Research

IN-BRIEF: GREE ELECTRIC (000651 CH)

Gree’s recent decision to suspend its dividend despite record profits, cash balances and free cash inflows is the latest in a series of incidents that raise concerns over the credibility of its financials and, specifically, whether its cash exists. We have three additional concerns. First, the large accruals for sales rebates that never get paid give the impression that sales have been artificially inflated. Second, aggressive discounting of receivables is at odds with the company’s supposedly strong cash generation. Third, back in 2016, the company proposed paying for an acquisition by issuing new shares for almost double the required consideration,…
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Insights

IN-BRIEF: GDS (GDS US)

SELL: Too bad to fake

Mark Webb · 15 August 2018

GDS was targeted by short-seller Blue Orca in a report published on 31st July, prompting a 47% share price decline. We find the claims regarding revenue and profit manipulation weak. After all, who would fake something that looks this bad? As for the allegations concerning overpriced acquisitions and undisclosed related parties, they have not been adequately addressed by management. Meanwhile, the practice of holding surplus cash offshore is not uncommon although it is undermining profitability. Our A&G Screen suggests that the company has likely manufactured operating cash flows and under-stated capex in order to present the most favourable cash flow…
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IN-BRIEF: PINDUODUO

Distorted metrics undermine premium valuation

Nigel Stevenson · 3 August 2018

Online market place Pinduoduo (PDD US) appears to have employed questionable accounting in order to engineer a successful IPO. Sales and gross profits may have been inflated by failing to properly account for coupon costs, while profits and cash flows have been flattered through the accounting treatment of a co-operation agreement with Tencent. Important metrics such as GMV might also be misleading given inconsistencies in reported numbers. We are unable to get a proper understanding of the business and financials owing to poor disclosure within its prospectus. The company is a US foreign listing which could lead to limited corporate…
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IN-BRIEF: CHINA TOWER

AVOID: Financially engineered

Nigel Stevenson · 30 July 2018

We struggle to summon enthusiasm for the upcoming IPO of China Tower which appears financially engineered to exploit minority investors. The core problem is the conflicted position of the three Chinese telcos which will remain its controlling shareholders and only customers. Indeed, rental rates were cut just prior to the IPO, partially offset by a reduction in depreciation. Long-term pricing will be what the telcos decide to pay, while future capex may be higher than expected. Another major concern is China Tower’s exceptionally low profitability with returns on capital of about 2% well below its cost of capital, and we…
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