Research

FOREIGN DEBT

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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Insights

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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