Research

TAL EDUCATION

Muddy Waters’ allegations against Chinese tutoring company, TAL Education (TAL US) raise serious concerns regarding several transactions as they clearly appear to have been engineered. This casts doubt on the integrity of TAL’s financial statements and management. However, so far, we think there is limited evidence to support the specific claim that TAL faked relatively small amounts of deferred revenue. Nonetheless, it is possible the transactions are part of a complicated round-tripping exercise, although we have found no direct evidence to support this. We have considerable concerns about the company given its financial statements display traits which are similar to…
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Insights

THE OVERSEAS CHINESE

Top 30 US-listed Chinese companies

Gillem Tulloch · 16 January 2019

It was all supposed to be so easy: just analyse the 30 largest US-listed Chinese companies and evaluate the risk. Well, it wasn’t. This share class has an unusually high historic track record of fraud and shenanigans, likely stemming from the deliberate avoidance of regulatory oversight through the exploitation of Foreign Private Issuer status. The accounting picture is further muddied by the use of Variable Interest Entities (VIEs) where we suspect there are large undisclosed tax liabilities. These issues are complicated and need explaining, hence the length of this report. Our analysts regarded over 70% of this sample as a…
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HENGAN INTL

SELL: Magic Margins

Nigel Stevenson · 17 December 2018

Short-seller, Bonitas Research has targeted Hengan (1044 HK) as a fraud. Operating margins in its sanitary napkins business of over 50% are far higher than those earned by any other comparable business. We struggle to think of any plausible explanation. Hengan has also accumulated US$3bn of cash, yet continues to raise additional debt. Nonetheless, proving fraud is difficult: any evidence that Hengan has faked its profits is entirely circumstantial. But an air of suspicion is likely to hang over the stock. One easy solution would be for the company to reduce its cash to a reasonable level and repay its…
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TONGCHENG-ELONG

SELL: Risky, embellished and overrated

Mark Webb · 13 December 2018

Tongcheng-Elong is yet another hastily constructed company with limited historical financials that has sought a listing in Hong Kong. Taken at face value, China’s third largest online travel agency is more profitable than market leader Ctrip, in what is a highly commoditised business. How can that be? There is huge scope for manipulation given that the group has only existed in its present form since March 2018, meaning that historical financials are not representative. We’ve found evidence of profit inflation, cash flow manipulation and misleading non-GAAP performance measures. Given its business model is inferior to Ctrip’s, we believe Tongcheng-Elong should…
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