Research

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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IN-BRIEF: THE CHINA HUSTLE

Reverse mergers (CBPO, HOLI)

Gillem Tulloch · 12 April 2018

If you haven’t already seen the latest finance documentary, The China Hustle, it’s well worth watching. Carson Block, Dan David and others take viewers on a captivating romp through the Chinese reverse takeover scam. Interestingly, our Fake Cash Flow model correctly identified eight of the nine frauds specifically mentioned in the movie. Of the RTOs still listed, Hollysys Automation and China Biologic raise concerns. This got us thinking: if we’re correct in that around 5% of Chinese companies (mainly small caps) are faking the majority of their revenues, what percentage are faking just 5-10%? As we discuss within, it’s probably…
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IN-BRIEF: SINOPHARM

Spiced up

Gillem Tulloch · 29 March 2018

An apparently spectacular 4Q17 result for Sinopharm but, as usual, nothing’s quite what it seems. Earnings were distorted by numerous one-off and downright curious items which gives the impression that management was trying hard to impress. As usual, the main action was in the balance sheet with record amounts of assets sold at the year-end, seemingly to give the impression of operating cash inflows and lower reported leverage. The company’s financial statements are something of a riddle owing to the adoption of questionable accounting practices and inexplicable anomalies. We’ll find out more when the full annual report is released by…
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IN-DEPTH: ACCOUNTING RISK

Assessing the top 100 companies in Asia ex-Japan

Gillem Tulloch · 23 March 2018

In assessing the accounting risk at the top 100 companies in Asia ex-Japan, our analysts highlight 36 companies with high risk, and short-list six where it is acute. We have previously written on four of these (CCC, CKH, Ctrip, and Sinopharm) and are in the process of following up with management at Gree and Mengniu Dairy. Furthermore, our quantitative scoring system highlights a further five companies with risky accounting, including Mahindra & Mahindra, New Oriental Education, Alibaba, Hikvision and Amcor. The report includes write-ups of all 100 companies with links to our screen and published financials. GET PDF VIEW SLIDES…
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IN-BRIEF: CORPORATE FRAUD

Slandering Fujian?

Gillem Tulloch · 14 March 2018

Fujian has gained a bit of reputation for being home to a large number of frauds. As a result, we decided to see if the statistics supported the allegations. We have records of 13 alleged or confirmed Fake Cash Flow Frauds at listed companies from Fujian where investors have lost almost everything. That’s the highest number recorded for any Chinese province and accounts for 17% of all alleged Chinese Fake Cash Flow Frauds in our database. And yet Fujian accounts for just 3% of China’s population, 3% of its large listed companies and 4% of its economy. Most of these…
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TICKING TIME BOMBS

Stocks with similar traits to Steinhoff

Mark Webb · 22 February 2018

Steinhoff surprised the market late last year with an admission of accounting irregularities which led to its share price collapse. Interestingly, its financial statements showed early warning signs, such as unusually high profitability which failed to translate into free cash flows or dividends. A number of acquisitions also showed evidence of asset write-downs which likely inflated profits. Indeed, the company triggered two of our proprietary accounting models, Acquisition Accounting and Fake Cash Flow. We screened 3,500 large companies globally for those with similar traits and found 84 stocks of which 35 were in Asia. We have major concerns over five…
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IN-BRIEF: IMPERIAL PACIFIC

How long before it goes to zero?

Gillem Tulloch · 16 February 2018

Gong Hey Fat Choy from Thailand! How long before Imperial Pacific (1076 HK) goes to zero? Now, don’t get too excited if you’re a short-seller as its market cap is only US$1.8bn and liquidity is just under a million US dollars a day; however, the story behind this casino stock is worthy of the annals of Asia’s craziest, and has just been exposed in a Bloomberg article titled “A Chinese Casino Has Conquered a Piece of America” (15 Feb 2018). It involves death, bribery, gambling, money laundering and lots more, all on the US-administered tiny island of Saipan in the…
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NEWSLETTER 17

Asia’s most manipulated market is…

Gillem Tulloch · 8 February 2018

Are Hong Kong-listed companies the most manipulated in Asia? Of the 6,000 largest companies in Asia, 16 rose by more than 10% in the ten trading days before New Year and then fell by more than 10% in the ten days after. Although Philtrust Bank in the Philippines took the top spot with a total 20-day swing of 71%, the list was dominated by companies listed in Hong Kong. Some familiar names appear, including China High Speed and China Greenland Broad Greenstate. We wonder whether the Hong Kong Stock Connect has created a regulatory blind spot that allows stocks to…
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CELLTRION INC (068270 KS)

SELL: Gaming the accounting

Nigel Stevenson · 1 February 2018

Since 2010, Celltrion has generated 98% of its sales from its sister company, Celltrion Healthcare, which has been unable to sell 55% of the product that it’s bought. Celltrion Healthcare appears to have been established to buy unapproved drugs from Celltrion. It is highly unlikely that an outside third party would have bought these drugs, and we question the economic substance of these past transactions for Healthcare. We think Celltrion’s profits are significantly overstated, by as much as two-thirds in 9M17, owing to continued channel stuffing at Healthcare and the capitalisation of R&D costs. We therefore apply a 50% discount…
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SCANNING FOR TROUBLE

Debt reconciliation

Gillem Tulloch · 29 January 2018

You can now download our Excel-based, Bloomberg-linked screen that identifies companies globally where we are unable to reconcile changes in debt on the balance sheet with the cash flow statement. This suggests that companies might be paying for assets with debt which is a non-cash item and therefore not reconciled within the cash flow statement. It has the effect of under-stating capex and over-stating free cash flows, and can distort valuations. The other reason might be that companies are deliberately misrepresenting their cash flow statements. We discussed this in detail in our report, COMING UP SHORT: Manipulating cash flows (22…
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