Research

IN BRIEF: SINOPHARM (1099 HK)

In July, we wrote a report on Sinopharm which alleged that the company was manufacturing operating cash flow by imaginatively reclassifying creditor repayments as a financing activity (an accounting first) and by selling an ever-greater quantity of receivables. Adjust for this and there are no operating cash inflows while leverage is worryingly high. Well, no amount of window dressing could disguise the substantial operating outflows in 1H17, leading to an alarming rise in leverage (see chart below). Curiously, this occurred at a time when growth was slowing (and disappointing), not accelerating. This suggests a substantial deterioration in terms of trade,…
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Insights

IN BRIEF: TIBET WATER (1115 HK)

Tip of the iceberg

Mark Webb · 17 October 2017

Water and beer bottler Tibet Water Resources (TWR) has the dubious distinction of being accused of fraud by two anonymous short-sellers in just one week. Our analysis of its financials raises concerns that something is amiss: (i) Operating margins are super-normal despite minimal capex, which would appear to be a dichotomy. (ii) Free cash inflows have gone into acquisitions and, despite super-high cash balances, dividends have been reduced to zero. (iii) Unusually high investment flows are consistent with companies window-dressing their financials and, in some instances, past frauds. Management’s response to these accusations has been to threaten litigation as opposed…
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SPECULATIVE INVESTMENTS

Now you see them, now you don’t

Gillem Tulloch · 12 October 2017

It appears contradictory that Asia’s most leveraged corporate sectors, India and China, also have the highest incidence of companies likely to be window dressing their short-term investments. The removal of dubious assets prior to reporting periods may be a way of avoiding awkward investor questions. For companies engaging in such behaviour, risks should be re-evaluated and management held to account. Worryingly, our short-list of 125 Asian companies contains a disproportionately high percentage that have either been accused of fraud, or have fraud-like traits. The layering of short-term investments might be a means of obscuring the source of cash from auditors….
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IN BRIEF: ZTO (ZTO US)

Risks rising on Alibaba’s plans for Cainiao

Mark Webb · 4 October 2017

China has a fragmented and commoditised parcel delivery industry which is dominated by goods purchased on Alibaba’s (BABA US) platforms. This is ZTO’s key business which currently reports world-beating margins and returns on capital. Alibaba’s acquisition of an increased stake in Cainiao Network is probably not an attempt to take-over the delivery market itself; unlike Amazon and JD.com, it does not want to control the entire value chain. Instead, we suspect it is part of Alibaba’s strategy to ensure the delivery market is low-cost and efficient, and will help Alibaba monetarise Cainiao’s services. That’s good news for Alibaba and the…
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