Research

IN BRIEF: CHINESE SUBSIDIES

Subsidies paid to Chinese companies are back in the spotlight due to the ongoing trade dispute with the US and their escalating cost to Chinese taxpayers. The majority of subsidies are probably hidden but our work on the top 100 Chinese companies suggests that explicit subsidies have risen by 38% between 2015 and 2017, to US$24bn, equal to 12% of pre-tax profit on average. Any sustained reduction in handouts would create significant earnings risks for a wide range of companies (highlighted within). Four of the most exposed include BYD (Sell), Unisplendour (NR), China Eastern Airlines (Sell) and ZTE (NR). GET…
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Insights

A2 Milk

SELL: Ready to pop

Nigel Stevenson · 15 November 2018

WA2 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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CORPORATE TRAVEL

Short-seller claims lacks substance

Gillem Tulloch · 31 October 2018

We’re no fan of acquisition-driven business models, such as Corporate Travel (CTD), but they’re not a crime. The allegations presented thus far by hedge fund VGI Partners against CTD appear, in our opinion, to lack substance and in some instances are plain inflammatory. The short-seller alludes that CTD is faking its overseas profits but fails to provide hard evidence, or explain how this would impact CTD’s financials. In its defence, CTD has provided a fairly comprehensive rebuttal. This shorting campaign against CTD appears to be working as VGI has made allegations against an expensive stock, not because they have much…
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SMOKE & MIRRORS

Embellishing performance using non-GAAP measures

Mark Webb · 24 October 2018

Accounting standards are designed to make life easy for investors. As such, companies moving away from GAAP measures should be regarded with suspicion. Our review of the 30 largest Chinese domiciled ADRs shows an increasing use of adjusted, vaguely defined and non-GAAP metrics which, in some cases, greatly exaggerates performance. This has likely led to inflated valuations and created a potential shorting opportunity as reality bites. The worst culprits are Bitauto, JD.com, Pinduoduo and Vipshop. GET PDF VIEW SLIDES Adjustments to GAAP data Of the 30 largest China-domiciled US-listed stocks, 26 publish adjusted net income (non-GAAP) alongside the GAAP figures…
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