Research

SCANNING FOR TROUBLE

You can now download our Excel-based, Bloomberg-linked screen that identifies companies globally where we are unable to reconcile changes in debt on the balance sheet with the cash flow statement. This suggests that companies might be paying for assets with debt which is a non-cash item and therefore not reconciled within the cash flow statement. It has the effect of under-stating capex and over-stating free cash flows, and can distort valuations. The other reason might be that companies are deliberately misrepresenting their cash flow statements. We discussed this in detail in our report, COMING UP SHORT: Manipulating cash flows (22…
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Insights

IN BRIEF: CHINESE SUBSIDIES

Handouts continue to prop-up PRC corporates

Mark Webb · 17 May 2018

Subsidies paid to Chinese companies are back in the spotlight due to the ongoing trade dispute with the US and their escalating cost to Chinese taxpayers. The majority of subsidies are probably hidden but our work on the top 100 Chinese companies suggests that explicit subsidies have risen by 38% between 2015 and 2017, to US$24bn, equal to 12% of pre-tax profit on average. Any sustained reduction in handouts would create significant earnings risks for a wide range of companies (highlighted within). Four of the most exposed include BYD (Sell), Unisplendour (NR), China Eastern Airlines (Sell) and ZTE (NR). GET…
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NEWSLETTER 18: CELLTRION INC

Billion dollar write-down?

Nigel Stevenson · 9 May 2018

Artificial sales from Celltrion (068270 KS) to its sister company Celltrion Healthcare (091990 KS) have led to a massive build-up of unsold inventories on the latter’s balance sheet. A billion dollar write-down could be on its way. By selling almost all of its drugs to Healthcare, Celltrion has been able to consistently overstate revenue and profits. It recognised sales even before its drugs had received regulatory approval, when no-one else would – or could – buy them. Sales to Healthcare continue to significantly exceed underlying demand; Healthcare has been unable to sell half or more of all the product it…
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IN-BRIEF: GREE ELECTRIC (000651 CH)

Show me the money!

Nigel Stevenson · 2 May 2018

Gree’s recent decision to suspend its dividend despite record profits, cash balances and free cash inflows is the latest in a series of incidents that raise concerns over the credibility of its financials and, specifically, whether its cash exists. We have three additional concerns. First, the large accruals for sales rebates that never get paid give the impression that sales have been artificially inflated. Second, aggressive discounting of receivables is at odds with the company’s supposedly strong cash generation. Third, back in 2016, the company proposed paying for an acquisition by issuing new shares for almost double the required consideration,…
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