Research

IN BRIEF: TIBET WATER (1115 HK)

Tip of the iceberg

Mark Webb · 17 October 2017

Water and beer bottler Tibet Water Resources (TWR) has the dubious distinction of being accused of fraud by two anonymous short-sellers in just one week. Our analysis of its financials raises concerns that something is amiss: (i) Operating margins are super-normal despite minimal capex, which would appear to be a dichotomy. (ii) Free cash inflows have gone into acquisitions and, despite super-high cash balances, dividends have been reduced to zero. (iii) Unusually high investment flows are consistent with companies window-dressing their financials and, in some instances, past frauds. Management’s response to these accusations has been to threaten litigation as opposed…
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SPECULATIVE INVESTMENTS

Now you see them, now you don’t

Gillem Tulloch · 12 October 2017

It appears contradictory that Asia’s most leveraged corporate sectors, India and China, also have the highest incidence of companies likely to be window dressing their short-term investments. The removal of dubious assets prior to reporting periods may be a way of avoiding awkward investor questions. For companies engaging in such behaviour, risks should be re-evaluated and management held to account. Worryingly, our short-list of 125 Asian companies contains a disproportionately high percentage that have either been accused of fraud, or have fraud-like traits. The layering of short-term investments might be a means of obscuring the source of cash from auditors….
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IN BRIEF: ZTO (ZTO US)

Risks rising on Alibaba’s plans for Cainiao

Mark Webb · 4 October 2017

China has a fragmented and commoditised parcel delivery industry which is dominated by goods purchased on Alibaba’s (BABA US) platforms. This is ZTO’s key business which currently reports world-beating margins and returns on capital. Alibaba’s acquisition of an increased stake in Cainiao Network is probably not an attempt to take-over the delivery market itself; unlike Amazon and JD.com, it does not want to control the entire value chain. Instead, we suspect it is part of Alibaba’s strategy to ensure the delivery market is low-cost and efficient, and will help Alibaba monetarise Cainiao’s services. That’s good news for Alibaba and the…
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HOT AIR

Asian airlines inflating performance

Mark Webb · 27 September 2017

Airline investing is all about the earnings outlook. Unfortunately for investors, the sector is particularly prone to profit manipulation due to the treatment of leased aircraft, differing depreciation rates, hidden maintenance costs and selective presentation of one-off gains and recurring losses. Investors may not be too surprised that Asian airlines are using accounting tricks to flatter their financial statements. However, what may be of greater interest is that the more highly rated carriers are some of the worse culprits. GET PDF VIEW SLIDES Earnings dominate investing, but huge risk of manipulation Investing in Asian airlines tends to focus on earnings…
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NEWSLETTER 16: SINOPHARM (1099 HK)

Not what it seems

Gillem Tulloch · 27 September 2017

Sinopharm has misrepresented its cash flow statement and aggressively window dressed its balance sheet. The company appears to have persuaded its auditors, PwC and then EY, to reclassify some working capital items as financing activities, thereby substantially inflating operating and free cash flows. This accounting treatment smacks of tricks used in past accounting scandals such as Delphi Auto and Enron/Mahonia. We have lodged a complaint with EY which has yet to respond. Sinopharm also sells increasing amounts of receivables, further flattering operating and free cash flows. Adjust for these issues and Sinopharm is not a lowly leveraged cash-generative company but…
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CAR (699 HK)

SELL: Defying gravity

Nigel Stevenson · 30 August 2017

All that stands between CAR and a disorderly liquidation of its shareholder base is a share buyback scheme which it can ill-afford. Since we wrote our in-depth SELL report in March 2016, CAR’s performance has been dire: Its largest customer and sister company, UCAR, the ride-hailing business, is struggling and has halved the number of cars rented from CAR. To offset the resulting lost revenue, CAR has slashed prices for its traditional self-drive rental business to boost demand. In 1H17, CAR’s total rental revenue was flat while adjusted net profit fell by a third. Its shares have fallen by 15%…
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IN BRIEF: SINOPHARM (1099 HK)

Results show haemorrhaging cash outflows

Gillem Tulloch · 28 August 2017

In July, we wrote a report on Sinopharm which alleged that the company was manufacturing operating cash flow by imaginatively reclassifying creditor repayments as a financing activity (an accounting first) and by selling an ever-greater quantity of receivables. Adjust for this and there are no operating cash inflows while leverage is worryingly high. Well, no amount of window dressing could disguise the substantial operating outflows in 1H17, leading to an alarming rise in leverage (see chart below). Curiously, this occurred at a time when growth was slowing (and disappointing), not accelerating. This suggests a substantial deterioration in terms of trade,…
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IN BRIEF: CHINA SHENGMU (1432 HK)

More spilt milk 2

Gillem Tulloch · 24 August 2017

Is every dairy company listed in Hong Kong dodgy? It certainly feels that way following scandals at Daqing and Huishan. We warned readers back in May that China Shengmu was likely to be next following a questionable FY16 audit report by Ernst & Young which appeared to scuttle management’s attempt to sell the company to Mongolia Yili. Sure enough, Shengmu announced a profit warning today relating to receivables and biological assets, prompting an 11% selloff. Our suspicion is that this is just the tip of the iceberg given that Shengmu is one of just twelve Asian companies highlighted in our…
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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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