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

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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