Research

IN BRIEF: TIBET WATER (1115 HK)

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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Insights

SCANNING FOR TROUBLE

Excess capital screen

Gillem Tulloch · 18 January 2018

You can now download our Excel-based, Bloomberg-linked screen that identifies companies globally that have been raising too much external capital relative to their requirements. This could mean that they are about to make a large acquisition, or that reported cash flows are not real and that external finance is being raised in order to survive. We discussed this in detail in our recent report, EXCESS NEW EQUITY: Fraud or poor corporate governance (12 Jan 2018). The model is set up to allow users to check individual stocks in detail, paste in a selection of companies or to hunt for stocks…
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EXCESS NEW EQUITY

Fraud or poor corporate governance?

Gillem Tulloch · 12 January 2018

It is widely assumed that companies returning capital to shareholders while reporting free cash inflows cannot be frauds, but this is not entirely true. Around 30% of past fake cash flow frauds were able to pay dividends despite reporting fraudulent free cash inflows. These dividends were likely financed from the proceeds of debt or equity. In order to spot companies with similar traits, we have created an abbreviated cash flow which monitors cash requirements, and devised a number of screens which highlight companies raising equity despite being net cash positive and generating free cash inflows. Companies where we have significant…
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IN BRIEF: THE HOLIDAY SEASON

Hiding bad news?

Gillem Tulloch · 4 January 2018

December was a busy month for HK-listed companies with 22 auditor resignations, 23 companies losing a CEO and/or CFO, plus 35 profit alerts. It’s tempting to believe that companies rush out bad news when investors are away on holiday, but the numbers don’t support this. Some of the most interesting developments included KPMG’s resignation from CogoBuy which adds credibility to short-seller fraud allegations. Also, Chinese dairy companies were again in the spotlight for all the wrong reasons with senior departures from China Shengmu following possible fraud, and some curious developments at Zhuangyuan Pasture. However, it was Anta Sports where the…
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