Research

THE RELUCTANT CONSUMER

Abenomics was not supposed to turn out like this. Despite low rates and money printing, it appears that consumption is running 20% below last year. We now expect consumption tax revenue will be 13% below budget. Corporation and income tax should cover this shortfall but don’t get excited; government spending is still 1.5x revenues and under its own forecasts the deficit will double by 2023. By then, the Bank of Japan will either own 80% of outstanding JGBs or be suffering under huge losses. We suggest shorting the yen, avoiding domestic plays and looking for yen weakness winners highlighted in…
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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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