Forensic Analyst

Jason Yap, CFA

Forensic Accounting

In the past 4 decades, there is no lack of hedge funds focused on short-selling strategies that incorporate forensic research into their investment process. Often, the forensic research is focused on uncovering companies' vulnerabilities and betting that their stock price will fall.  
More recently, large funds have increasingly incorporated forensic accounting and investigative research techniques into their investment process, hiring former forensic accountants and investigative journalists.  The massive frauds in 2020 such as Wirecard and Luckin have brought such application of forensic accounting to the fore.
When it comes to investing, knowing what to buy is just half the equation. However, over time, facts change and/or the investment hypothesis may be wrong, which leads investors to consider resizing or exiting the existing position. In this context, the use of forensic accounting and investigative tools and techniques can be a more illuminating source of information compared to reading sell-side reports or industry research reports. 
In this Insight, we discuss how investors can incorporate forensic accounting into the investment process and bridge existing knowledge gaps of traditional fundamental analysis, with the aim of maximising portfolio returns.

In the past 4 decades, there is no lack of hedge funds focused on short-selling strategies that incorporate forensic research into their investment process. Often, the forensic research is focused on uncovering companies' vulnerabilities and betting that their stock price will fall.  
More recently, large funds have increasingly incorporated forensic accounting and investigative research techniques into their investment process, hiring former forensic accountants and investigative journalists.  The massive frauds in 2020 such as Wirecard and Luckin have brought such application of forensic accounting to the fore.
When it comes to investing, knowing what to buy is just half the equation. However, over time, facts change and/or the investment hypothesis may be wrong, which leads investors to consider resizing or exiting the existing position. In this context, the use of forensic accounting and investigative tools and techniques can be a more illuminating source of information compared to reading sell-side reports or industry research reports. 
In this Insight, we discuss how investors can incorporate forensic accounting into the investment process and bridge existing knowledge gaps of traditional fundamental analysis, with the aim of maximising portfolio returns. 

Forensics 101: Incorporating Forensic Accounting into the Investment Process

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

Evergrande Property Services / Event-Driven

<a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> is a Chinese property management provider. The controlling shareholder is the <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a>, which represents 60.96% of outstanding shares. It floated on 2 December 2020 to raise net proceeds of US$930 million (gross proceeds around US$1.8 billion) at HK$8.80 per share.  Evergrande Property Services entered a trading halt today pursuant to the Hong Kong Code on Takeovers and Mergers. Evergrande is in talks to sell a 51% controlling stake to <a href="https://www.smartkarma.com/entities/hopson-development-holdings" target="_blank" data-smartkarma-citation="entities:8108:1" rel="noopener">Hopson Development (754 HK)</a> for more than HK$40 billion ($5 billion), according to the Chinese financial news platform Cailian. Hopson also entered a trading halt today citing a major transaction to acquire the shares of a company listed on the HKEx and the relevant possible mandatory offer pursuant to the Hong Kong Code on Takeovers and Mergers.The potential stake sale was anticipated as Evergrande flagged on 14 September that it was actively exploring with potential investors the sales of part of its interests in <a href="https://www.smartkarma.com/entities/china-evergrande-new-energy-vehicle-group-ltd" target="_blank" data-smartkarma-citation="entities:713:1" rel="noopener">Evergrande Auto (708 HK)</a> and Evergrande Property Services.The rumoured Evergrande Property Services valuation implies a possible general offer of HK$3.70 per share, a -27.7% discount to the last close price of HK$5.12 per share. The steep discount to the last close is perhaps unsurprisingly as Evergrande is a distressed seller. The potential sale even at a distressed price could help Evergrande buy short-term breathing space to its liquidity issues.    If the potential deal materialises, Evergrande will cease to be the controlling shareholder and hold 9.96% of the outstanding shares. Evergrande Property Services’ shares have sunk 41% YTD due to the liquidity issues plaquing Evergrande. A new controlling shareholder will gradually reduce Evergrande Property Services reliance on Evergrande and also remove a significant share overhang.<div class="content-highlight">
Clearly, there will be limited shareholders who will accept the possible general offer price at a -27.7% discount to the last close. In the short term, Evergrande Property Services shares will likely be under pressure until the deal closes and there are some signs of closure on Evergrande's liquidity issues. 
While this potential transaction represents a sale at a distressed price (below the all-time low share price), the shift to a more stable controlling shareholder along with a market focus on fundamentals/valuation will help in the re-rating of Evergrande Property Services over the medium-term. 
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Evergrande Property Services (6666 HK) is a Chinese property management provider. The controlling shareholder is the Evergrande (3333 HK), which represents 60.96% of outstanding shares. It floated on 2 December 2020 to raise net proceeds of US$930 million (gross proceeds around US$1.8 billion) at HK$8.80 per share.  Evergrande Property Services entered a trading halt today pursuant to the Hong Kong Code on Takeovers and Mergers. Evergrande is in talks to sell a 51% controlling stake to Hopson Development (754 HK) for more than HK$40 billion ($5 billion), according to the Chinese financial news platform Cailian. Hopson also entered a trading halt today citing a major transaction to acquire the shares of a company listed on the HKEx and the relevant possible mandatory offer pursuant to the Hong Kong Code on Takeovers and Mergers.The potential stake sale was anticipated as Evergrande flagged on 14 September that it was actively exploring with potential investors the sales of part of its interests in Evergrande Auto (708 HK) and Evergrande Property Services.The rumoured Evergrande Property Services valuation implies a possible general offer of HK$3.70 per share, a -27.7% discount to the last close price of HK$5.12 per share. The steep discount to the last close is perhaps unsurprisingly as Evergrande is a distressed seller. The potential sale even at a distressed price could help Evergrande buy short-term breathing space to its liquidity issues.    If the potential deal materialises, Evergrande will cease to be the controlling shareholder and hold 9.96% of the outstanding shares. Evergrande Property Services’ shares have sunk 41% YTD due to the liquidity issues plaquing Evergrande. A new controlling shareholder will gradually reduce Evergrande Property Services reliance on Evergrande and also remove a significant share overhang.
Clearly, there will be limited shareholders who will accept the possible general offer price at a -27.7% discount to the last close. In the short term, Evergrande Property Services shares will likely be under pressure until the deal closes and there are some signs of closure on Evergrande's liquidity issues. 
While this potential transaction represents a sale at a distressed price (below the all-time low share price), the shift to a more stable controlling shareholder along with a market focus on fundamentals/valuation will help in the re-rating of Evergrande Property Services over the medium-term. 


