The China Hustle (O abalo da China)
Advanced Scuttle-bug analysis
Invest in what do you know is one of the most fundamental concepts of value investing.
However, how much do we actually know and how much do we think we know?
That is the most important question.
I chanced upon Teh Hooi Ling's article in the weekend business times about the documentary, The China Hustle. Personally, she is one of the few Singapore Female fund managers that I knew about. As a regular contributor to the Business times, I came to respect her views and her neutral assessment of the financial landscape. And that led me to The Chinese Hustle.
https://www.youtube.com/watch?v=oQGpdgV_ifI
Understanding of Chinese and using you-tube subtitles can be vastly useful.
Embedding is not allowed for this YouTube video.
Links
https://www.businesstimes.com.sg/authors/teh-hooi-ling
https://www.marketwatch.com/amp/story/guid/ACC1079E-344B-11E8-BF33-EE6BD1423D3B
http://caveat-emptor-venditor.blogspot.com/2017/11/accounting-fraud.html
From my impression of the documentary
1) The shadow of the S chips seemed to have displaced itself from Singapore market and seem to be implemented in more attractive US markets whereby a lot of capital can be easily raised. A lot of the cheap tricks employed in my previous article have been implemented in US via reverse takeovers.
http://caveat-emptor-venditor.blogspot.com/2017/11/accounting-fraud.html
2) This documentary has a strong short selling slant and the producing directors have a vested interest in shorting specific companies . As such, I will not pay too much weight to the companies that it suggests are fraudulent. Caveat Emptor /Venditor and let the buyer / seller beware,
Similarly, any reader reading this article should not construct this as a short selling promotion despite the bearish slant this author is presenting. This blog is simply reflecting my personal opinion and I also respect the views of others. I simply do not understand certain aspects about China financial landscape, the subterfuge of its financial statements, and is simply drawing parallels from historic cases.
3) One thing is for sure however. Short selling entails a large dose of deep digging into its financials, actual bean counting of inventory, kicking the tyres, walking the ground after office hours, as well as scuttle-bug analysis way beyond the resources of the average retail investor. Generally, they must work from a larger informational advantage than the general market as the upside is limited but the downside unlimited.
Short selling also incurs maintenance fees from securities lending rates and the potential to incur unlimited liability. The best course of action for risk averse investors like me is to stay away from such activities. The market can stay irrational longer than the investor can stay solvent.
One thing is for sure, Value investing, quantitative investing and financial statement analysis should be adequately supported by kicking the tyres and on the ground scuttlebutt analysis. Value companies with fraudulent numbers can easily transit to value traps. No matter how advanced your analytical tools may be, it can be GIGO if the wrong parameters are input. Much more astute value investors have tried to value invest in UN-analysable assets (Bear sterns, Noble group balance sheet) and gone broke.
4) Drawing parallels with Enron, what Ali-baba /Jack Ma is doing is chronologically disturbingly similar. I hope it doesn't go from Ali-baba the economic miracle to Ali-baba and the 40 thieves.
<A poor woodcutter in the Arabian Nights who gains entrance to the treasure cave of the 40 thieves by saying the magic words "Open, Sesame!">
i) A company finding a blue market and managed to perform double digit growth in an unventured territory
ii) Company managed to grow its businesses and realise actual profits and revenues.
Some of it may be inflated due to corporate culture and implicit reciprocity / Guangxi so seemingly small issues can be ironed out. This culture is not scalable as the company progresses beyond a small cap to a public listed corporation.
iii) Companies managed to wangle its IPO and get the green light to conduct its proprietary accounting methodology from the authorities.
Detractors will find it hard to exercise independent criticism as it is endorsed by authorities such as PWC, SEC and China Accounting board.
iv) Use of an overarching and charismatic leader and asking many others to put blind trust in the growth company and believe in the numbers it is presenting.
v) In reality, the respective gatekeepers are just conducting duties pertaining only to their job scope. No one is looking at the big picture and connecting the dots.They leave the responsibility of regulatory oversight, ethical conduct and integrity / soundness of what they are doing to management and other gatekeepers.
vi) Corporate culture and corporate governance.
Firstly, the construction of a powerless dummy board, which is powerless to oppose the chairman / CEO from acquiring companies that are outside its circle of competence.
When massaging the numbers becomes socially acceptable, constructing legal entities to hide losses and inflate profits come next.
VIE legal contracts and structuring comes third to protect the founder from individual liability and downside risks.
