Research

AAC TECHNOLOGIES (2018 HK)

Gotham Research’s short-seller’s report on AAC Technology (2018 HK) sent the latter’s shares tumbling 10% in Hong Kong today. The company is accused, amongst other things, of using undisclosed related party transactions to overstate profits. Our quick analysis of AAC’s financials failed to find a significant build-up of non-production assets which would normally be associated with this type of fraud. There is a slight build-up of some questionable assets but it is not possible to determine if this is in the normal course of business or some small-scale profit padding. Perhaps the biggest risk is not profit inflation but AAC’s…
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CIMIC GROUP (CIM AU)

SELL/SHORT: Engineering profits

Nigel Stevenson · 10 April 2019

We estimate CIMIC has inflated profits by around 100% in the last two years through aggressive revenue recognition, acquisition accounting and avoidance of JV losses. A lack of supporting cash flow has been obscured by the increased sale of receivables and reverse factoring of payables. While reported net cash was 69% of equity at YE18, we estimate adjusted net debt-to-equity of 74%. CIMIC’s refusal to provide substantive answers to our questions suggests it has something to hide. Its shares trade on a premium multiple of 19x FY19 consensus earnings; however, we derive a target of A$23/share based on a double…
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KINGDEE INT SOFTWARE

Questionable accounting, mediocre performance

Mark Webb · 26 March 2019

It’s difficult to find fault with David Webb’s conclusions that Kingdee struggles to make a profit once adjusting for government subsidies, one-off gains and questionable transactions with related parties. The company’s rebuttal attempts to allay investor fears by highlighting ample operating cash flows, but our analysis suggests that even these look inflated. We have additional concerns about the deconsolidation of Qingdao Xinrun Real Estate prior to the apparent completion of the deal, possibly to flatter financials. If government subsidies are considered core profit, Kingdee trades on a demanding 78x FY19e. It is a possible shorting candidate given expensive valuations, weak…
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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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