Research

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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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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SCANNING FOR TROUBLE

Acquisition Accounting

Gillem Tulloch · 24 January 2018

You can now download our Excel-based, Bloomberg-linked screen that identifies companies globally that might be inflating profits through the use of acquisition accounting. We discussed this in detail in our report, GOODWILL HUNTING: Using acquisition accounting to inflate earnings (1 Nov 2016). The model is set up to allow users to paste in a selection of companies or to hunt for stocks in a specific region. A live Bloomberg terminal is not required for this latter screen. Download Screen Acquisition Accounting We aim to highlight companies at risk of manipulating their profits through acquisition accounting. As highlighted in our report,…
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SCANNING FOR TROUBLE

Fake Cash Flow

Gillem Tulloch · 24 January 2018

You can now download our Excel-based, Bloomberg-linked screen that identifies companies globally that have similar characteristics to past fake cash flow frauds. We discussed this in detail in our report, FAKING CASH FLOWS: And how to spot it (10 May 2017). The model is set up to allow users to paste in a selection of companies or to hunt for stocks in a specific region. A live Bloomberg terminal is not required for this latter screen. Download Screen Fake Cash Flow In our report, FAKING CASH FLOWS: And How to Spot it (10 May 2017), we devised a system to…
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SCANNING FOR TROUBLE

Excess capital screen

Gillem Tulloch · 18 January 2018

You can now download our Excel-based, Bloomberg-linked screen that identifies companies globally that have been raising too much external capital relative to their requirements. This could mean that they are about to make a large acquisition, or that reported cash flows are not real and that external finance is being raised in order to survive. We discussed this in detail in our recent report, EXCESS NEW EQUITY: Fraud or poor corporate governance (12 Jan 2018). The model is set up to allow users to check individual stocks in detail, paste in a selection of companies or to hunt for stocks…
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EXCESS NEW EQUITY

Fraud or poor corporate governance?

Gillem Tulloch · 12 January 2018

It is widely assumed that companies returning capital to shareholders while reporting free cash inflows cannot be frauds, but this is not entirely true. Around 30% of past fake cash flow frauds were able to pay dividends despite reporting fraudulent free cash inflows. These dividends were likely financed from the proceeds of debt or equity. In order to spot companies with similar traits, we have created an abbreviated cash flow which monitors cash requirements, and devised a number of screens which highlight companies raising equity despite being net cash positive and generating free cash inflows. Companies where we have significant…
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IN BRIEF: THE HOLIDAY SEASON

Hiding bad news?

Gillem Tulloch · 4 January 2018

December was a busy month for HK-listed companies with 22 auditor resignations, 23 companies losing a CEO and/or CFO, plus 35 profit alerts. It’s tempting to believe that companies rush out bad news when investors are away on holiday, but the numbers don’t support this. Some of the most interesting developments included KPMG’s resignation from CogoBuy which adds credibility to short-seller fraud allegations. Also, Chinese dairy companies were again in the spotlight for all the wrong reasons with senior departures from China Shengmu following possible fraud, and some curious developments at Zhuangyuan Pasture. However, it was Anta Sports where the…
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IN BRIEF: STEINHOFF (SNH GY)

Red flags which could have alerted investors

Mark Webb · 14 December 2017

It’s been a bad few weeks for Steinhoff’s shareholders following allegations of fraud, delayed publication of audited results, the CEO’s resignation and an 80% plunge in its share price. Our Accounting & Governance screen reveals evidence of acquisition accounting to inflate profit which then triggered our Fake Cash Flow fraud alert. There is also evidence of cash flow manipulation that might have helped hide payments, manipulate profit or inflate cash flows. Arguably, these red flags could have given investors advanced warning of accounting irregularities. But don’t think these tricks are limited to Steinhoff; our recent reports have flagged Asian companies…
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