The majority of Noble’s profit comes from capitalising, or front loading, the income streams from future off-take and supply contracts. Since 2009, the nature of these cashless profits has been hidden by an US$4bn rise in payables. Worse, Noble’s black box not only builds the risk/valuation models but it self certifies the results. Blind faith in their reliability has been undermined by questionable valuations attached to financially distressed investments. We also worry that future profits have been booked on projects with a low chance of survival; hence, the reluctance to make write-downs. Capitalised profits mean earnings multiples are inappropriate; instead,…
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Research
Insights
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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PINDUODUO (PDD US)
AVOID/SHORT: Risks rise from surprise fund raising
Mark Webb · 12 February 2019
PDD’s surprise announcement of a secondary share offering in the middle of Chinese New Year is not just surprising but has a whiff of desperation about it. Fund raising during a public holiday and so soon after its IPO is a concern. At best, it’s an opportunistic measure to raise cash it doesn’t need. Other explanations are more problematic; disclosure in the accompanying prospectus suggests underlying profitability and cash generation may be even weaker than headline figures suggest. The revelation that new revenue recognition rules will be applied a year earlier than previously thought may also have encouraged PDD to…
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NEW DOGS, OLD TRICKS
Frauds in 2018
Mark Webb · 30 January 2019
Accounting irregularities and alleged frauds led to some spectacular share price declines in 2018. Allegations were confirmed at seven companies globally, with claims made against a further 11 Asian companies, leading to an average share price decline of 40%. The most frequent fraud involved faking revenues and profits with the evidence hidden as cash or other current assets. Meanwhile, the inflation of profits through the abuse of acquisition accounting is an increasingly common occurrence. Our Accounting & Governance Screen successfully identified problems at targeted companies, and we highlight those with similar characteristics within this report. Transactions with connected but off…
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