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Short-Sell Strategies – How to Get Teflon Coated?

By | Smartkarma Originals

This insight has been produced jointly by Shifara Samsudeen, ACMA, CGMA ​and Supun Walpola ​at LightStream Research ​

  • In this Smartkarma Original, we provide a guide on short-sell strategies employed by short-sellers to identify, analyse, and subsequently target companies. We also provide our recommendations to companies to prevent, detect, and combat short-sell attacks.
  • We believe companies whose share prices have increased significantly within a short period of time and whose valuations are at significant premiums to their peers become vulnerable for short-sell attacks. The share price of the short-sell targets in our sample increased by 89.2% on average from its 52-week low to the date of release of the short-sell report. The EV/Revenue, EV/OP, P/E, and P/B multiples of the short-sell targets in our sample were at premiums of 241.2%, 37.6%, 42.5%, and 118.7% on average over their peers, respectively.
  • Short sellers also seem to target companies that significantly outperform their peers on operating matrices. Short-sellers imply that such outperformance is due to fabricated results. The OP margin of the short-sell targets in our sample were around 4.5x higher than their peers.
  • It is conventional wisdom that insiders cash-out when they are no longer confident about the prospects of the company. Short sellers try to exploit this idea and are often on the lookout for instances where insiders are continuously cashing out, either by way of selling their stake in the company, or through back door transactions like share pledges, collar transactions, and high levels of compensation.
  • Short-sellers show no mercy when it comes to questionable or complex corporate structures like VIE arrangements either. Short-sellers are of the view that such dubious corporate structures enable companies to round trip revenue and assets to fabricate financial results. Short-sellers are also on the lookout for suspicious M&A transactions with related parties, particularly overvalued asset sales to and undervalued asset purchases from insiders.     
  • When a company fakes revenue or profit at the income statement level, it leads to a fake cash problem, i.e. the company then has to forge significant cash balances to match its inflated profit. Short sellers believe that inflated capex or R&D expenses are helpful tools to burn fake cash as these expenses often do not raise any suspicion if they do not generate instant returns.
  • Short-sellers also seem to target companies and insiders that historically have a bad reputation. We also came across several instances where short-sellers have questioned the track record of auditors, underwriters, and appraisers that were employed by the target companies. Short-sellers also consider frequent auditor changes and audit fees that are either too-high or too-low as red-flags.
  • Short-sellers regularly keep an eye out for companies with weaker corporate governance practices. However, some of the cases that we came across in our research suggest that traditional corporate governance matrices have limited relevance in exposing fraudsters in this day and age. Short-sellers now seem to question the true “independence” of independent directors and are sceptical about companies with high board turnover.
  • A short-seller can identify a plethora of red-flags for a company, but a short-sell attack is seldom successful without any smoking-gun evidence. Therefore, short-sellers often thrive on finding that one key piece of evidence that would make their thesis irrefutable. In most of the cases we looked at, this smoking gun evidence has come in the form of alternative filings, which include the likes of filings with the local regulators, credit reports, and tax filings. Short sellers have often used these alternative filings to reconcile reported financials and in some cases to trace the “true” ownership of assets.
  • We believe recent short-sell reports on Luckin Coffee (LK US) and GSX Techedu (GSX US) raise the bar for modern-day short-sellers. The anonymous short-sell report on Luckin was backed by 11,000+ hours of store traffic video and 25,000+ customer receipts while Grizzly’s short-sell report on GSX Techedu used a variety of alternative data sources such as customer reviews, web traffic, keyword search results and app rankings as smoking-gun evidence.
  • Short-seller attacks have become part of today’s investment world and companies should learn to co-exist with them and more importantly, to defend these attacks, companies should have a plan in place while strengthening their fundamentals and improving corporate disclosures.  
  • In order to prevent short-seller attacks we recommend companies to 1) be honest about any errors and make due restatements to reported financials, 2) adopt conservative accounting practices, 3) avoid providing aggressive earnings guidance, 4) provide detailed disclosures when deviating from accepted accounting standards, 5) avoid withholding or delaying bad news such as product failures, litigation, profit warnings, layoffs, etc. from the market, 6) improve corporate governance measures, 7) and improve company disclosures particularly regarding company acquisitions, divestitures, and capital investments.
  • If a company has always been committed to providing complete disclosures and its shareholders are kept informed about both good and bad news regarding a company, the best way to approach the shorts may be to completely ignore them. However, a company should respond to a short sell attack if the allegations laid out by the shorts were unreasonable or misleading or if it is impacting the company’s valuation.

