Research

ON THIN ICE

Healthy profit, flimsy cashflow

Mark Webb · 25 June 2018

When operating cashflow consistently fails to match profit, there is normally a problem either with a company’s accounting, or their business model. Therefore, our screen of Asian domiciled companies (excluding non-financial and property) highlights plenty of potential concerns. Almost a third of Asian companies had operating cashflows at least 20% lower than like-for-like profit over the last five years. We highlight 15 stocks with huge discrepancies and the six we believe represent the highest risk are AviChina, BYD, Celltrion Healthcare, China Everbright Int’l, Samsung SDI and True Corp. GET PDF VIEW SLIDES CEIL EXTRACT GMT Research cashflow screen We screened…
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IN-BRIEF: TAL EDUCATION

What's going on?

Nigel Stevenson · 18 June 2018

Muddy Waters’ allegations against Chinese tutoring company, TAL Education (TAL US) raise serious concerns regarding several transactions as they clearly appear to have been engineered. This casts doubt on the integrity of TAL’s financial statements and management. However, so far, we think there is limited evidence to support the specific claim that TAL faked relatively small amounts of deferred revenue. Nonetheless, it is possible the transactions are part of a complicated round-tripping exercise, although we have found no direct evidence to support this. We have considerable concerns about the company given its financial statements display traits which are similar to…
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SPORTSWEAR REBUTTAL

His Master's Voice

Gillem Tulloch · 15 June 2018

Before we respond to some of the sell-side’s reactions to our Anta report, we need to warn you not to forward our research outside of your firm. It’s against our agreement with you, devalues our product and raises the chances of expensive legal and/or regulatory action against us. On to business… Much of Anta’s rebuttal came from selective disclosure to a group of analysts rather than anything published. Arguably, this is peddling potential insider information and stops us tackling their points head-on. Sell-side analysts have responded as expected. So far, of the reports we have seen, they have, in general, simply regurgitated…
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CHINESE SPORTSWEAR

Fake or Fabulous?

Gillem Tulloch · 13 June 2018

Nine out of the sixteen Chinese sportswear companies listed since 2005 have turned out to be frauds, all of them from Fujian. Their financials shared a number of characteristics which are rarely exhibited by other listed companies. The most obvious giveaway is that past frauds were more profitable than sector global leaders, such as Nike. Unfortunately, of the seven remaining companies, Anta, Xtep and 361 Degrees share these fraud-like traits, and also come from Fujian. Indeed, Anta’s FY17 operating margin is the third highest ever recorded in the sector; the other nine in the top ten turned out to be…
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IN-BRIEF: SAMSONITE (1910 HK)

A robust rebuttal

Nigel Stevenson · 5 June 2018

Samsonite jettisoned its CEO but provided a robust rebuttal to Blue Orca’s allegations in its eagerly awaited reply to the short-seller’s report. Overall, we think the company provided a strong response which addresses most of the key issues. In particular, it shows that purchase price accounting was not used to inflate profit. However, there are still a small number of points that we think the company should address, including a better explanation for the low level of provisioning relative to the value of inventory held at net realisable value at YE17. Blue Orca has yet to respond to Samsonite’s rebuttal,…
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IN-BRIEF: SAMSONITE (1910 HK)

A trivial pursuit

Mark Webb · 28 May 2018

New short-seller, Blue Orca, has made quite a splash with its report on luggage maker, Samsonite (1910 HK). It claims Samsonite has used acquisition accounting to artificially boost profits, as well as other allegations including dodgy related party transactions. Samsonite has flagged up before on our Accounting & Governance Screen for possible acquisition accounting issues resulting from the acquisition of Tumi and, indeed, as having traits similar to Steinhoff, a recent high-profile fraud. However, on closer examination, we concluded that there was no real evidence that Samsonite had materially flattered its profits in this way. In particular, Tumi’s tangible net…
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IN BRIEF: CHINESE SUBSIDIES

Handouts continue to prop-up PRC corporates

Mark Webb · 17 May 2018

Subsidies paid to Chinese companies are back in the spotlight due to the ongoing trade dispute with the US and their escalating cost to Chinese taxpayers. The majority of subsidies are probably hidden but our work on the top 100 Chinese companies suggests that explicit subsidies have risen by 38% between 2015 and 2017, to US$24bn, equal to 12% of pre-tax profit on average. Any sustained reduction in handouts would create significant earnings risks for a wide range of companies (highlighted within). Four of the most exposed include BYD (Sell), Unisplendour (NR), China Eastern Airlines (Sell) and ZTE (NR). GET…
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NEWSLETTER 18: CELLTRION INC

Billion dollar write-down?

Nigel Stevenson · 9 May 2018

Artificial sales from Celltrion (068270 KS) to its sister company Celltrion Healthcare (091990 KS) have led to a massive build-up of unsold inventories on the latter’s balance sheet. A billion dollar write-down could be on its way. By selling almost all of its drugs to Healthcare, Celltrion has been able to consistently overstate revenue and profits. It recognised sales even before its drugs had received regulatory approval, when no-one else would – or could – buy them. Sales to Healthcare continue to significantly exceed underlying demand; Healthcare has been unable to sell half or more of all the product it…
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IN-BRIEF: GREE ELECTRIC (000651 CH)

Show me the money!

Nigel Stevenson · 2 May 2018

Gree’s recent decision to suspend its dividend despite record profits, cash balances and free cash inflows is the latest in a series of incidents that raise concerns over the credibility of its financials and, specifically, whether its cash exists. We have three additional concerns. First, the large accruals for sales rebates that never get paid give the impression that sales have been artificially inflated. Second, aggressive discounting of receivables is at odds with the company’s supposedly strong cash generation. Third, back in 2016, the company proposed paying for an acquisition by issuing new shares for almost double the required consideration,…
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IN-BRIEF: IQIYI (IQ US)

Watch carefully

Nigel Stevenson · 19 April 2018

Recently listed iQiyi, the Netflix of China, is loss-making and rapidly burning through cash. Our review of its financials reveals two main concerns: first, the company is substantially overstating operating cash flows by classifying spending on licensed content as an investing rather than an operating activity. Secondly, the company recognises a material portion of revenue from barter transactions, whereby programming is swapped with third parties. Such arrangements are open to abuse; Netease, for example, was caught overstating its revenue through bartering advertising shortly after its IPO. Therefore, while these practices are not illegal, they can distort the financials, and investors…
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