Research

SHORT SELLER’S SNAPSHOT

TIAN GE (1980 HK): Reasons for concern

Gillem Tulloch · 17 August 2017

The seventh short seller’s report in Hong Kong this year has targeted social video platform operator, Tian Ge (Mkt Cap US$1bn). The report was written by anonymous short seller, Emerson Analytics, whose 100% success rate for its six previous reports should be cause for concern in itself. Emerson alleges that more than half of Tian Ge’s revenues have been faked and this can be proven by monitoring its market share of various online metrics. Unfortunately, there are good reasons for concern. Tian Ge has many of the hallmarks of a fraud in that it is highly profitable and there is…
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NEWSLETTER 15:

Hong Kong needs short-sellers

Gillem Tulloch · 14 August 2017

It’s not just because Hong Kong allows short-selling that there are so many short-sellers’ reports, it’s because (by our estimates) Hong Kong is the corporate fraud capital of the world. A small but meaningful percentage of mainland companies seem predisposed to defrauding investors. In general, the sellside is not incentivised to uncover these frauds while auditors and regulators have been unsuccessful in spotting them. Meanwhile, as an accounting research firm, GMT Research is able to detect companies we suspect of being fake cash flow frauds but cannot definitely prove it. Given the expense involved in researching and uncovering frauds, short-sellers are…
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BYD (1211 HK)

SELL: Bury your debt

Nigel Stevenson · 3 August 2017

Take into account BYD’s hidden debt and its gearing rises from 74% to 122%. This raises the possibility of further capital increases in light of substantial cash outflows and deteriorating profitability due to fast declining subsidies. These purchase subsidies doubled in FY16, contributing over 40% of BYD’s revenue from electric vehicles, which led to a near 80% rise in profits. However, subsidies will be gone in three years. The company is already feeling the impact; analysts have reduced FY17 profit expectations by almost 20% so far this year. Add into the mix the company’s expensive valuation and a propensity to…
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CARILLION (CLLN LN)

Worrying parallels

Gillem Tulloch · 19 July 2017

You might be wondering what a UK contractor’s woes have to do with Asia. First, Carillion’s has a similar supplier payment arrangement to Sinopharm but, unlike Sinopharm, it does not reclassify repayments as a financing activity which materially overstates Sinopharm’s operating cash flow. This re-enforces the view presented in our recent report that Sinopharm’s cash flow statement misrepresents its financial position. Second, Carillion’s surprise share price collapse shows that subjective contract accounting can inflate reported profits and asset prices. It is only when banks want their money back that shareholders find out there’s nothing left. The UK contractors might look…
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SINOPHARM (1099 HK)

SELL: Not what it seems

Gillem Tulloch · 11 July 2017

Sinopharm is not the lowly geared, cash generative company it seems. Operating cash inflows have been entirely manufactured through two methods: First, trade creditor repayments have been reclassified from operating cash flows to financing activities…an accounting first. Second, the company has sold ever greater quantities of receivables. Adjust for this and there are no operating cash inflows while leverage is worryingly high. Add into the mix the pursuit of growth through acquisitions, reduced financial disclosure, management’s failure to address our concerns, and we believe that the stock is virtually uninvestable. For those wishing to short, there is likely at least…
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THE DIRTY DOZEN

Stocks to avoid in Asian infrastructure

Mark Webb · 29 June 2017

Competition for infrastructure has grown, project returns fallen and policy interference is rife in Asia. However, against this backdrop, some Asian infrastructure companies have been able to offer strong growth and decent ROEs. Unfortunately for investors, most owe their superior financial performance to the aggressive application of accounting policies rather than infrastructure investment prowess. The dirty dozen: Beijing Cap Co (600008 CH), Beijing Origin (300070 CH), Canvest Env (1381 HK), China Com Constr (1800 HK), China Everbright Gr (1257 HK), China Everbright Int (257 HK), Dynagreen (1330 HK), Henan Zhong (600020 CH), IRB Infra (IRB IN), Sichuan Road (600039 CH),…
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ACCOUNTING & GOVERNANCE SCREEN

Our latest version

Gillem Tulloch · 20 June 2017

Please download the latest version of our Accounting and Governance Screen by clicking on the link provided below. This screen is an excel-based spreadsheet linked into Bloomberg which means that subscribers can 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 at highlighting profit manipulation (Beneish’s…
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ASIAN SHORT-SELLERS

The Bogeyman Is Coming…

Gillem Tulloch · 15 June 2017

The number of anonymous short-seller reports targeting Hong Kong listed companies is likely to rise, primarily due to their low quality which is, in part, a result of regulatory shortcomings. While the win rate of short-sellers is very high, not all are equal. Investors should be particularly concerned with Emerson and Glaucus given the high quality of their research and level of success. However, there is some hope for investors: Companies accused by short-sellers of Fake Cash Flow Fraud all score poorly under our scoring system and we urge investors to check their stocks with our Accounting & Governance Screen….
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MAN WAH (1999 HK)

Comfortably profitable or heavily padded?

Mark Webb · 9 June 2017

Sofa maker Man Wah has been targeted by short-seller Muddy Waters over its profitability, taxes, export sales and debt. So far, the main publically available accusations levelled (via twitter) concerning undisclosed debt appear to lack credibility. In management’s favour, it has lifted the stock’s suspension after issuing a speedy and robust rebuttal. Furthermore, the amounts of cash Man Wah has returned to shareholders via dividends and share buybacks are inconsistent with past frauds. However, our Accounting & Governance Screen reveals some fraud like traits within its financials, such as the build-up of non-production assets, window dressing of heavy trading activity,…
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COGOBUY (400 HK)

Cause for Concern

Gillem Tulloch · 31 May 2017

Blazing Research may be a newcomer to the anonymous short-selling game, but its report on CogoBuy has credibility in key areas. The company’s founder has been accused of asset stripping his NASDAQ listed company, Viewtran, to the detriment of minorities, and then re-listing the assets in Hong Kong as CogoBuy. He is also accused of perpetuating Fake Cash Flow frauds at both CogoBuy and Viewtran. We have been able to verify the sequence of events that allowed Mr Kang to legally, if somewhat unethically, transfer these assets. The company’s rebuttal failed to address concerns. What’s to say he won’t repeat…
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