Research

FAKING CASH FLOWS

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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Insights

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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