Research

CHINA LONG & SHORT

If you think the credit numbers out of China over the past five years have been crazy, just wait for the next five. To maintain GDP growth at the current 7.5%, China needs to create new credit equivalent to replicating the entire US-listed financial system. By 2018, it will have built enough new apartments to potentially rehouse 55% of its population over the previous 15 years, will command 65% of the world’s cement production and 59% of its steel. The tyranny of numbers suggests it can’t be done. Within this report, we talk through those numbers and come up with…
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Insights

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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PINDUODUO

Window-dressing rather than fraud

Mark Webb · 23 November 2018

Pinduoduo (PDD) has been accused of inflating GMV, overstating revenues, understating staff costs and, therefore, under-reporting its losses. In our view, the majority of allegations made by short-seller Blue Orca (BOC) are not supported by the evidence. We agree that PDD’s GMV is almost certainly exaggerated, but this is likely well known. BOC’s other arguments are less compelling. Its specific allegations about PDD inflating revenues and understating losses are not adequately established. In addition, while it flags inconsistencies over staff numbers, it is not evident that staff costs are artificially depressed. We argue that PDD is an unattractive investment, but…
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A2 MILK

SELL: Ready to pop

Nigel Stevenson · 15 November 2018

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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