Research

SMOKE & MIRRORS

Accounting standards are designed to make life easy for investors. As such, companies moving away from GAAP measures should be regarded with suspicion. Our review of the 30 largest Chinese domiciled ADRs shows an increasing use of adjusted, vaguely defined and non-GAAP metrics which, in some cases, greatly exaggerates performance. This has likely led to inflated valuations and created a potential shorting opportunity as reality bites. The worst culprits are Bitauto, JD.com, Pinduoduo and Vipshop. GET PDF VIEW SLIDES Adjustments to GAAP data Of the 30 largest China-domiciled US-listed stocks, 26 publish adjusted net income (non-GAAP) alongside the GAAP figures…
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Insights

CKH HOLDINGS (1 HK)

Wind Tre accounting adds to earnings concerns

Mark Webb · 14 May 2019

CKH Holding’s (CKHH) recently released annual report reveals that accounting adjustments relating to the acquisition of Wind Tre, combined with the residual impact of the 2015 reorganisation, boosted FY18 profit by approximately HK$13.2bn, or 38%. These non-cash adjustments explain why operating cash flows lag cash profit, and why capex consistently exceeds depreciation and amortisation. Furthermore, by deeming a portion of its assets as held-for-sale, CKHH may be concealing HK$57.7bn of debt in liabilities associated with assets held-for-sale. Presumably, this aggressive accounting is being used to give CKHH a higher market rating and access to cheaper credit than it would have…
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NEWSLETTER 19: CIMIC (CIM AU)

Engineering profits

Nigel Stevenson · 30 April 2019

We estimate that Australia’s largest construction company CIMIC has inflated profits by around 100% in the last two years through aggressive revenue recognition, acquisition accounting and avoidance of JV losses. A lack of supporting cash flow has been obscured by the increased sale of receivables and reverse factoring of payables. While reported net cash was 69% of equity at YE18, we estimate adjusted net debt-to-equity of 74%. CIMIC’s refusal to provide substantive answers to our questions suggests it has something to hide. Get PDF version Dominant shareholder CIMIC came to our attention owing to a large restatement of its shareholders’…
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58.COM (WUBA US)

Hidden losses show performance has stalled

Mark Webb · 30 April 2019

58.com’s recently released annual report provides further evidence that it has hidden losses by deconsolidating subsidiaries. It has treated 58 Home as an associate since 2015 despite retaining 88% of its ordinary shares. Furthermore, in FY18, it stopped recognising most of 58 Home’s losses as its carrying value had fallen to zero. Without this, 58.com’s profits would have fallen 36% in FY18 rather than the reported increase of 55%. In another engineered transaction, 58.com transferred its loss-making Finance Business to its CEO in 2017, but appears not to have received any net consideration since, and continues to support the business…
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