LightStream Research • Equity Analyst • (Opens in a new window) ⧉

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China Internet Healthcare: Massive Potential Awaits for Further Policy Tailwinds

By | Smartkarma Originals

We are positive on the long term prospects of China internet healthcare industry and expect robust growth outlook, driven by large & fast growing users base, increasing adoption and penetration rate, supported by government favorable policies. However, in the near term, only pharma e-commerce business has a valid monetization model & is proven to have reliable revenue stream for leading players, such as Alibaba Health Information Technology (241 HK) ; While online consultation player Ping An Healthcare and Technology Company Limited (1833 HK) and internet hospital provider WeDoctor are still struggling to find sustainable profit model, due to certain policies limitation & lower paying client conversion, the massive growth potentials are likely unlocked by further policy tailwinds such as online prescription drug sales, insurance reimbursement of online medical services, in our view. 

In the order of stock preference, we prefer Alibaba Health Information Technology (241 HK) with its dominate position in the pharma e-commerce market, distinctive edges in users acquisition from synergies from Alibaba Group (9988 HK); 3) best positioned to benefit robust growth upon the opening of online prescription drugs sales with its integrated business model. With >70% 3-year sales CAGR forecast, our DCF valuation suggests margin of safety of 22%.

With its leading position on online consultation, we believe Ping An Healthcare and Technology Company Limited (1833 HK) will continue to enjoy fast users growth thanks to its supported from Ping An group. Yet, the lower paying client conversation rate & large revenue reliance from Ping An group concerned us. At current level, we believe the street has over priced in the potential policy benefits & growth potential. With ~38% sales CAGR estimates, our DCF valuation reveal potential downside of 30%. 

Our proprietary scorecard rating system also suggests Ali Health stands ahead of peers, with larger MOAT, more comprehensive product & services offerings, higher sales CAGR, better profitability, more efficiency (higher customer acquisition growth, lower acquisition cost), higher productivity. 

• Asia-ex Japan, Senior Healthcare Analyst • (Opens in a new window) ⧉

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China Environment Sector Deep Dive: Solid Waste Treatment

By | Smartkarma Originals

We are positive towards the outlook of China’s solid waste treatment industry and believe the current share price level is a very good entry point, especially after the approval of the revisions in “Solid Waste Pollution Environmental Prevention and Treatment Law of the People’s Republic of China” by National People’s Congress in May which will become effective on 1 Sep. In addition to the Law which will lead to an improved operating landscape of the industry, the increase in waste volume stimulated by urbanisation and e-commerce, growth in waste treatment capability, potential for industry consolidation and favourable financial infrastructure are the factors that presented the industry with tremendous opportunities.

There are still risks including heightened competition due to fragmented industry structure, potential change in on-grid tariff and subsidies and weak power demand due to economic slowdown. However, the depressed valuations of the sector after sustained underperformance offer good value with long-term structural change in the industry, in our view. We rank the five major Hong Kong listed and A-share companies in the sector in the following order: Canvest Environmental Protection Group (1381 HK), China Conch Venture Holdings (586 HK), China Everbright Intl (257 HK), Zhejiang Weiming Environment (603568 CH), and China Everbright Greentech (1257 HK).

What’s Original?

This Smartkarma Original takes a detailed look on the revised “Solid Waste Pollution Environmental Prevention and Treatment Law” and reads on the implications to the major listed waste treatment companies.  In addition to discussions on the revenue and profit drivers of the individual companies, we will also assess the outlook for improvement in returns, and compared the relative valuations of individual companies within the sector based on their P/B vs. ROE and PEG ratios.

Since the waste treatment industry is highly fragmented, we analyse the possibility of consolidation as a potential way to improve sector return levels. Lastly, we will take this opportunity to introduce a leading A-share waste treatment company – Zhejiang Weiming Environment (603568 CH), which has recorded a marvelous share price performance – up 95% over the last three years and 28% YTD.

• China Analyst – Onshore Credit, Equity Long-Short • (Opens in a new window) ⧉

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How Big Tech and Banks Work Together to Grow Digital Payments in Southeast Asia

How Big Tech and Banks Work Together to Grow Digital Payments in Southeast Asia

By | General

Anyone watching financial technology evolve knows it takes two to innovate. Plenty of fintech startups are developing bold, game-changing solutions but distribution and scale remains a problem. That’s where big players come in. 

