Research

IN BRIEF: CTRIP (CTRP US)

Online travel agency Ctrip has delivered remarkable revenue growth. Moreover, despite the cost of integrating new businesses, Ctrip’s free cash flow also appears to have improved, with rising reported operating cashflow and falling capex. However, rather than indicating robust health, Ctrip’s headline performance shows how easily investors can be misled by the cashflow statement. The cashflow is primarily designed to assess liquidity and omits payments made using debt and equity rather than cash. In the case of Ctrip, if we include significant outflows from share-based staff pay and share-funded acquisitions in 2014-16, performance deteriorates from a headline free cash inflow…
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Insights

IN-BRIEF: CHINA HONGQIAO (1378 HK)

Unresolved Issues (SELL/AVOID/SHORT)

Nigel Stevenson · 29 November 2017

China Hongqiao’s post-suspension share price appreciation might lead some to believe that fraud allegations have been addressed, but we are not entirely convinced. Even if investors can accept that the company had four different auditors in two years, they still have to grapple with a less than satisfactory response to fraud allegations and a very worrying set of financial statements containing similar traits to past frauds. The stock might be trading on 5x 2018 PER (assuming profits are real) but we would still be sellers. The cost of shorting is expensive at 9% but might be a strategy for risk…
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COMING UP SHORT

Manipulating cash flows

Mark Webb · 22 November 2017

Investors increasingly view the income statement as unreliable; instead modelling cash flows to gauge performance. But the cash flow statement is flawed from an investment perspective as it only aims to reconcile movements in cash. This means that purchases funded with debt or equity are excluded which can materially distort operating and free cash flows. In this report, we discuss the most common practices affecting cash flows and highlight those stocks most impacted, such as China Southern, JD.com, Ctrip.com, China Resources Pharma and CKH Holdings. GET PDF VIEW SLIDES Payments using debt Items paid directly with debt, rather than cash,…
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IN-BRIEF: SINA (SINA US)

Your vote now means nothing

Nigel Stevenson · 9 November 2017

Sina’s management has taken control of the company without shareholder approval through the issue of new preference shares, as allowed under Cayman Islands law, taking its share of the voting rights to 55%, from 11% previously. This comes in response to attempts by a US hedge fund to place two directors on its board. Other companies have similar provisions in their articles of association, which we detail within. We recently wrote about the corporate governance risks of investing in foreign incorporated US-listed companies, and this incident further highlights those risks. It raises the question: what rights do shareholders in these…
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