Research

CHINA ROAD TRIP

We’re on day three of our China property road show and are currently holed up in a Country Garden (2007 HK) hotel somewhere in Changshou, which is 85km northeast of Chongqing (see pictures below). We decided to pick Chengdu and Chongqing as there is a concentration of large property assets that have been built by some of the main property developers over the past ten years. Judging by some of their balance sheets, plans have not panned out as expected with some of the projects being quietly revised down in size. The banner picture above shows a hotel which was…
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Insights

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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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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