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    EY refusing to sign off on Q4 2019 results; Q1 2020 results tomorrow. Wow. Just wow. This should be interesting to listen in on.

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      Hm, nothing much happened.

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      Bitcoin mining is the definition of a zero-moat business. It’s a race to the bottom based on who can get the lowest electricity fees and newest ASIC chips. That being said, I believe this analysis is a bit shallow. It’s not just as simple as “No way anybody can compete with Nvidia”. ASICs are by definition specialized chips not usable for general purpose computing, and therefore there’s a lot of value in targeting niche markets like crypto mining that big players like NVDA will not do.

      CAN doesn’t seem like the best positioned to dominate the crypto mining market, and overall is in an undesirable position. Net income is atrocious at -$1B TTM. Still though, market cap isn’t insane, could very well be targeted for takeover…

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        Updated report here: https://www.mca-mathematik.com/ey-wirecard-finance/

        The KPMG report and other information suggest that EY may have been repeatedly deceived by Wirecard when preparing past audit opinions. Internal chats among Wirecard finance employees seem to imply that EY Munich influenced another EY office as a favour for senior management in Munich. This situation is detrimental for all stakeholders in Wirecard.

        Given KPMG’s findings, and with this knowledge, can EY still stand by its previous audit opinions and Wirecard’s accounting treatment? We believe it is essential EY reviews its prior audits and takes account of the KPMG report and the other information now available to ensure a sufficiently rigorous process when handling the current audit.

        Throughout the KPMG report, it’s clear that KPMG’s forensic opinion often differs from that of EY, Wirecard’s group auditor. Most notably, as we highlighted in our last article, EY’s acceptance of Edo Kurniawan’s accounting opinion for treating escrow accounts as cash, written and sent just days before the 2016 audit was signed, raises concerns about the amount of time EY had to perform robust and independent analysis of this and other key accounting issues.

        As a second example, how were EY happy to allow Wirecard to report TPA revenue on a gross basis when Wirecard had no access to merchant records or KYC? It is risible that hundreds of millions of euros of revenue were booked and “audited” based solely on the presentation of quarterly excel spreadsheets from TPA partners.

        To be fair, EY’s lack of insight into the situation does not look like their fault. Communications within the Wirecard finance team in 2016 and 2017 make for astonishing reading. It’s clear that there’s little respect for EY. Executives in the finance team gloat while making derogatory comments related to how they can get EY to do whatever they want. Was EY aware of how they were viewed, or more likely, were they simply lied to?

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          I am not surprised at all. Shopify’s EV/Sales averaged around high single to low teens until 2018 and now is at a whopping 40+ times. While the company gets around 60% of its gross profit from subscriptions and related services, the subscribers at the end of the day are SMB businesses that often sell highly discretionary merchandise and not consumables/basic food items. Clearly, the havoc that is playing in the SMB space is going to impact the company in terms of fewer subscribers over the medium term and fewer transactions over the near term. Finally, Square a close competitor is trading at mid single digit ev/sales. Why would I want to pay a multiple that over 8 times that of Square?

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            Big difference though: Square is payments processor for physical retail, while Shopify owns online shopping market. While the valuation does seem a tad high, I can see the investor rationale for it.

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            This company has never turned a profit! Can someone explain how these pharma companies never seem to die?

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              Very interesting interview with Carson Block (founder of Muddy Waters) where he discusses this short position, among other things.

              On the possibility of the stock price going upwards:

              Now, why didn’t the stock continue to go down? If you look at most of the page one holders, and this goes back to what I was saying earlier. I think they felt that the report was correct. They just felt it didn’t matter. You’ll have these large, sophisticated hedge funds say, “Yeah. It’s a fraud. It’s a big fraud. But whatever. We should still own it.”

              So these are decisions that are made by large allocators on a macro basis. “We’re going to be X percent US, Y percent Europe, Z percent China.” Ok, so now they’ve got Z amount of money going into China. Well, “we need things that are large and liquid.” So that crosses off a lot of names. “We don’t want to be in state-owned enterprises.” So that crosses off even more names. Ok, “What are we left with?” You’re left with a handful of companies that are just going to, no matter how problematic those companies are, I shouldn’t say no matter how problematic they are, but absent a showing of enormous problems, I guess, they’re going to continue to receive capital flows, at least in the environment that we had been in where central banks are just globally trying to force up asset prices as their economic playbook.

              So the question really becomes, “Do investors think it matters?” That’s what we’re trying to figure out. Even outside of the world of China fraud, this is a question that we have to constantly answer. Because when we look at our bread and butter type of shorts, highly misleading accounting, etc. The bar has gotten higher each year because investors are just more and more unconcerned, just more and more oblivious, or deliberately oblivious to, risk.

              On investment banks participating in coverups:

              What’s their role? Years ago, right after we published Sino-Forest, I spoke with the credit analyst at one of Sino-Forest’s investment bankers. This analyst told me, “I figured out that Sino-Forest was a fraud over a year ago. I went to my boss, and I said that.” And my boss said, “Listen, you just be quiet. You don’t have to cover the company.” But, that’s it.

              On the failure of the big 4 audit firms:

              Every year, every one of the big four will have a major blowup. And yet everybody thinks the big four brand means something. Every time we short a company, especially if we say it’s a fraud, I just see all of the responses on Twitter. And it’s all “Oh, but it’s audited by so and so.” Like, come on man. So and so last year had three major audit failures.

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                Word on the street is that there’s about 30% topline fraud tolerance from the CCP. So yeah these are legitimately very large companies with thousands of employees providing a real service. They fudge their numbers some and the government turns a blind eye as long as its not too egregious. See also this thread where sell side Chinese analysts are, shall we say, strongly discouraged from giving sell recommendations to domestic firms.

                Will be very interesting to see how this dynamic plays out over the next few years…

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                Not that I disagree with the “all Chinese companies are frauds” news that’s been coming out recently, but not sure this is a home run here. Quarterly reports are unaudited so there won’t be audited financials until next year, which is a long time away. In the meantime, what’s gonna happen if they just admit no wrongdoing? Bit scary shorting large Chinese companies as you know you’re fighting against the government, who can prop up companies ad infimum.