Research

IN-BRIEF: GDS (GDS US)

SELL: Too bad to fake

Mark Webb · 15 August 2018

GDS was targeted by short-seller Blue Orca in a report published on 31st July, prompting a 47% share price decline. We find the claims regarding revenue and profit manipulation weak. After all, who would fake something that looks this bad? As for the allegations concerning overpriced acquisitions and undisclosed related parties, they have not been adequately addressed by management. Meanwhile, the practice of holding surplus cash offshore is not uncommon although it is undermining profitability. Our A&G Screen suggests that the company has likely manufactured operating cash flows and under-stated capex in order to present the most favourable cash flow…
Read more ›


IN-BRIEF: PINDUODUO

Distorted metrics undermine premium valuation

Nigel Stevenson · 3 August 2018

Online market place Pinduoduo (PDD US) appears to have employed questionable accounting in order to engineer a successful IPO. Sales and gross profits may have been inflated by failing to properly account for coupon costs, while profits and cash flows have been flattered through the accounting treatment of a co-operation agreement with Tencent. Important metrics such as GMV might also be misleading given inconsistencies in reported numbers. We are unable to get a proper understanding of the business and financials owing to poor disclosure within its prospectus. The company is a US foreign listing which could lead to limited corporate…
Read more ›


IN-BRIEF: CHINA TOWER

AVOID: Financially engineered

Nigel Stevenson · 30 July 2018

We struggle to summon enthusiasm for the upcoming IPO of China Tower which appears financially engineered to exploit minority investors. The core problem is the conflicted position of the three Chinese telcos which will remain its controlling shareholders and only customers. Indeed, rental rates were cut just prior to the IPO, partially offset by a reduction in depreciation. Long-term pricing will be what the telcos decide to pay, while future capex may be higher than expected. Another major concern is China Tower’s exceptionally low profitability with returns on capital of about 2% well below its cost of capital, and we…
Read more ›


CHINA EVERBRIGH INT

SELL: Paper Profits

Mark Webb · 5 July 2018

China Everbright Intl Ltd (CEIL) has one of the worst track records in Asia for cashflow generation relative to profit. CEIL gains this dubious distinction because it applies accounting rules for its service concessions in a manner that accelerates profit recognition relative to cashflow. Limited disclosure means investors may be unaware of CEIL’s lacklustre cash profit performance. If we strip out our estimate of front-loaded earnings, 2017 profit falls 61%, its PE rises to 36x and its ROIC is only 6%. Our target price of HK$5.40 is based on 2x adjusted book value and gives 50% downside. SELL. GET PDF…
Read more ›


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…
Read more ›


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…
Read more ›


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…
Read more ›


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…
Read more ›


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,…
Read more ›


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…
Read more ›


Free Newsletter

GET OUR FREE NEWSLETTER

Input your email address below to sign-up to our free newsletter.