Hopson Development’s Potential 51% Stake in Evergrande Property Services

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Trading in <a href="https://www.smartkarma.com/entities/hopson-development-holdings" target="_blank" data-smartkarma-citation="entities:8108:1" rel="noopener">Hopson Development (754 HK)</a> was halted pre-market today along with <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a> and <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a>.There are reports now that <a href="https://www.smartkarma.com/entities/hopson-development-holdings" target="_blank" data-smartkarma-citation="entities:8108:1" rel="noopener">Hopson Development (754 HK)</a> is looking to buy 51% in <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> at a valuation of more than HK$40bn. This amends an earlier report that <a href="https://www.smartkarma.com/entities/hopson-development-holdings" target="_blank" data-smartkarma-citation="entities:8108:1" rel="noopener">Hopson Development (754 HK)</a> would pay HK$40bn for 51% of <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a>. The HK$40bn number values <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> at HK$3.7/share, a 27.7% discount  to its last close.<a href="https://www.smartkarma.com/entities/hopson-development-holdings" target="_blank" data-smartkarma-citation="entities:8108:1" rel="noopener">Hopson Development (754 HK)</a> will need to make a Mandatory General Offer (MGO) to all existing shareholders in cash at HK$3.70/share or higher. With a closing low of HK$4.03/share since listing, it is unlikely that there will be many takers in the MGO.<a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a> is a very high probability deletion from the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> at the December rebalance and is expected to be replaced by <a href="https://www.smartkarma.com/entities/xinyi-solar-holdings-ltd" target="_blank" data-smartkarma-citation="entities:318:1" rel="noopener">Xinyi Solar Holdings (968 HK)</a>.<a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> is also an <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> constituent and is a high probability deletion from the index at the March 2022 review, where <a href="https://www.smartkarma.com/entities/innovent-biologics-inc" target="_blank" data-smartkarma-citation="entities:27452:1" rel="noopener">Innovent Biologics Inc (1801 HK)</a> is a potential inclusion.

Trading in Hopson Development (754 HK) was halted pre-market today along with Evergrande (3333 HK) and Evergrande Property Services (6666 HK).There are reports now that Hopson Development (754 HK) is looking to buy 51% in Evergrande Property Services (6666 HK) at a valuation of more than HK$40bn. This amends an earlier report that Hopson Development (754 HK) would pay HK$40bn for 51% of Evergrande Property Services (6666 HK). The HK$40bn number values Evergrande Property Services (6666 HK) at HK$3.7/share, a 27.7% discount  to its last close.Hopson Development (754 HK) will need to make a Mandatory General Offer (MGO) to all existing shareholders in cash at HK$3.70/share or higher. With a closing low of HK$4.03/share since listing, it is unlikely that there will be many takers in the MGO.Evergrande (3333 HK) is a very high probability deletion from the Hang Seng China Enterprises Index (HSCEI INDEX) at the December rebalance and is expected to be replaced by Xinyi Solar Holdings (968 HK).Evergrande Property Services (6666 HK) is also an Hang Seng China Enterprises Index (HSCEI INDEX) constituent and is a high probability deletion from the index at the March 2022 review, where Innovent Biologics Inc (1801 HK) is a potential inclusion.

