Research

IN-BRIEF: CHINA HONGQIAO (1378 HK)

China Hongqiao’s post-suspension share price appreciation might lead some to believe that fraud allegations have been addressed, but we are not entirely convinced. Even if investors can accept that the company had four different auditors in two years, they still have to grapple with a less than satisfactory response to fraud allegations and a very worrying set of financial statements containing similar traits to past frauds. The stock might be trading on 5x 2018 PER (assuming profits are real) but we would still be sellers. The cost of shorting is expensive at 9% but might be a strategy for risk…
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TREASURY WINE ESTATES (TWE AU)

Full-year results allay concerns…somewhat

Nigel Stevenson · 16 August 2019

Treasury Wine’s full-year results undoubtedly showed a major improvement in operating cash flow, as receivables declined from elevated levels. While channel-stuffing cannot be ruled out, there is limited evidence of this in the latest financials. Our concerns have been somewhat allayed, although questions remain regarding earnings quality. The direct gains from acquisition accounting appear to have wound down, but we suspect there could be some lagging profit benefits from the sale of other held-back inventory. We maintain our AVOID recommendation given the ongoing uncertainty over earnings quality. GET PDF

SHORT-SELLERS

Blue Orca attacks Ausnutria

Gillem Tulloch · 15 August 2019

In the 8th short-seller attack on Hong Kong listed companies this year, Blue Orca alleges that Ausnutria has been faking sales and profits. The company’s shares are suspended pending a rebuttal from management. It is sometimes possible to demonstrate that a company’s financials do not reflect the allegations, but not here. The company shows similar financial traits to past frauds, and these have become more pronounced over the past two years. Ausnutria’s unusual corporate structure, with production assets in Europe and sales in China, might help explain some of these traits. The best shareholders can hope for is a comprehensive…
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TREASURY WINE (TWE AU)

Disappointing vintage

Nigel Stevenson · 7 August 2019

Treasury Wine Estates (TWE) may have inflated profits by up to 50% over the last two years through the use of acquisition accounting to write-down inventories and establish other liabilities. Weak operating cash flow with a widening divergence from cash profits raises additional concerns that profits are being manipulated. Tell-tale signs include rising receivables and inventories which suggest possible channel-stuffing and deferral of overheads. The winding down of benefits from acquisition accounting may have left a hole in earnings; if we are correct, there is 35% downside to A$10.60/share. We currently recommend investors AVOID the stock but poor forthcoming results…
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