tag:blogger.com,1999:blog-4815867514277794362.post6702671483296794041..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Hollysys - a blog post inspired by the railway crashJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger30125tag:blogger.com,1999:blog-4815867514277794362.post-19843848437876780082016-04-10T20:45:01.554+10:002016-04-10T20:45:01.554+10:00John, Glenn Chan did a quick follow-up on HOLI.John, Glenn Chan did a quick follow-up on HOLI.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-21051239478012602652014-04-16T22:51:15.728+10:002014-04-16T22:51:15.728+10:00John, despite some 2 years on, somehow I still rec...John, despite some 2 years on, somehow I still recall your analysis and opinion (particularly your readers’ opinions) of a small little stock in those days called Hollysys. To recap Hollysys was one of those Chinese RTOs trading on the Daq, nearly all of which were treated like the plaque in the wake of a number of bad apples (fraud) that started to smell. To make matters worse, Hollysys, a rail equipment technology provider also got caught up indirectly in the aftermath of a major scandal at top of the responsible transport ministry, and followed then by a rail disaster that painted an even more negative picture of Chinese made products and regard for safety systems.<br /><br />Whilst I as an investor/analyst have not profited or loss any capital based on your blog about the company in July 2011, I am deeply curious as to how the ball got rolling for you in this. Let me be straight; I was one of those that found your arguments on the light side relative to such a bold and vocal call. Let me ask two questions: <br /><br />Firstly, what analysis did you really conduct on the company and industry upon hearing the ‘idea’ that Hollysys may not be what it claimed to be? I can understand how you got to your line of questioning (and scepticism) based on your elaborated scan of the company’s website and balance sheet plus notes to the accounts. But it does seem like that’s where you drew the line before sharing your views to a broader audience, for which you know you have a certain level of influence. Was there more than what you were willing to share that prompted you to suggest this was a company that was simply too amazing to be true? <br /><br />Secondly, if there was more than you were willing to share, what has been the disconnect between what you knew but didn’t write versus the real world, in the time since? I haven’t picked up recent research on the company as yet, but the share price ($21 today versus $7.8 when you first wrote in July 2011, massively outperforming a rising market by 3x in that time frame) seems to suggest that you did not catch much wind in those sails over quite an extended period.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-80617734454619304542012-10-17T17:39:48.253+11:002012-10-17T17:39:48.253+11:00John, I am curious about your view here. It's ...John, I am curious about your view here. It's more than a year since you made some pretty explicit comments questioning the accounting and validity of Hollysys operations. It seems your view then (explicit and applied with some subtlety) was it was too amazing to be true, just on what you read and some people you spoke to. But there was no proprietary research to confirm any of your allegations. You were up front and mentioned you had a short on the stock. What is your view now?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-1963987725653946702011-08-18T00:13:21.279+10:002011-08-18T00:13:21.279+10:00Anything new to say after their earnings report? ...Anything new to say after their earnings report? <br />Their unaudited non-gaap earnings report..Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-36207472741469530132011-08-01T14:19:31.158+10:002011-08-01T14:19:31.158+10:00Like I said - I find it laughable but I confess I...Like I said - I find it laughable but I confess I am annoyed as to how amateurish the analysis is. When told about this blog, I was keen to read and learn something new and smart.<br /><br />The author clearly knows he has some sort of influence over readers and hence the responsibility to actually understand basic finance concepts. <br /><br />The author may also join the long queue of being proven right and the stock/company capitulates like some other RTOs (maybe). But at the very least, please come up with something smart and challenging with real original research rather than analysis that can be so easily faulted (a "balance sheet kind of guy"? really?) and circumstantial arguments.<br /><br />Re nemo incognito's reply ...On R&D wages... wages in R&D may not be capitalised..ie research generally gets expensed...development gets capitalised is the rule of thumb. Now, I don't know about you, but I would think you prefer to see a company not tweaking around accounting concepts by capitalising expenses and instead recognise them as expenses when incurred (not to suggest that I know whether the company had a choice in this matter).<br /><br />Relationships. Difficult to have a view on the background or be convinced of the possible implications. That goes for all companies hence is not a differentiator for performance I'm afraid. Which Chinese company doesn't have one or more political backers, direct or indirect, or proclaim to have one? Welcome to Emerging Markets 101.