Research

PINDUODUO

Pinduoduo (PDD) has been accused of inflating GMV, overstating revenues, understating staff costs and, therefore, under-reporting its losses. In our view, the majority of allegations made by short-seller Blue Orca (BOC) are not supported by the evidence. We agree that PDD’s GMV is almost certainly exaggerated, but this is likely well known. BOC’s other arguments are less compelling. Its specific allegations about PDD inflating revenues and understating losses are not adequately established. In addition, while it flags inconsistencies over staff numbers, it is not evident that staff costs are artificially depressed. We argue that PDD is an unattractive investment, but…
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Insights

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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A2 MILK

SELL: Ready to pop

Nigel Stevenson · 15 November 2018

A2 Milk (A2M) has achieved super-normal profitability by selling a “special” kind of infant formula to Chinese consumers through unofficial distribution channels. The problem is that A2M has limited IP to protect its product, and competitors like Nestle are closing in. Meanwhile, new Chinese e-commerce rules may hamper its distribution network. It is difficult to see how A2M can protect its returns when it spends far less on marketing and research than peers. Consensus forecasts 30% compound revenue growth for two years on widening margins, placing it on 22x FY20 PER; we see slower revenue growth and contracting margins resulting…
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