: Risks lie to the downside

Gillem Tulloch · 12 January 2017

Pou Sheng has revealed that its CFO was caught inflating December’s sales and has fired him. Subsequently, the company’s CEO has resigned. It is unlikely the CFO was acting alone especially as he had no disclosed shareholding in the firm, unlike its CEO who has a relatively small holding. The company’s auditors, Deloitte, have been asked to conduct a thorough review of the accounts which must raise concerns that more gremlins are uncovered. Our accounting scan not only suggests that profit manipulation was possible before December’s incident in 1H16, but raises concerns over the possibility of cash being extracted through…
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GUEST SERIES

A Trifecta of Three Small Banks

Gillem Tulloch · 11 January 2017

We’ve taken a detour from our usual accounting research to high three under-loved and overlooked small banks in this Guest Series report from Daniel Tabbush. BTPN in Indonesia and Heartland in New Zealand dominate niche markets, resulting in super-profitable net interest margins with low credit costs. Meanwhile, PNB in the Philippines is a turnaround story with improving growth prospects. Although market capitalisation only ranges from US$500m up to US$1.4bn, there is 40-90% upside. GET PDF VIEW SLIDES Bank Tabungan Pensiunan Nasional BTPN has a niche in providing consumer loans to retired civil servants which results in a combination of low…
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MANIPULATING PROFITS?

Huishan Dairy and SMC

Gillem Tulloch · 6 January 2017

We’ve put SMC and Huishan Dairy though our new accounting screen following the publication of recent short-sellers’ reports that allege fraud. Both companies trigger an alarmingly high number of red flags which suggests profitability could be over-stated and cash is fake. As such, there would appear to be merit in both reports. Our accounting screen can check any company globally, for any accounting period, anywhere, so feel free to send us a short list of tickers that you would like checked. The good news is that by the end of January we will be able to provide you with your…
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