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-17506489788345515962011-07-31T19:26:00.174+10:002011-07-31T19:26:00.174+10:00Anon July 30 12:39, last time I saw someone that a...Anon July 30 12:39, last time I saw someone that angry was when this blog was discussing Longtop.<br /><br />Maybe there is value in the engineers but normally that gets crystallized as patents in the form of cumulative R&D and the like. Maybe you could just throw together a company that has massive value and no patents - I could think of a few recent VC deals (Colors?) but any company that has been around for a decent period of time would accumulate some R&D. Those engineers don't get paid to play PS3 all day. <br /><br />Now, here's another possibility which belies that I do know something about doing business in China. HOLI is controlled by proxies of someone *very* politically powerful. HOLI has zero value add (couldn't those engineers be hired by CRC, China Highspeed, etc? Why work for HOLI?) but can extract rents from these companies because they are told to purchase services of no value from HOLI (consulting contracts, minor design tweaks for serious markups,etc) in order to line the pockets of someone very important. <br /><br />Now that would be entirely plausible - but given the former head of China's rail buildout appears to be on the sort of career track that gets your family billed for a bullet, I wonder how durable that relationship could be now?<br /><br />Ultimately, its either a defrauding of investors and the Chinese state and people, or a defrauding of investors.Nemo Incognitohttps://www.blogger.com/profile/07345185457108156269noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-82403981792313105282011-07-30T00:39:11.654+10:002011-07-30T00:39:11.654+10:00I find your analysis amateurish and laughable. But...I find your analysis amateurish and laughable. But I acknowledge you will convince the average layman who still thinks Bali and China is the same 'country'!<br /><br />Holi is more a tech company than you think. The value is in the people ie engineers. These don't get counted in the bal sheet. And yes, once the design is done, almost all manufacturing is outsourced. Final assembly is done back in their hq by ...people..not machines. Testing is simply about hooking up to pc's and switches.<br /><br />YOu were puzzled by high inventory from no machines?? Please go back to school and read up on some accounting basics if you are going to continue blogging about companies. Next you will accuse all retail and tech companies as fraudulent based on that!<br /><br />If you knew how business works in China (or Bali?) then you will also know that receivables stretch out for close to a year when dealing with the state owned companies, which make up the most of Holi's clients.<br /><br />Enough said.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-89864529029665980392011-07-28T02:36:04.908+10:002011-07-28T02:36:04.908+10:00The Italian example is new to me and an interestin...The Italian example is new to me and an interesting comparison.<br /><br />The bigger difference there is that the Italian company has huge work in progress funded by huge customer advances.<br /><br />There is 657 million euro advances from customers and 403 million in trade payables...<br /><br />Hollysys works and works and never sees cash.<br /><br />The balance sheet is really strange at Holly. Antsalto just looks like an outsource engineering company. Its on OTHER PEOPLES KIT.<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-27830316405394018012011-07-28T01:57:11.618+10:002011-07-28T01:57:11.618+10:00How are you short holi?
Do you use options or do y...How are you short holi?<br />Do you use options or do you sell the stock short directly?Joseph McGaugheyhttps://www.blogger.com/profile/09675280507752988550noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-12279960264589226592011-07-27T21:28:19.932+10:002011-07-27T21:28:19.932+10:00Not sure. Ansaldo STS produces € 1.2bln of revenue...Not sure. Ansaldo STS produces € 1.2bln of revenues on € 100mln of tangible assets, of which € 70mln are buildings.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-52008032503383407292011-07-27T05:59:09.925+10:002011-07-27T05:59:09.925+10:00If you go to China and make a DD, you should ask B...If you go to China and make a DD, you should ask BASF China if they use HOLI-Products. On the website they claim BASF China choose their product (for what? As paperweight?)<br /><br />Theoretically, they can have products and no machinery. Apple also doesn't produce anything themself)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-91110274516504961862011-07-27T04:22:27.934+10:002011-07-27T04:22:27.934+10:00Hollysys has long, large contracts with the govern...Hollysys has long, large contracts with the government. The lumpiness of their quarterly business is to be expected, and the large contract that was completed in Q2 and will be recognized should balance a lot of that. The situation with the rail crash is another thing...NYC Analystnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-83876217501260944242011-07-27T03:27:23.166+10:002011-07-27T03:27:23.166+10:00Our products are subjected to rigorous testing in ...<i>Our products are subjected to rigorous testing in our facilities prior to shipment</i><br /><br />In facilities costing less than $3.1m, presumably. I had always thought of testing equipment for nuclear industry safety controls as being quite expensive stuff.ddnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-3855281754876596312011-07-27T00:35:17.645+10:002011-07-27T00:35:17.645+10:00John, are you going to post this on Business Insid...John, are you going to post this on Business Insider? <br /><br />or perhaps a more direct (not sarcasm) version with a link? <br /><br />seems like your original thoughts got a little obstructed/misinterpreted.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-37709136356499914852011-07-26T19:09:46.636+10:002011-07-26T19:09:46.636+10:00Hi John,
