Research

AVOIDING TROUBLE

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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Insights

THE OVERSEAS CHINESE

Top 30 US-listed Chinese companies

Gillem Tulloch · 16 January 2019

It was all supposed to be so easy: just analyse the 30 largest US-listed Chinese companies and evaluate the risk. Well, it wasn’t. This share class has an unusually high historic track record of fraud and shenanigans, likely stemming from the deliberate avoidance of regulatory oversight through the exploitation of Foreign Private Issuer status. The accounting picture is further muddied by the use of Variable Interest Entities (VIEs) where we suspect there are large undisclosed tax liabilities. These issues are complicated and need explaining, hence the length of this report. Our analysts regarded over 70% of this sample as a…
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HENGAN INTL

SELL: Magic Margins

Nigel Stevenson · 17 December 2018

Short-seller, Bonitas Research has targeted Hengan (1044 HK) as a fraud. Operating margins in its sanitary napkins business of over 50% are far higher than those earned by any other comparable business. We struggle to think of any plausible explanation. Hengan has also accumulated US$3bn of cash, yet continues to raise additional debt. Nonetheless, proving fraud is difficult: any evidence that Hengan has faked its profits is entirely circumstantial. But an air of suspicion is likely to hang over the stock. One easy solution would be for the company to reduce its cash to a reasonable level and repay its…
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TONGCHENG-ELONG

SELL: Risky, embellished and overrated

Mark Webb · 13 December 2018

Tongcheng-Elong is yet another hastily constructed company with limited historical financials that has sought a listing in Hong Kong. Taken at face value, China’s third largest online travel agency is more profitable than market leader Ctrip, in what is a highly commoditised business. How can that be? There is huge scope for manipulation given that the group has only existed in its present form since March 2018, meaning that historical financials are not representative. We’ve found evidence of profit inflation, cash flow manipulation and misleading non-GAAP performance measures. Given its business model is inferior to Ctrip’s, we believe Tongcheng-Elong should…
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