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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GUEST SERIES

Variable Interest Entities in China

Gillem Tulloch · 14 March 2019

It’s been close to three years since we last had a guest writer but when Professor Paul Gillis floated the idea of updating his views on Chinese Variable Interest Entities (VIEs), we jumped at the opportunity to publish. As the report explains, VIEs and the accompanying service agreements are the structure by which foreigners mimic the benefits of owning a restricted asset in China. Close to 70% of all China-domiciled companies listed on foreign exchanges use them but they are not without their controversies, after all, they are trying to enable something which strictly speaking is prohibited under Chinese law….
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LOADED DICE

Companies that rig returns from investments

Mark Webb · 6 March 2019

Accounting scandals at Enron and Olympus, as well as fallout from the global financial crisis, were meant to have tightened rules governing the treatment of investments. Unfortunately, our research shows companies have continued to hide problems off balance sheet and selectively recognise gains from only the most successful investments. 58.Com has been one of the most active users of these accounting tricks and doubts about its profit growth question its premium P/E rating. CCCC and JD.com’s businesses are burning cash and appear to be camouflaging the magnitude of outflows. We recommend AVOIDING all three stocks. GET PDF Stricter accounting rules…
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TRADITIONAL CHINESE MEDICINE

AVOID/SELL: A scandal too far

Gillem Tulloch · 21 February 2019

Traditional Chinese Medicine (TCM) has lost eight directors and a CFO in less than a year. Predictably, the company is playing down these departures. TCM has a troubled history. The original business had a disappointing US listing and was subsequently privatised; it gained its current Hong Kong listing through a reverse takeover, circumventing regulatory scrutiny. Financials are problematic owing to poor working capital, possible cost capitalisation and fraud-like traits. Furthermore, acquisitions from related parties, including the current MD, raise additional governance issues. Given these concerns, we recommend investors AVOID/SELL. The possibility of a major corporate governance event, such as the…
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