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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Insights

CARILLION (CLLN LN)

Worrying parallels

Gillem Tulloch · 19 July 2017

You might be wondering what a UK contractor’s woes have to do with Asia. First, Carillion’s has a similar supplier payment arrangement to Sinopharm but, unlike Sinopharm, it does not reclassify repayments as a financing activity which materially overstates Sinopharm’s operating cash flow. This re-enforces the view presented in our recent report that Sinopharm’s cash flow statement misrepresents its financial position. Second, Carillion’s surprise share price collapse shows that subjective contract accounting can inflate reported profits and asset prices. It is only when banks want their money back that shareholders find out there’s nothing left. The UK contractors might look…
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SINOPHARM (1099 HK)

SELL: Not what it seems

Gillem Tulloch · 11 July 2017

Sinopharm is not the lowly geared, cash generative company it seems. Operating cash inflows have been entirely manufactured through two methods: First, trade creditor repayments have been reclassified from operating cash flows to financing activities…an accounting first. Second, the company has sold ever greater quantities of receivables. Adjust for this and there are no operating cash inflows while leverage is worryingly high. Add into the mix the pursuit of growth through acquisitions, reduced financial disclosure, management’s failure to address our concerns, and we believe that the stock is virtually uninvestable. For those wishing to short, there is likely at least…
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THE DIRTY DOZEN

Stocks to avoid in Asian infrastructure

Mark Webb · 29 June 2017

Competition for infrastructure has grown, project returns fallen and policy interference is rife in Asia. However, against this backdrop, some Asian infrastructure companies have been able to offer strong growth and decent ROEs. Unfortunately for investors, most owe their superior financial performance to the aggressive application of accounting policies rather than infrastructure investment prowess. The dirty dozen: Beijing Cap Co (600008 CH), Beijing Origin (300070 CH), Canvest Env (1381 HK), China Com Constr (1800 HK), China Everbright Gr (1257 HK), China Everbright Int (257 HK), Dynagreen (1330 HK), Henan Zhong (600020 CH), IRB Infra (IRB IN), Sichuan Road (600039 CH),…
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