Research

A2 Milk

SELL: Ready to pop

Nigel Stevenson · 15 November 2018

WA2 Milk (A2M) has achieved super-normal profitability by selling a “special” kind of infant formula to Chinese consumers through unofficial distribution channels. The problem is that A2M has limited IP to protect its product, and competitors like Nestle are closing in. Meanwhile, new Chinese e-commerce rules may hamper its distribution network. It is difficult to see how A2M can protect its returns when it spends far less on marketing and research than peers. Consensus forecasts 30% compound revenue growth for two years on widening margins, placing it on 22x FY20 PER; we see slower revenue growth and contracting margins resulting…
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CORPORATE TRAVEL

Short-seller claims lacks substance

Gillem Tulloch · 31 October 2018

We’re no fan of acquisition-driven business models, such as Corporate Travel (CTD), but they’re not a crime. The allegations presented thus far by hedge fund VGI Partners against CTD appear, in our opinion, to lack substance and in some instances are plain inflammatory. The short-seller alludes that CTD is faking its overseas profits but fails to provide hard evidence, or explain how this would impact CTD’s financials. In its defence, CTD has provided a fairly comprehensive rebuttal. This shorting campaign against CTD appears to be working as VGI has made allegations against an expensive stock, not because they have much…
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SMOKE & MIRRORS

Embellishing performance using non-GAAP measures

Mark Webb · 24 October 2018

Accounting standards are designed to make life easy for investors. As such, companies moving away from GAAP measures should be regarded with suspicion. Our review of the 30 largest Chinese domiciled ADRs shows an increasing use of adjusted, vaguely defined and non-GAAP metrics which, in some cases, greatly exaggerates performance. This has likely led to inflated valuations and created a potential shorting opportunity as reality bites. The worst culprits are Bitauto, JD.com, Pinduoduo and Vipshop. GET PDF VIEW SLIDES Adjustments to GAAP data Of the 30 largest China-domiciled US-listed stocks, 26 publish adjusted net income (non-GAAP) alongside the GAAP figures…
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HAILIANG EDUCATION

SELL: Bad teacher?

Gillem Tulloch · 18 October 2018

In the best-case scenario, Hailiang Education (HLG US) is a financing vehicle for its parent company, with cash being siphoned into related parties. In the worst-case, it’s a fraud; and there’s a substantial body of evidence, although circumstantial, to support this: Its financials have similar traits to past frauds, such as unnecessary capital increases and a failure pay dividends; the replacement of a Big Four auditing firm with an obscure auditor; numerous concerns raised by auditors; three CFOs in two years; allegations of underhand dealings with ASA Resource; public listings possibly orchestrated to avoid proper scrutiny; and finally, a shambolic…
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A&G SCREEN UPDATE

And lessons learned from Folli Follie

Gillem Tulloch · 1 October 2018

The newly released forensic report on Greek jewellery retailer Folli Follie concludes that it was making up 90% of its sales in China. Our Accounting & Governance Screen suggests that the company had been faking sales since FY09, hiding the evidence in receivables, inventories, prepayments and cash. In reality, the company had been loss-making for close to a decade. Fortunately, only a dozen or so European companies have similar traits, which we detail within. The A&G Screen has expired and you must login and download the latest version if you wish to check your portfolio or search for companies with…
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HAIDILAO

Watch the relations

Nigel Stevenson · 28 September 2018

Half of Haidilao’s raw materials are bought from related parties, accounting for 25% of total operating expenses. This recently listed hot pot restaurant chain has a seemingly compelling investment story but there is huge scope to shift profits around the wider group. One of these related party suppliers, Yihai (1579 HK), reports that half its revenues come from Haidilao. Unfortunately, Yihai has similar traits to past frauds which could make it a short-seller target. This might undermine confidence towards the entire group. Instead of accumulating cash on its balance sheet like a fraud, Yihai needs to start investing, or increase…
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AVOIDING TROUBLE

Tomorrow's targets

Gillem Tulloch · 20 September 2018

You might have skimmed over last week’s email in the belief that we were droning on about yet another sportswear company that you would never buy in a month of Sundays. Well, you’d be partly right; however, buried deep in the back of the report is a table which contains a list of 200 Asian companies which have fraud-like traits. We’ve specifically focused on those which are unusually profitable (thereby triggering our Fake Cash Flow flag) but fail to distribute proceeds to shareholders (triggering our Excess Capital flag). GET PDF For example, Keyence (6861 JP) looks to be a great…
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CHINESE SPORTSWEAR

Another one bites the dust

Gillem Tulloch · 13 September 2018

Yet another sportswear company has blown up. In June, Hosa’s share price mysteriously collapsed 90% in a day. It has since been targeted by a short-seller, delayed its dividend, failed to submit interim financials and is now suspended. Hosa’s financials have similar traits to the nine previous frauds highlighted in our recent report on the Chinese sportswear sector, lending credibility to our argument that companies faking their sales have a unique set of financial characteristics. Furthermore, background research shows that many of Hosa’s management had links to companies embroiled in past scandals. We have devised a slightly more generic scan…
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COMPLICIT AUDITORS

PWC gives Sunac and R&F a free pass

Nigel Stevenson · 29 August 2018

Imagine if fund managers could immediately revalue new investments to what they considered fair value. It would make a mockery of the industry and be considered unethical. In RARE circumstances, such as a forced sale, accounting rules allow buyers to book an immediate gain on the revaluation of acquired assets. Unfortunately, highly indebted Hong Kong audited companies are using this loophole to inflate their profits and equity. PWC has set the benchmark by allowing Sunac and R&F Properties to push through questionable revaluations of acquired assets. Incidentally, embattled commodities trader, Noble Group used similar gains on acquisitions to pad its…
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A&G MASTER SCREEN

New Product Launch

Gillem Tulloch · 23 August 2018

We’re pleased to launch our Accounting & Governance (A&G) Master Screen, a major new addition to our product line-up. This enables users to evaluate portfolio accounting risk, and to search for companies with specific accounting traits. A significant development is the introduction of positive accounting flags, as opposed to negative ones. This will, hopefully, help users find companies with desirable accounting traits, not just problematic ones. The screen has been pre-loaded with over 10,000 companies globallly, based on the latest year-end scores from six of our accounting modules, including Profit Manipulation (Beneish and Montier), Fake Cash Flow, Excess Capital, Acquisition Accounting and Debt…
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