Research

IN BRIEF: STEINHOFF (SNH GY)

It’s been a bad few weeks for Steinhoff’s shareholders following allegations of fraud, delayed publication of audited results, the CEO’s resignation and an 80% plunge in its share price. Our Accounting & Governance screen reveals evidence of acquisition accounting to inflate profit which then triggered our Fake Cash Flow fraud alert. There is also evidence of cash flow manipulation that might have helped hide payments, manipulate profit or inflate cash flows. Arguably, these red flags could have given investors advanced warning of accounting irregularities. But don’t think these tricks are limited to Steinhoff; our recent reports have flagged Asian companies…
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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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