Research

FAKING CASH FLOWS

It’s every fund manager’s nightmare to discover that a holding has been targeted by a short-seller alleging fraud. Our analysis of over 80 previous fake cash flow frauds shows some recurring similarities, such as superb profitability and yet a stingy attitude towards dividends and an inability to secure debt. In this report, we discuss our scoring system that correctly identifies 73% of historic frauds but is triggered by less than 1% of all listed companies globally – except for China and Hong Kong where it is 6-7%. Our short list of 25 potential frauds (excluding A-Shares) discussed in this report…
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Insights

SCANNING FOR TROUBLE

Excess capital screen

Gillem Tulloch · 18 January 2018

You can now download our Excel-based, Bloomberg-linked screen that identifies companies globally that have been raising too much external capital relative to their requirements. This could mean that they are about to make a large acquisition, or that reported cash flows are not real and that external finance is being raised in order to survive. We discussed this in detail in our recent report, EXCESS NEW EQUITY: Fraud or poor corporate governance (12 Jan 2018). The model is set up to allow users to check individual stocks in detail, paste in a selection of companies or to hunt for stocks…
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EXCESS NEW EQUITY

Fraud or poor corporate governance?

Gillem Tulloch · 12 January 2018

It is widely assumed that companies returning capital to shareholders while reporting free cash inflows cannot be frauds, but this is not entirely true. Around 30% of past fake cash flow frauds were able to pay dividends despite reporting fraudulent free cash inflows. These dividends were likely financed from the proceeds of debt or equity. In order to spot companies with similar traits, we have created an abbreviated cash flow which monitors cash requirements, and devised a number of screens which highlight companies raising equity despite being net cash positive and generating free cash inflows. Companies where we have significant…
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IN BRIEF: THE HOLIDAY SEASON

Hiding bad news?

Gillem Tulloch · 4 January 2018

December was a busy month for HK-listed companies with 22 auditor resignations, 23 companies losing a CEO and/or CFO, plus 35 profit alerts. It’s tempting to believe that companies rush out bad news when investors are away on holiday, but the numbers don’t support this. Some of the most interesting developments included KPMG’s resignation from CogoBuy which adds credibility to short-seller fraud allegations. Also, Chinese dairy companies were again in the spotlight for all the wrong reasons with senior departures from China Shengmu following possible fraud, and some curious developments at Zhuangyuan Pasture. However, it was Anta Sports where the…
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