Research

IN-BRIEF: CORPORATE FRAUD

Fujian has gained a bit of reputation for being home to a large number of frauds. As a result, we decided to see if the statistics supported the allegations. We have records of 13 alleged or confirmed Fake Cash Flow Frauds at listed companies from Fujian where investors have lost almost everything. That’s the highest number recorded for any Chinese province and accounts for 17% of all alleged Chinese Fake Cash Flow Frauds in our database. And yet Fujian accounts for just 3% of China’s population, 3% of its large listed companies and 4% of its economy. Most of these…
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Insights

IN-BRIEF: IQIYI (IQ US)

Watch carefully

Nigel Stevenson · 19 April 2018

Recently listed iQiyi, the Netflix of China, is loss-making and rapidly burning through cash. Our review of its financials reveals two main concerns: first, the company is substantially overstating operating cash flows by classifying spending on licensed content as an investing rather than an operating activity. Secondly, the company recognises a material portion of revenue from barter transactions, whereby programming is swapped with third parties. Such arrangements are open to abuse; Netease, for example, was caught overstating its revenue through bartering advertising shortly after its IPO. Therefore, while these practices are not illegal, they can distort the financials, and investors…
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IN-BRIEF: THE CHINA HUSTLE

Reverse mergers (CBPO, HOLI)

Gillem Tulloch · 12 April 2018

If you haven’t already seen the latest finance documentary, The China Hustle, it’s well worth watching. Carson Block, Dan David and others take viewers on a captivating romp through the Chinese reverse takeover scam. Interestingly, our Fake Cash Flow model correctly identified eight of the nine frauds specifically mentioned in the movie. Of the RTOs still listed, Hollysys Automation and China Biologic raise concerns. This got us thinking: if we’re correct in that around 5% of Chinese companies (mainly small caps) are faking the majority of their revenues, what percentage are faking just 5-10%? As we discuss within, it’s probably…
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IN-BRIEF: SINOPHARM

Spiced up

Gillem Tulloch · 29 March 2018

An apparently spectacular 4Q17 result for Sinopharm but, as usual, nothing’s quite what it seems. Earnings were distorted by numerous one-off and downright curious items which gives the impression that management was trying hard to impress. As usual, the main action was in the balance sheet with record amounts of assets sold at the year-end, seemingly to give the impression of operating cash inflows and lower reported leverage. The company’s financial statements are something of a riddle owing to the adoption of questionable accounting practices and inexplicable anomalies. We’ll find out more when the full annual report is released by…
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