Muddy Waters’ Carson Block sounds like he’s having a great day since the co-CEO of one of his short targets China NQ Mobile stepped down

Carson Block sounds like he’s having a great day since the co-CEO of one of his short targets stepped down


Influential short-seller Carson Block, the founder of Muddy Waters Research, seems pleased this morning. That’s because NQ Mobile’s co-CEO, Omar Khan, just stepped down from his role at the Chinese telecom company that Block has publicly called a “massive fraud.” The company said Khan will remain in an advisory role through December 31, 2015.

“We wish all the best to Omar Khan in his new endeavors, which will doubtless provide fewer opportunities for self-humiliation,”Block’s Muddy Waters Research Tweeted.

In October 2013, Block published a damning research report accusing the company of having “fictitious” revenues and customers that don’t really exist. Continue reading

Noble Group barred from Platts’ oil pricing process

Tue Apr 21, 2015 10:30pm EDT

Noble Group barred from Platts’ oil pricing process – sources


(Reuters) – Commodity trader Noble Group has been barred from taking part in some of the trading processes used to set global oil price benchmarks by reporting agency Platts, according to two people familiar with the matter.

Noble, the Singapore-listed merchant that has been battling criticism of its accounting practices this year, is not able to act as a “market maker” – actively offering both bids and offers to facilitate trading – in the half-hour trading process run by Platts, part of McGraw Hill Financials Inc. Continue reading

Noble saga: Ball is in regulators’ court; Noble’s AGM raises further concern; Noble AGM: shareholders may not be so supportive next time; Chairmen should take shareholder questions in the spirit of the law

Noble saga: Ball is in regulators’ court

Michael Dee

21 April 2015

Business Times Singapore

A HEADLINE in The Business Times on Saturday reads: “Noble dodges accounting queries at AGM”. For 90 minutes, Noble Group founder and chairman Richard Elman “repeatedly dodged shareholders’ queries on the group’s accounting practices …”.

How can it be that for more than two months Noble continues to refuse to provide details of its finances to the owners of the business and show such disregard for their interests? Continue reading

Reality Check: Accounting Alerts Every Investor Should Know by Olstein Funds

Olstein Funds: Accounting Alerts Help Avert Trouble

An astute investor should be aware of the types of accounting smokescreens that companies use to disguise problems and to misrepresent the company’s economic reality. The following alerts are sometimes clear indicators of future earnings surprises and have proved valuable to investors:

  • Sizable negative divergences between cash flow and net income;
  • Questionable accounting for transactions with unconsolidated affiliates or joint ventures;
  • Prematurely realizing revenue that may not be sustainable;
  • Reversal of past reserves to artificially inflate earnings;
  • Realizing nonrecurring gains, and netting these gains to hide past mistakes;
  • Lowering discretionary expenditures to meet earnings targets;
  • Continual characterization of material expenses as nonrecurring;
  • Unrealistic depreciation schedules;
  • Capitalizing expenses based on unjustified optimism;
  • Serial acquisitions under purchase accounting that overstate internal earnings growth;
  • Lower inventory turns or negative inventory divergences;
  • Accounts receivable rising faster than sales; and
  • Unrealistic pension assumptions.

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

Family control and corporate cash holdings: Evidence from China; family firms with excess control rights tend to have high cash holdings that are tunneled rather than being invested or paid to shareholders

Journal of Corporate Finance Volume 31, April 2015, Pages 220–245

Family control and corporate cash holdings: Evidence from China 

Qigui Liu , Tianpei Luo ,  Gary Gang Tian, 


  • We examine effect of family control on cash holding in China.
  • High cash holding are tunneled other than being invested or paid to shareholders.
  • Multiple large shareholders tend to collude with controlling family.
  • NTS reform helps to alleviate the issue of family firms’ high cash holding.
  • Founders with one child, politically connected and involved in management hold more cash.


This study examines the effect of family control on the cash holding policy in China. We find that family firms with excess control rights tend to have high cash holdings that are tunneled rather than being invested or paid to shareholders. We further show that the incentive for controlling families to hold cash and for tunneling is exacerbated by the agency conflict between controlling and minority shareholders, i.e., it is weakened after the Chinese Non-tradable share (NTS) reform and strengthened by the presence of multiple large shareholders who probably play no monitoring role in Chinese family firms. Furthermore, family firms’ incentive to hold cash for tunneling is influenced by the unique characteristics of Chinese firms in the following ways: the incentive is stronger when the family founder has one child and face family succession problem, and when the founder has political connections and directly involves in firm’s management; while it is weakened by family founder’s social interpersonal trust with other entrepreneurs through their membership of Chambers of Commerce. Overall, we argue that family firms in China tend to hold high levels of cash for tunneling, which harms firm value, while the severe controlling-minority shareholder agency conflicts and unique Chinese family characteristics only make this situation worse.