Digital payments and e-wallets are on the rise in Southeast Asia, with a number of players coming out with their own products, including international and local tech firms as well as established financial institutions.

According to a comprehensive report on Southeast Asia’s digital ecosystem by Google, Temasek, and Bain & Company, digital payments and e-wallets are a fast-growing segment, the market having reached an “inflection point”. 

Digital payments are expected to reach US$1 trillion in gross transaction value (GTV) in 2025, up from US$600 billion in 2019. 

E-wallets are projected to reach US$114 billion that same year, up from US$22 billion in 2019.

“Adoption and usage levels are surging, in line with other Internet economy sectors such as [ride-hailing] and [ecommerce],” the report says.

How Big Tech and Banks Work Together to Grow Digital Payments in Southeast Asia

Source: e-Conomy SEA 2019 report

Several companies have moved to capture this opportunity. Google Asia-Pacific has been active in the region, bringing its Google Pay service of mobile and online payments. The multi-national has been working with local and regional banks such as DBS to integrate its services to existing frameworks. 

It has also developed new solutions from the bottom up to serve specific local needs, like the Tez payment app (now Google Pay) in India.

Collaboration with banks like DBS brings each party’s strengths to the table according to Aman Narain, Google’s Global New Payments Ecosystems Lead. Speaking as part of a fireside chat at Smartkarma’s INSIGHT 2020 digital conference, Aman notes that Google is strong at building ecosystems and developing solutions, while banks are more business-driven, understanding customers and risk. “It helps to have people who have worked in both areas,” Aman adds, himself a “banker-turned-Googler”.

Participating in the same fireside chat, DBS Managing Director & Head of Payments & Platforms, Anthony Seow, concurs. He adds that there needs to be “strategic alignment” between the players, which can help avoid conflicts and serve customers better in the long run.

“When we digitise payments, there’s a lot of opportunities to change the customer journey,” he says. Value-added services like ordering and paying at a food court through a phone create the kind of seamless customer journey the bank envisions. “We’re trying to go after the Uber kind of experience,” he adds.

Money Talks

DBS has its own digital payments app and e-wallet, called PayLah, but it’s also exploring so-called “conversational payments”: integrating payment systems into popular messaging apps, which enables users to send money to their friends or merchants who use the system.

The bank unveiled such a system on Facebook Messenger in 2018, through which users could order and pay through the app in participating restaurants and coffee shops in Singapore. “The point is to be where consumers are, so they can do what they want to do,” Anthony says.

Google Pay in India helps users make peer-to-peer (P2P) payments as well as pay bills and in stores, and has a conversational element built in – which the company is now working to bring to Singapore as well.

How Big Tech and Banks Work Together to Grow Digital Payments in Southeast Asia

Source: Google

“Can payments continue to happen without a conversational [element]? Absolutely,” Aman says. But that element “humanises” payments, he thinks. “Whether interacting with a small business or splitting a bill with friends, it makes everything much more human.

And they’re not the only ones jumping on the opportunity. Facebook is making its own inroads into Asia-Pacific regions. In India, the company just announced it is compliant with national regulations for its WhatsApp Pay product. In Indonesia, along with PayPal, the social networking giant bought a stake in GoJek, the country’s “super-app”, whose most prominent feature outside its ride-hailing service is its GoPay e-wallet.

The region is particularly well-placed for growth in this sector thanks to the confluence of a few different factors, notes Insight Provider Valerie Law in a Smartkarma Original Insight. 

“Credit and debit card penetration rates are low across parts of developing Asia,” she writes. “It is precisely the lack of cashless options that created the opportunity for these new players to provide their e-wallet.”

Read Valerie Law’s full Smartkarma Original Insight: Asian E-Wallets Plant Their Flags: An In-Depth Analysis of the Top-10 Players

The region also has very high smartphone penetration (close to 97 million smartphones were purchased across Southeast Asia in 2019, according to a study by GfK). Many of these companies are focusing on leveraging that volume to grow their market share and build a user base for now rather than making a profit through payments, Valerie notes.

How Big Tech and Banks Work Together to Grow Digital Payments in Southeast Asia

Source: Valerie Law

Cross-border Payments Remain a Challenge

With many payment players trying to go regional, establishing cross-border systems is one of the biggest challenges that both banks and tech firms face. The first step is to establish local solutions, suggests Aman. “I don’t think it’s impossible, but it’s harder to get to cross-border if you don’t have local payments down,” he says.

