Research

FULLSHARE HLDS (607 HK)

Manufactured Bubble

Nigel Stevenson · 27 April 2017

Well, that was annoying. We had been planning to issue a brief note on Fullshare given the 200x increase in its market cap since its backdoor listing but were beaten to it. The well-known short-seller, Glaucus Research, issued a report on 25th April claiming that it is “one of the largest stock manipulation schemes…anywhere in the world”. While we are in broad agreement with the conclusions, our view on the details is slightly different. Fullshare’s shares have been suspended (at the company’s request) pending a clarification announcement, giving it time to regroup. We thought it would be worthwhile giving our…
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CHINA EVERGRANDE

Out of Ammo?

Nigel Stevenson · 19 April 2017

Last Thursday (the 13th), Evergrande narrowly averted a collapse in its share price, which at one point fell 12% in just three minutes. It did so by instigating a massive share buyback, spending around HK$1.74bn on 203m shares. The company bought a further 95m shares on the next trading day (the 18th), seemingly in blatant disregard of the Hong Kong Exchange’s Listing Rules. These require a minimum public free float of 25%, whereas Evergrande was down to 24% by the end of the 18th. Furthermore, in our view, there was clear evidence of market manipulation in these trading sessions. We…
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MSCI CHINA “A” INDEX

How do its Constituents Stack Up?

Gillem Tulloch · 7 April 2017

For many investors, the emergence of China’s A-Shares as an asset class is both a threat and an opportunity. How to get to grips with 1,800 additional companies which have almost no track record and limited coverage? To help address this, we have put the 115 non-financial constituents of the China A-Share Index through our Accounting and Governance Screen. To give some perspective, we grade the financials in terms of quality and then check for more specific criteria such as profit manipulation (Beneish, Montier, etc.), financial stress (Piotroski and Altman), abuse of acquisition accounting, possible fake cash flow frauds, obscure…
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CHINA GREENLAND BG (1253 HK)

SELL: The Government’s Unpaid Gardener

Gillem Tulloch · 30 March 2017

Shares pledged by Huishan Dairy and Hanergy founders created an incentive to manipulate profits and share prices. We worry that this is also the case with landscaping company, China Greenland Broad Greenstate (CGBG). Either the company’s business model is extremely poor or something more sinister is afoot. CGBG generates most of its profits from unbilled revenues, resulting in ballooning receivables and operating cash outflows. This subjective accounting might explain why it is nominally so profitable: Margins are far higher than competitors, and rising, whilst peers’ are falling. Primarily dependent on the continued health of the property sector and with just…
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CK HUTCHISON HOLDINGS

2016 recurring earnings inflated by nearly 50%

Mark Webb · 30 March 2017

“Results beat expectations” ran the headline following CKHH’s recent results announcement. Not according to our calculations. We believe CKHH’s measure of recurring earnings was inflated by HK$10.6bn, or 47%, by accounting adjustments that largely originated from the reorganisation of Cheung Kong in 2015. On a like-for-like basis, we estimate that CKHH’s underlying recurring profit fell 8% y-o-y to about HK$22.7bn. Poor cash flow generation would appear to support this. At face value, CKHH’s appears to be trading on a reasonable valuation of 11.3x 2016 PER, but strip away accounting adjustments and it is closer to 16.4x, which is expensive. (The…
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NEWSLETTER 13

ZTO EXPRESS: Downgrade risks rise

Mark Webb · 29 March 2017

When ZTO Express (ZTO US) listed on the New York Stock Exchange (NYSE) in October last year, investors bought into a well-packaged story, leveraged to one of the most compelling themes in Asia – the rapid growth in Chinese online sales. However, just four months later and the story is already starting to unravel. Results for 4Q16 came in below forecast and 2017 revenue guidance was far weaker than expected. Indeed, investors are starting to see a rather more mediocre story beneath the attractive wrapping. We expect disappointment with ZTO to continue as margins and returns erode to more normalised…
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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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