Hopson (754 HK) To Buy 51% of Evergrande Property Services? Upcoming MGO & Potential HSCEI Changes

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Bank Call Reveals Nothing: A competitor held a conference call with Ping An Bank (000001.CH) [PAB]. According to management, the market has over-reacted to risks associated with China Evergrande Group (3333.HK) [Evergrande] and certain other developers. Further, PAB believes that policymakers in Beijing are likely to maintain stable growth within the property sector and coordinate the completion of housing projects – and this “should contain” any spillover effect;  *What Wasn’t Addressed: The Group has real estate-related exposure which represents 24.3% of Ping An Insurance’ (2318.HK) [Ping An] stated equity – more so depending which insurance subsidiary (likely Ping An Life [PAL] given the shortfall in 1H21 earnings) this risk is attributed to. There was no mention of Ping An remaining a source of strength to PAB given the PAL stress, nor if PAB participates in real estate financings led by Ping An - normal practice for conglomerates in mainland China; and  *Negative Credit Delta Could Accelerate Capital Raise: By our analysis, we find that PAB credit remains incredibly challenged as net new NPLs have accelerated 102.2% annualized at 2Q21 - up from 53.6% in 1Q21. Assuming the accelerated credit break in the PAB portfolio continues to remain at the current level, we find that PAB’s reserves still remain quite light by CNY 16 bn - representing about two quarters of pre-tax earnings.

*Bank Call Reveals Nothing: A competitor held a conference call with Ping An Bank (000001.CH) [PAB]. According to management, the market has over-reacted to risks associated with China Evergrande Group (3333.HK) [Evergrande] and certain other developers. Further, PAB believes that policymakers in Beijing are likely to maintain stable growth within the property sector and coordinate the completion of housing projects – and this “should contain” any spillover effect;  *What Wasn’t Addressed: The Group has real estate-related exposure which represents 24.3% of Ping An Insurance’ (2318.HK) [Ping An] stated equity – more so depending which insurance subsidiary (likely Ping An Life [PAL] given the shortfall in 1H21 earnings) this risk is attributed to. There was no mention of Ping An remaining a source of strength to PAB given the PAL stress, nor if PAB participates in real estate financings led by Ping An - normal practice for conglomerates in mainland China; and  *Negative Credit Delta Could Accelerate Capital Raise: By our analysis, we find that PAB credit remains incredibly challenged as net new NPLs have accelerated 102.2% annualized at 2Q21 - up from 53.6% in 1Q21. Assuming the accelerated credit break in the PAB portfolio continues to remain at the current level, we find that PAB’s reserves still remain quite light by CNY 16 bn - representing about two quarters of pre-tax earnings.   

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

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Prudential raised around US$2.4bn via an international and public offering in Hong Kong. 
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We covered various aspects of the deal in our earlier note, <a href="https://www.smartkarma.com/insights/prudential-hong-kong-offering-well-flagged-pivot-to-asia-mind-the-liquidity-gap" target="_blank" rel="noopener">Prudential Hong Kong Offering - Well Flagged Pivot to Asia, Mind the Liquidity Gap</a>.
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In this note, we will talk about the updates since then.
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Prudential raised around US$2.4bn via an international and public offering in Hong Kong. 

We covered various aspects of the deal in our earlier note, Prudential Hong Kong Offering - Well Flagged Pivot to Asia, Mind the Liquidity Gap.

In this note, we will talk about the updates since then.


Prudential Hong Kong Offering - Trading Quick Note

China

China Evergrande Group is an integrated residential property developer. The Company, through its subsidiaries, operates in property development, investment, management, finance, internet, health, culture, and tourism markets.

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Evergrande (3333 HK)

Forensics 101: Incorporating Forensic Accounting into the Investment Process

Large funds have incorporated forensic accounting and investigative techniques into their investment process, hiring forensic accountants and...

Jason Yap, CFA

Hopson Development’s Potential 51% Stake in Evergrande Property Services

Evergrande is in talks to sell a 51% stake in Evergrande Services to Hopson Dev for more than HK$40 bn. The shift to a more stable controlling...

Arun George

Hopson (754 HK) To Buy 51% of Evergrande Property Services? Upcoming MGO & Potential HSCEI Changes

Hopson is reportedly looking to buy 51% in Evergrande Prop Serv for more than HK$40bn.That is a 41.7% premium to the last close and will trigger an...

Brian Freitas

Ping An Insurance – Don’t Bank On It

PING AN: Competitor conference call with PAB reveals nonchalant management. The Group has enormous real estate-related exposure, and questions of...

Thomas J. Monaco

Prudential Hong Kong Offering - Trading Quick Note

Prudential raised around US$2.4bn via an international and public offering in Hong Kong. In this note, we will talk about the updates since then.

Sumeet Singh

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