Lastly, Fraud becomes acceptable when penalties cannot be enforced, especially if extradition between China - US is not realisable. (Repetition of China - SG S chips scandal)
vii) In order to achieve unsustainable growth, Ali-baba abandoned organic growth and its focus on core products / services, in order to pursue inorganic growth and pursue businesses outside its circle of competence. Its rapid and ill-thought out M&A policy led to a conglomerate with unanalysable assets that are impossible to value. It is encountering slipping profit margins by diwosifying into low margin hyper competitive businesses, and miraculously reporting higher earnings and profits. Ultimately, theoretical finance can only result in theoretical profits and does not reflect company reality.
Economics of the technology - sharing business
https://www.bloomberg.com/news/articles/2018-08-15/china-startups-struggle-to-escape-alibaba-and-tencent-s-shadows
https://www.straitstimes.com/business/new-ride-hailing-disruptors-lining-up-to-eat-grabs-lunch-in-singapore
viii) When Jack Ma is suddenly announcing retirement, it could be the case of a graceful retreat to philanthropy, or a rat leaving the sinking ship.
Coincidentally, Jeffrey Skilling was recently released from prison after serving his time in prison.
Links
https://www.channelnewsasia.com/news/technology/jack-ma-retire-alibaba-founder-new-york-times-10696942
https://www.ft.com/content/ed75c0c4-ad57-11e8-89a1-e5de165fa619
5) A quick search through Reddit and Google have brought me aware of this blog
https://deep-throat-ipo.blogspot.com/
Despite its provocative name, the fundamental and scuttle-bug analysis conducted far exceeded the due diligence conducted by mere retail investors. Before encountering this blog, I simply prefer to stay away from Alibaba specifically. After reading this blog, my personal preference will be to stay more in cash and away from the markets entirely until the markets present a larger margin of safety <aka larger fall> .
Despite China, HK and SG market presenting a 'healthy correction', the US market is still disjointed and presenting booming performance, right before US fed announced its i/r rate hike at September. For now, I am going to wait for possible bearish movement in the US market before considering entering into any position, or wait indefinitely until sizeable opportunities emerge.
https://www.reuters.com/article/us-usa-fed/fed-leaves-rates-unchanged-stays-on-course-for-september-hike-idUSKBN1KM5UA
Invest in what do you know is one of the most fundamental concepts of value investing.
However, how much do we actually know and how much do we think we know?
That is the most important question.
I chanced upon Teh Hooi Ling's article in the weekend business times about the documentary, The China Hustle. Personally, she is one of the few Singapore Female fund managers that I knew about. As a regular contributor to the Business times, I came to respect her views and her neutral assessment of the financial landscape. And that led me to The Chinese Hustle.
https://www.youtube.com/watch?v=oQGpdgV_ifI
Understanding of Chinese and using you-tube subtitles can be vastly useful.
Embedding is not allowed for this YouTube video.
Links
https://www.businesstimes.com.sg/authors/teh-hooi-ling
https://www.businesstimes.com.sg/investing-wealth/china-hustle-movie-mirrors-s-chip-blow-up
https://www.youtube.com/watch?v=oQGpdgV_ifIhttps://www.marketwatch.com/amp/story/guid/ACC1079E-344B-11E8-BF33-EE6BD1423D3B
http://caveat-emptor-venditor.blogspot.com/2017/11/accounting-fraud.html
From my impression of the documentary
1) The shadow of the S chips seemed to have displaced itself from Singapore market and seem to be implemented in more attractive US markets whereby a lot of capital can be easily raised. A lot of the cheap tricks employed in my previous article have been implemented in US via reverse takeovers.
http://caveat-emptor-venditor.blogspot.com/2017/11/accounting-fraud.html
2) This documentary has a strong short selling slant and the producing directors have a vested interest in shorting specific companies . As such, I will not pay too much weight to the companies that it suggests are fraudulent. Caveat Emptor /Venditor and let the buyer / seller beware,
Similarly, any reader reading this article should not construct this as a short selling promotion despite the bearish slant this author is presenting. This blog is simply reflecting my personal opinion and I also respect the views of others. I simply do not understand certain aspects about China financial landscape, the subterfuge of its financial statements, and is simply drawing parallels from historic cases.
3) One thing is for sure however. Short selling entails a large dose of deep digging into its financials, actual bean counting of inventory, kicking the tyres, walking the ground after office hours, as well as scuttle-bug analysis way beyond the resources of the average retail investor. Generally, they must work from a larger informational advantage than the general market as the upside is limited but the downside unlimited.
Short selling also incurs maintenance fees from securities lending rates and the potential to incur unlimited liability. The best course of action for risk averse investors like me is to stay away from such activities. The market can stay irrational longer than the investor can stay solvent.
