Research

SPECULATIVE INVESTMENTS

It appears contradictory that Asia’s most leveraged corporate sectors, India and China, also have the highest incidence of companies likely to be window dressing their short-term investments. The removal of dubious assets prior to reporting periods may be a way of avoiding awkward investor questions. For companies engaging in such behaviour, risks should be re-evaluated and management held to account. Worryingly, our short-list of 125 Asian companies contains a disproportionately high percentage that have either been accused of fraud, or have fraud-like traits. The layering of short-term investments might be a means of obscuring the source of cash from auditors….
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Insights

IN BRIEF: CTRIP (CTRP US)

Cashflow confusion questions premium rating

Mark Webb · 7 December 2017

Online travel agency Ctrip has delivered remarkable revenue growth. Moreover, despite the cost of integrating new businesses, Ctrip’s free cash flow also appears to have improved, with rising reported operating cashflow and falling capex. However, rather than indicating robust health, Ctrip’s headline performance shows how easily investors can be misled by the cashflow statement. The cashflow is primarily designed to assess liquidity and omits payments made using debt and equity rather than cash. In the case of Ctrip, if we include significant outflows from share-based staff pay and share-funded acquisitions in 2014-16, performance deteriorates from a headline free cash inflow…
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IN-BRIEF: CHINA HONGQIAO (1378 HK)

Unresolved Issues (SELL/AVOID/SHORT)

Nigel Stevenson · 29 November 2017

China Hongqiao’s post-suspension share price appreciation might lead some to believe that fraud allegations have been addressed, but we are not entirely convinced. Even if investors can accept that the company had four different auditors in two years, they still have to grapple with a less than satisfactory response to fraud allegations and a very worrying set of financial statements containing similar traits to past frauds. The stock might be trading on 5x 2018 PER (assuming profits are real) but we would still be sellers. The cost of shorting is expensive at 9% but might be a strategy for risk…
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COMING UP SHORT

Manipulating cash flows

Mark Webb · 22 November 2017

Investors increasingly view the income statement as unreliable; instead modelling cash flows to gauge performance. But the cash flow statement is flawed from an investment perspective as it only aims to reconcile movements in cash. This means that purchases funded with debt or equity are excluded which can materially distort operating and free cash flows. In this report, we discuss the most common practices affecting cash flows and highlight those stocks most impacted, such as China Southern, JD.com, Ctrip.com, China Resources Pharma and CKH Holdings. GET PDF VIEW SLIDES Payments using debt Items paid directly with debt, rather than cash,…
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