Great Post. Plausible deniability is mot...Hi John,<br /> Great Post. Plausible deniability is motto for most in financial services ( it's hard to prove criminal intent in this business). Like you said there are lot of auditors who are worse and the big 4 are duped (my experience during my banking days says otherwise - lax controls and incentive policies),i suspect it's not about reputation anymore.<br /><br />And now i am glad to know you are worthy of being on any news corp media businessAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-37648589103158027092011-07-26T19:07:27.580+10:002011-07-26T19:07:27.580+10:00Huh...I'd love to short this company, but thei...Huh...I'd love to short this company, but their annual report says that all of their manufacturing is outsourced. They contract with outside manufacturers to produce equipment for them, and basically do the assembly themselves:<br /><br />We assemble our products from subcomponents provided by others or we outsource the production to qualified vendors. We acquire advanced printed circuit<br />board components from high quality suppliers. We rely on our manufacturing management department to coordinate the procurement of raw materials and<br />outsourced processing, including the procurement of components and standard parts (such as cables and connectors), and outsourced processing of Polyvinyl<br />Chloride (PVC) coating, shells, and printed circuit boards. Our products are subjected to rigorous testing in our facilities prior to shipment.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-2251266432656644052011-07-26T17:40:32.920+10:002011-07-26T17:40:32.920+10:00Ha, you missed their greates invention of semi-inv...Ha, you missed their greates invention of semi-invisilbility, as applied to the building on top right part of their ne complex. <br /><br />Maybe their machinery is using similar technology as to make it hard-to-copy by nefarious competitors?<br /><br />On the other hand, I'm not sure that applying the technology to the signaling devices was the best idea the sales team had...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-70513636378917549382011-07-26T12:40:39.113+10:002011-07-26T12:40:39.113+10:00I think your thesis is a bit weak on this one. But...I think your thesis is a bit weak on this one. But there is certainly a lot of hair. This could also be a company that is moving from a local trader to a manufacturer. But even then the B/S looks suspect. While the thesis that this may be a fraud may be right, the chances of your trade being successful could be different due to external factors (costs of shorting) and internal factors (the company may have "good" inventory and good cash). <br /><br />On a different note: As a buy side analyst, I have struggled to get heard and have had my worries pushed aside by others probably under pressure to do deals. Your blog has in some ways been a "motivation" as I struggled. Some one called my line of thinking as incongruous -- and I took that as a compliment. My views have been validated more than a few times as, in Andrew Smithers' words " opinions tend to be moved more quickly by events than by arguments." I have survived because of that! <br /><br />Good work, as always.<br /><br />Best<br />SPVAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-48565057650837538762011-07-26T07:56:58.425+10:002011-07-26T07:56:58.425+10:00Its amazing that a cursory look at the financial s...Its amazing that a cursory look at the financial statements of these firms raises really big, bright flashing red flags, yet "smart" people are long these firms, like your friend who seemed to use a sort of plug (guaxni) to explain away the very strange PP&E/R&D numbers.<br /><br />I priced some servers on Alibaba when I was looking at YOKU, and while hardly being an expert in the field (to assess quality, reliability, installation/integration/maintenance/operating costs), it does seem that just the hardware can be bought for fairly cheap. <br /><br />But it seems then even if these firms can get equipment for so cheap (or even free/free-ish), they're still carrying them on their balance sheets at WAY too low values relative to what they claim to be using them for/achieving.<br /><br />Like you say, either these young Chinese firms have achieved productivity and efficiency never before even imagined, or they are lying (about what, exactly, is harder to ascertain).<br /><br />I find the latter far easier to believe than the former.Jeffrey Rothsteinhttp://www.stonestreetadvisors.comnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-26352690149770240402011-07-26T06:55:14.115+10:002011-07-26T06:55:14.115+10:00A big chunk of your argument is on receivables.