One thing is for sure, Value investing, quantitative investing and financial statement analysis should be adequately supported by kicking the tyres and on the ground scuttlebutt analysis. Value companies with fraudulent numbers can easily transit to value traps. No matter how advanced your analytical tools may be, it can be GIGO if the wrong parameters are input. Much more astute value investors have tried to value invest in UN-analysable assets (Bear sterns, Noble group balance sheet) and gone broke.
4) Drawing parallels with Enron, what Ali-baba /Jack Ma is doing is chronologically disturbingly similar. I hope it doesn't go from Ali-baba the economic miracle to Ali-baba and the 40 thieves.
<A poor woodcutter in the Arabian Nights who gains entrance to the treasure cave of the 40 thieves by saying the magic words "Open, Sesame!">
i) A company finding a blue market and managed to perform double digit growth in an unventured territory
ii) Company managed to grow its businesses and realise actual profits and revenues.
Some of it may be inflated due to corporate culture and implicit reciprocity / Guangxi so seemingly small issues can be ironed out. This culture is not scalable as the company progresses beyond a small cap to a public listed corporation.
iii) Companies managed to wangle its IPO and get the green light to conduct its proprietary accounting methodology from the authorities.
Detractors will find it hard to exercise independent criticism as it is endorsed by authorities such as PWC, SEC and China Accounting board.
iv) Use of an overarching and charismatic leader and asking many others to put blind trust in the growth company and believe in the numbers it is presenting.
v) In reality, the respective gatekeepers are just conducting duties pertaining only to their job scope. No one is looking at the big picture and connecting the dots.They leave the responsibility of regulatory oversight, ethical conduct and integrity / soundness of what they are doing to management and other gatekeepers.
vi) Corporate culture and corporate governance.
Firstly, the construction of a powerless dummy board, which is powerless to oppose the chairman / CEO from acquiring companies that are outside its circle of competence.
When massaging the numbers becomes socially acceptable, constructing legal entities to hide losses and inflate profits come next.
VIE legal contracts and structuring comes third to protect the founder from individual liability and downside risks.
Lastly, Fraud becomes acceptable when penalties cannot be enforced, especially if extradition between China - US is not realisable. (Repetition of China - SG S chips scandal)
vii) In order to achieve unsustainable growth, Ali-baba abandoned organic growth and its focus on core products / services, in order to pursue inorganic growth and pursue businesses outside its circle of competence. Its rapid and ill-thought out M&A policy led to a conglomerate with unanalysable assets that are impossible to value. It is encountering slipping profit margins by diwosifying into low margin hyper competitive businesses, and miraculously reporting higher earnings and profits. Ultimately, theoretical finance can only result in theoretical profits and does not reflect company reality.
Economics of the technology - sharing business
https://www.bloomberg.com/news/articles/2018-08-15/china-startups-struggle-to-escape-alibaba-and-tencent-s-shadows
https://www.businesstimes.com.sg/brunch/food-fight-the-battle-for-the-food-delivery-market?Echobox=1536364017#utm_campaign=Echobox&utm_medium=Social&utm_source=Facebook&xtor=CS1-3
https://www.google.com.sg/amp/s/www.businesstimes.com.sg/startups/obike-blames-new-rules-for-singapore-exit-but-writing-already-on-the-wall%3famp?espv=1https://www.straitstimes.com/business/new-ride-hailing-disruptors-lining-up-to-eat-grabs-lunch-in-singapore
viii) When Jack Ma is suddenly announcing retirement, it could be the case of a graceful retreat to philanthropy, or a rat leaving the sinking ship.
Coincidentally, Jeffrey Skilling was recently released from prison after serving his time in prison.
Links
https://www.channelnewsasia.com/news/technology/jack-ma-retire-alibaba-founder-new-york-times-10696942
https://www.ft.com/content/ed75c0c4-ad57-11e8-89a1-e5de165fa619
5) A quick search through Reddit and Google have brought me aware of this blog
https://deep-throat-ipo.blogspot.com/
Despite its provocative name, the fundamental and scuttle-bug analysis conducted far exceeded the due diligence conducted by mere retail investors. Before encountering this blog, I simply prefer to stay away from Alibaba specifically. After reading this blog, my personal preference will be to stay more in cash and away from the markets entirely until the markets present a larger margin of safety <aka larger fall> .
Despite China, HK and SG market presenting a 'healthy correction', the US market is still disjointed and presenting booming performance, right before US fed announced its i/r rate hike at September. For now, I am going to wait for possible bearish movement in the US market before considering entering into any position, or wait indefinitely until sizeable opportunities emerge.
https://www.reuters.com/article/us-usa-fed/fed-leaves-rates-unchanged-stays-on-course-for-september-hike-idUSKBN1KM5UA
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