Research

CIMIC GROUP (CIM AU)

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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Insights

LEASE ACCOUNTING RULE CHANGES

Operating profit, debt and cash flow implications

Mark Webb · 13 June 2019

New rules on accounting for leases coming into effect this year are inconsistent, subjective and complicated, leading to potentially huge adjustments to balance sheets, income statements and cash flow, as well non-GAAP metrics such as EBITDA, net debt-to-equity and free cash flow. However, few companies in Asia appear to have adequately briefed investors on the impact. Our research and other studies show retailers and airlines will be most affected. We are particularly concerned with the IFRS cash flow treatment as comparative periods will not necessarily be restated and may materially inflate free cash flow metrics. Investors need to be aware…
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FAKING CASH

Coming to an A-share near you?

Gillem Tulloch · 5 June 2019

The fake cash flow fraud epidemic has arrived in the Chinese A-share market following the disappearance of US$4.4bn of cash at Kangmei Pharma, the default of Kangde Xin and investigations into Tunghsu Optoelectronic and Yihua Lifestyle. The financials of all four are not only startlingly similar to each other, but to past frauds. What makes them stand out is their access to debt finance, which is rare for a fraud. Our screens have identified 23 companies out of 1,800 with worryingly similar traits of which we have immediate concerns over four, including XXXX, XXXX, XXXX and XXXX. These are difficult to short but investors should sell or avoid.

CKH HOLDINGS (1 HK)

Wind Tre accounting adds to earnings concerns

Mark Webb · 14 May 2019

CKH Holding’s (CKHH) recently released annual report reveals that accounting adjustments relating to the acquisition of Wind Tre, combined with the residual impact of the 2015 reorganisation, boosted FY18 profit by approximately HK$13.2bn, or 38%. These non-cash adjustments explain why operating cash flows lag cash profit, and why capex consistently exceeds depreciation and amortisation. Furthermore, by deeming a portion of its assets as held-for-sale, CKHH may be concealing HK$57.7bn of debt in liabilities associated with assets held-for-sale. Presumably, this aggressive accounting is being used to give CKHH a higher market rating and access to cheaper credit than it would have…
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