T...A big chunk of your argument is on receivables.<br /><br />The receivables for projects that are multi-year, large projects like nuclear and high speed rails tends to go through ballooning phases as payments are made at fixed milestones in a year. <br /><br />Especially with the fact that they regularly get work from Chinese government who only pays a few times a year. It is not unusual for income to be non-cash as they'll be paid later.<br /><br />As for R&D, it doesn't cost that much to employ 3000 engineers in China. It's no surprise their R&D costs isn't as high as established company like Siemans.<br /><br />Moreover, a lot of their technology are directly transferred and obtained from government and partnerships with Japan, so they do not bear the R&D cost from scratch.<br /><br />To your point about construction costs. They're constructing a new facility. Who buys equipment and computers for a facility that's "STILL BEING BUILT"?! Only when the buildings are done do you start investing in those two categories. For manufacturers, esp those that have to build the buildings from scratch, it is not unusual to see machinery, software and equipment costs come in later.<br /><br />I think your analysis is biased.James Banktonnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-18128188315342941772011-07-26T06:06:53.529+10:002011-07-26T06:06:53.529+10:00John, how do you approach the decision to short a ...John, how do you approach the decision to short a stock such as HOLI, which can only be borrowed at an insanely high call rate?<br /><br />A couple of months ago, I took a look at the few remaining RTOs that were still trading at high enough prices to be worth shorting. Only two stocks made it through my screen: AUTC and HOLI.<br /><br />I was about 99% sure that AUTC is fraudulent, and about 70% sure that HOLI is fraudulent. But I can only borrow AUTC at a call rate of 100%, and HOLI at 50%. Even if I'm right about AUTC, I lose money if the stock takes longer than one year to delist, or if another short squeeze happens.<br /><br />Is this one of those things that you get more comfortable with after doing it several times? Or do you often find yourself sitting out juicy short targets because they were simply too expensive to short?Tomnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-18379073228157158432011-07-26T05:36:36.872+10:002011-07-26T05:36:36.872+10:00John, you wrote that, "One long investor I kn...John, you wrote that, "One long investor I know visited the plants and was shown a very impressive company. There headquarters photographed on the website - is very impressive"<br /><br />Did that long see lots of equipment? (this would easily prove/disprove whether they got stuff for free from thegovernment).<br /><br />I can't understand how I keep missing these companies--it seems like the more companies I try to analyse, the more "good" ones I seem to not get around to in time...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-45063251383104474762011-07-26T04:01:10.012+10:002011-07-26T04:01:10.012+10:00From 11-16-10 HLS International 20K: "We ass...From 11-16-10 HLS International 20K: "We assemble our products from subcomponents provided by others or we outsource the production to qualified vendors. We acquire advanced printed circuit board components from high quality suppliers. We rely on our<br />manufacturing management department to coordinate the procurement of raw materials and outsourced processing, including<br />the procurement of components and standard parts (such as cables and connectors), and outsourced processing of Polyvinyl<br />Chloride (PVC) coating, shells, and printed circuit boards. Our products are subjected to rigorous testing in our facilities prior to shipment." So I guess they would say that they don't need manufacturing equipment because they outsource it all.<br /><br />They seem to have "acquired" industry-leading technology very quickly thought. They are amazing!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-30476779184864811242011-07-26T03:57:54.002+10:002011-07-26T03:57:54.002+10:00According to the Guardian and Hong Kong media, the...According to the Guardian and Hong Kong media, there is a major cover-up underway regarding the causes of the high-speed rail crash. See <a href="http://www.guardian.co.uk/world/2011/jul/25/chinese-rail-crash-cover-up-claims" rel="nofollow">"Chinese anger over alleged cover-up of high-speed rail crash"</a><br /><br />There is no way a crash like that could occur without a major signalling system failure. A lightning strike should not take out a railroad signalling system. Railroad signal systems have been resistant to lightning strikes since the late 19th century.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-13275252006297412922011-07-26T03:55:41.065+10:002011-07-26T03:55:41.065+10:00Gotta love Yahoo Finance, who posted this story ab...Gotta love Yahoo Finance, who posted this story about your blog with the following headline:<br /><br />"Hollysys Automation should be able to beat competition, says Bronte Capital"<br /><br />http://finance.yahoo.com/news/Hollysys-Automation-able-beat-theflyonthewall-3365879510.html?x=0&.v=1<br /><br />"Bronte Capital reports that Hollysys has denied that its signalling was involved in the Chinese rail crash. The firm thinks the company offers amazing growth, amazing margins, and amazing technology."Anonymousnoreply@blogger.com