DBS is expanding its PayLah app out of Singapore but the challenge “is not trivial,” Anthony says. The app is compatible with Singapore’s PayNow online payments protocol, so the bank is exploring similar protocols in other markets to enable cross-border P2P payments. And then there’s the regulatory challenges, such as know-your-customer (KYC) requirements, payment settlement, and so on.

As more financial services are integrated into a digital framework, the COVID-19 crisis will also determine where the needs of consumers and merchants go. 

“Boring” things like being able to open an account and generally reduce friction for consumers are going to be some of the things to keep an eye on, Aman says. Anthony adds that supporting small- and medium-sized businesses in the current climate will be important as the pandemic has impacted transaction volume among other things.

Aman sums up his company’s approach quite nicely: “I think the main thing is to continuously experiment, and that’s something Google is really good at.”

Watch the full INSIGHT 2020 fireside chat with Aman Narain and Anthony Seow, moderated by Smartkarma’s Raghav Kapoor:

Lead image by Mika Baumeister on Unsplash

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Sign up for a free Press Pass to deep-dive into independent and differentiated analysis, discover new ideas, and stay in touch with analysts for original commentary.

Entities 28701-28800

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Insider Diagnostics: A Repository of Short-Sell Target Asian Companies & Associated Key Insiders

By | Smartkarma Originals

In this Original, we have created a repository of Asian companies and associated key insiders targeted by prominent short-sellers, over the last decade, to help serve as a tool for insider diagnostics.

What’s Original?

We track 19 prominent short-sellers who in turn have targeted about 115+ Asian companies over the past decade. Below we provide a detailed database of these companies along with the corresponding short-sell thesis, price moves since the short-sell report and outcome of the short-sell attack. We also track the current whereabouts of the 500+ key insiders associated with these companies.

How and to Whom would this be Useful? 

Insider Diagnostics (Quality of Management) and Accounting Diagnostics are two key pillars of any forensic analysis assessment. This Original, with a focus on insider diagnostics, further bolsters our prior Original focused on accounting diagnostics, A Forensic Analysis Tool for Detecting Accounting Red Flags: Focus on Developed Asia. Together, these two Originals are intended to serve as a comprehensive toolkit for investors, analysts, corporates, auditors, regulators, exchanges, media, etc. looking to conduct forensic analysis on Asian Companies.

Insight Flow:

  • Prominent Short-Sellers (Targeting Asian Companies)
  • Target Companies
  • Key Insiders
  • High Risk Insiders & Associated Companies
  • Other Notable Insiders & Associated Companies
  • Notable External Agencies
    • Does Presence of Global Renowned Auditors/Investment Banks imply Strong Governance?
  • Key Limitations

Please note that most of the repository content in this Original is in three key tables in the “Target Companies” and “Key Insiders” section. These tables are labeled as – 1) List of Target Companies, 2) Short-Seller Thesis on Individual Companies and 3) List of Key Insiders: Role in the Target Company & Current Whereabouts. Note that given the large amount of data and text in these tables, we have provided pagination and search functionality in these tables for ease of use and focused viewing. We have also provided these in the excel format. Please refer to the attachments section of this insight to download the excel files.

• Equity L/S Analyst | Forensic Accounting | India • (Opens in a new window) ⧉

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Asian Hospitals – In Through The Out Door

By | Smartkarma Originals

Intuitively, you would expect hospitals to do well during a pandemic given a spike in the number of sick people but quite the opposite is true. In fact, most of a private hospital’s bread and butter patients tend to steer clear of hospitals, unless an emergency, for fear of closer contact with those infected with COVID-19.  Otherwise, hospitals are called into public service to cater for testing and victims of the pandemic, with hospital staff putting their lives on the line in return for cost recovery only. 

This impacts both out-patients and in-patients, with the former seeing a larger impact than the latter, as their cases tend to be less urgent. However, in-patients booked in for elective treatment involving surgical procedures, will also tend to cancel unless urgent.

This collapse in the number of patients visiting hospital means that occupancy rates for hospitals have fallen significantly, which takes its toll on profitability, given the high fixed cost nature of the business. 

Private Hospitals in different markets are driven by a multitude of different factors depending on how developed those country’s government healthcare systems, the level of hospital penetration, as well as the penetration of individual healthcare insurance and corporate insurance plans which make treatment more affordable.

Revenue streams for hospitals are also very different in different markets, with companies such as Ramsay Health Care (RHC AU) driven more by domestic elective surgeries versus others such as IHH Healthcare (IHH MK) and Bangkok Dusit Medical Services (BDMS TB), which are quite reliant on “medical tourism” as foreign patients from foreign countries fly in for a multitude of different surgical procedures, which are of a high standard but a lot cheaper than in their home countries.

