Research

CHINA EVERGRANDE

Failed projects, abandoned hotels, empty car parking spaces, deserted shops…the list goes on. Evergrande adopted a “build it and they will come” business model – except that they didn’t come. Indeed, nearly a fifth of properties ever completed remain unsold, while dead assets account for around a third of total assets excluding cash, a consequence of management’s lack of investment discipline. And yet Evergrande’s financial statements show no evidence of ever taking any write-downs. Are its auditors asleep? Current attempts to outgrow its problems will only compound them. Our calculations suggest asset write-downs of RMB150bn (US$23bn) are needed, 3x shareholders’…
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Insights

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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