Thin-film solar technology under scrutiny as China’s Hanergy soars; What Li Hejun didn’t say was that the 30 percent conversion efficiency ratio was a laboratory-based result that experts say is hard to replicate in projects

Sat Apr 18, 2015 10:30pm EDT

Thin-film solar technology under scrutiny as China’s Hanergy soars


(Reuters) – The green energy potential of thin-film solar panels has propelled Li Hejun to the top of China’s rich-list, but his Hanergy Holdings has yet to prove it can turn impressive laboratory research into commercially successful products. Hanergy Thin Film Power, a Hong Kong-listed unit, has seen its value soar six-fold in the past year to $37 billion – more than its nearest two dozen rivals combined. Hanergy and some analysts say the meteoric rise has been fuelled in part by Beijing’s efforts to promote solar energy. But some industry insiders say it has more to do with the firm’s own bullish proclamations on thin-film solar panels and the competitiveness of its products.

Some experts, including a Hanergy sales executive, say the firm’s products are not efficient or cheap enough and are far from ready to take any major market share from conventional panels made with crystalline silicons. Continue reading


Detecting Accounting Fraud in Asia (Part 4): Introducing Six New Measures

Dear Friends,

Detecting Accounting Fraud in Asia (Part 4): Introducing Six New Measures

Earlier articles in the Accounting Fraud in Asia series:

“What seemed to be wrong with this income statement?” I would ask and engage value investors in a conversation discussing the limitations of western-based screening tools and techniques in financial statement analysis to analyze Asian companies.

“It was generated by a listed Chinese zipper company who claimed to be the ‘YKK of China’ with a diversified customer base of over 900 customers. Its zipper products are used in fashion and sports apparels, camping equipment, shoes, and bags by renowned brands. It also received the ‘PRC Top Ten Famous Zipper Brands’ in China. To perhaps make your job easier, a simple table of financial ratios from profit margins, ROE, cash conversion cycle (CCC) is provided. Interestingly, you might note that it is a company generating a ROE of 20.2% on profit net margin of 22.3% and trading at a modest valuation of Price-Earnings ratio 6.2x and Price-to-Book Value 1.6x, with downside protected by a seemingly healthy ‘net cash’ balance sheet with net cash comprising 27% of the market value of the company.”

Fuxing FY06-07

RMB Mil 2004 2005 2006 2007
Revenue   394.3   525.7   716.4   883.9
Operating Income     91.4   165.1   226.5   294.5
Net Income     57.4   109.3   155.6   197.0
GP Margin 26.7% 34.0% 33.7% 34.8%
OP Margin 23.2% 31.4% 31.6% 33.3%
Net Margin 14.6% 20.8% 21.7% 22.3%
ROE 20.2%
AR Days      137      167      139      121
Inventory Days        23        15        19        20
AP Days        12        17        18        18
CCC      149      165      140      123
Mkt Cap (US$m) 181
Price/ Book Value       1.6
PE ratio       6.2
Net “Cash” % Mkt Cap 27%

“And we would stay on this income statement for whatever time it takes before someone points out the dog that didn’t bark,” I added.

Sometimes, there would be one or two people, often those who are open-minded and intellectually curious in their learning approach, who would point out: “The selling and distribution expense of RMB3m seems awfully low for a company generating RMB882m in sales for truckloads of zippers to be transported to over 900 of their customers’ factories in the different provinces.”

This zipper company is SGX-listed Fuxing Zipper (SES: DC9, Bloomberg: FUXC SP), down over 90% in market value. We will later illustrate how accounting tunneling fraud is carried out and the six new measures for value investors to employ to avoid such statistically-attractive fraudulent stocks. From the case of Fuxing, one of the apparent measures is based on the opportunistic shifting or deferring of operating expenses out of the income statement to boost profits artificially – often into the balance sheet items. But how do we can capture this? A possible measure is that of the “OP/OL ratio”, or “Other Payables/Operating Liabilities ratio” which we will elaborate upon later with the cases that we have observed to be a systematic phenomenon. In essence, we have observed that an OP/OL ratio over 40% leads to subsequent and future acts of accounting tunneling fraud in which corporate wealth and cash is tunneled out.

Fuxing Zipper (SES: DC9) Stock Price Performance 2007-2015

Fuxing Share Price

As we have shared in earlier articles, transportation and logistical cost is a nightmare in China and emerging markets, estimated to account for 15 to 20% of the cost of doing business and of the GDP too by various sources that include World Bank and the Li & Fung group in an insightful presentation. The problem lies not only because of the geographical woes but also due to the regulatory licensing bottlenecks: “China’s logistics system is governed by nine separate ministries and commissions, which prevents the central government from regulating cross-provincial transport across China’s 31 provinces. Instead, local governments manage their transportation systems as provincial fiefdoms, often using local license rules and tolls to raise revenue. Thanks to high transaction costs, no trucking firm has yet established a nationwide network.

The emerging Asian and Chinese companies engaging in accounting fraud often push operating expenses and overheads off the listed entities to related-party companies to boost artificially-high profit margins and ROE. For instance, an Asian consumer “brand” selling its “visible” products in supermarkets would usually shift the substantial expenses related to shelf-space placement to undisclosed related-party “distributors” and “agents” (called “tong lu” 通路 in the local language) to achieve the high profit margins and ROE that are attractive to investors. Most value investors focusing on financial ratio analysis do not realize that logistics, distribution and marketing costs in emerging Asian markets is around 15-20% of sales, instead of the 0.34% that this zipper company incurred. Like-minded value investors are often amazed that they have not seen what was now obvious to them. Thus, one simple new measure is to use the “Selling and Distribution expense as % of Sales (Measure #1) as a sanity check on unrealistically low operating expenses that were deferred or shifted out of the income statement. Continue reading