Research

A2 MILK

A2 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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GUEST SERIES

Variable Interest Entities in China

Gillem Tulloch · 14 March 2019

It’s been close to three years since we last had a guest writer but when Professor Paul Gillis floated the idea of updating his views on Chinese Variable Interest Entities (VIEs), we jumped at the opportunity to publish. As the report explains, VIEs and the accompanying service agreements are the structure by which foreigners mimic the benefits of owning a restricted asset in China. Close to 70% of all China-domiciled companies listed on foreign exchanges use them but they are not without their controversies, after all, they are trying to enable something which strictly speaking is prohibited under Chinese law….
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LOADED DICE

Companies that rig returns from investments

Mark Webb · 6 March 2019

Accounting scandals at Enron and Olympus, as well as fallout from the global financial crisis, were meant to have tightened rules governing the treatment of investments. Unfortunately, our research shows companies have continued to hide problems off balance sheet and selectively recognise gains from only the most successful investments. 58.Com has been one of the most active users of these accounting tricks and doubts about its profit growth question its premium P/E rating. CCCC and JD.com’s businesses are burning cash and appear to be camouflaging the magnitude of outflows. We recommend AVOIDING all three stocks. GET PDF Stricter accounting rules…
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TRADITIONAL CHINESE MEDICINE

AVOID/SELL: A scandal too far

Gillem Tulloch · 21 February 2019

Traditional Chinese Medicine (TCM) has lost eight directors and a CFO in less than a year. Predictably, the company is playing down these departures. TCM has a troubled history. The original business had a disappointing US listing and was subsequently privatised; it gained its current Hong Kong listing through a reverse takeover, circumventing regulatory scrutiny. Financials are problematic owing to poor working capital, possible cost capitalisation and fraud-like traits. Furthermore, acquisitions from related parties, including the current MD, raise additional governance issues. Given these concerns, we recommend investors AVOID/SELL. The possibility of a major corporate governance event, such as the…
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