Countries like Indonesia are again very different again given that they rely on domestic patients for the most part, with virtually zero medical tourism but have had to adapt to and cater for government healthcare scheme patients, which generate lower margins. Companies such as Mitra Keluarga Karyasehat Tbk (MIKA IJ), Siloam International Hospital (SILO IJ), and Medikaloka Hermina (HEAL IJ) are also increasing the complexity of treatments available, which means patients can be treated in Indonesia rather than travelling overseas to Singapore or KL for example. 

In the Smartkarma Originals Insight, we compare major listed hospital stocks across Asia including Australia and India, with reference to the exposure these companies have to more developed markets in Europe. We look at the different revenue drivers across the region, from mature markets to those with much lower levels of hospital penetration and seek out the companies which will see the greatest potential for a sharp recovery. 

We will also look at the Diagnostics space, which can be highly profitable in developed markets but also prevalent in markets such as India and Indonesia, address the driving forces behind that business and whether the move towards more preventative medicine will provide the next leg to growth in a post-pandemic world.

What’s Original? 

In this Smartkarma Originals Insight, we cover 15 healthcare stocks in total including 11 listed hospitals and four listed diagnostics companies. Researching this Insight has involved multiple conversations with industry experts, as well as company management, which has enabled us to come up with our views. We see opportunity in these COVID-19 times of adversity to pick-up some very well-managed companies at depressed valuations and hence the title of the Insight.” In Through the Out Door”. 

CrossASEAN Research • ASEAN Insight Provider • (Opens in a new window) ⧉

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China Aerospace & Defense A Shares: An In-Depth Walkthrough

By | Smartkarma Originals

China’s aerospace and defense industry offers unique investment opportunity to investors, but due to its high sensitivity, all major companies involved are listed as A-shares in either the Shanghai or the Shenzhen Stock Exchanges only.  With the rise in global geopolitical tension, increase in the civilian uses of defense technology, the government’s support of the industry and the potential for further asset injection and restructuring of the listed companies, we are positive on the outlook of the sector.

While there are risks in the investment in this industry of national importance, we believe that they are outweighed by the potential returns. Among the MSCI China A-share constituents in the sector, we prefer Avic Shenyang Aircraft (600760 CH) and AECC Aviation Power (600893 CH). These are then followed by Avic Aircraft Co Ltd A (000768 CH) and China Spacesat Co Ltd A (600118 CH), respectively. However, we ranked China Avionics Systems Co (600372 CH) as the least attractive play among the five stocks. 

What’s Original?

This Smartkarma Original covers the opportunities and risks for the sector by looking at the recent geopolitical developments, including the US-China political and trade tension, and their implications on the future development of China’s defense spending and the market outlook of the aerospace and defense industry. We analyse the revenue and margin drivers, provide global comparison and present our views on the A-share aerospace & defense companies. We also look from the perspectives of potential asset restructuring and industry consolidation given the many unlisted central State-owned enterprises (SOEs) involved in this business and the numerous listed companies under these SOEs. In addition, we address the background and characteristics of the aerospace & defense central SOEs (unlisted parents of these listed companies) as they are essential to the understanding of the listed companies. 

• China Analyst – Onshore Credit, Equity Long-Short • (Opens in a new window) ⧉

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Fragility and Resilience Screening System

By | Smartkarma Originals

The spread of COVID-19, one of the greatest risks to humankind, has forced governments to enforce strict social distancing measures and lock down cities and countries. Businesses across many industries have been shut due to this crisis, as various areas such as travel, tourism, and international trade have been severely disrupted.

On 14th April 2020, the International Monetary Fund (IMF) reported that all the G7 nations had already entered or were entering into a recession. There are reasons to believe the ongoing recession is likely to be worse and more long-lasting than the 2007-2009 recession. The COVID-19- related health crisis is still underway, and it could take years to develop a vaccine. We believe that it is impossible for economics to predict an end to this recession until countries contain the COVID-19 health crisis. Recessions are detrimental to most companies, and they are deadly for some companies. Therefore, in these uncertain times it is rather important to rank the companies based on their bankruptcy risk.

In this insight we try to develop a screening system to identify the potential bankruptcy candidates and the most resilient companies.

LightStream Research • Equity Analyst • (Opens in a new window) ⧉

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