The financials are clearly manipulated and valuation is exceedingly high.  Given Xi Jinping's anti-corruption drive, the recent media attention in HK about Hanergy will act as a catalyst.  Even if I am wrong and this is a legitimate business, shorting at this valuation should be profitable.

* all figures in HKD unless stated otherwise

History

The company was a listed toy manufacturer and become a solar power company in a reverse merger in 2009.  The toy business was subsequently sold.  It sells and provides equipment and systems for the production of thin film silicon solar modules including a-Si & nc-Si and CIGS turnkey solutions.

Valuation

EV/T12M sales = 64.4

EV/T12M EBITDA = 91.2

Market Cap = $283.2B

source: Bloomberg

First Solar trades at 1.27x EV/sales and 6.43x EV/EBITDA.  This isn't a typo.  Hanergy trades at EV/Sales multiple is 50.7x First Solar.

To put this into perspective, if Hanergy is in the Heng Seng index, it would rank as teh 30th largest company by market cap.  It is a hair below China Unicom and is a couple of billions higher than Bank of China.

Possile Explanation of Recent Stock Performance

* Short squeeze is possible as the problem with the financials of the business was fairly apparent as early as 2011.   The stock is up 760% since 12/31/2013.  YTD it's up 153%.  Free float is limited.  Several media reports say Hanergy Holding (the parent company, to avoid confusion i will refer it as ParentCo in the write-up) controls 73% of the float.  I can't verify this. Bloomberg has free float % around 45%

* Recent inclusion into FTSE China 50 index generates incremental demand from ETFs and index funds

Questionable Business Model

The numbers indicate a strong, high growth company with great margins.  Revenue was $2.76B and $3.27B in 2012 and 2013 respectively, and $3.2B alone in the 1H2014.  

Nonetheless, the footnote disclosed that almost 100% of revenue is from ParentCo.  I have excluded “other income and gains” from the revenue line.

The company also enters into numerous transactions as a buyer with ParentCo as the seller.  Some notable transactions are listed below.

In 2013,

·         Bought $1.9B worth of photovoltaic modules

·         Acquired CIGS IP by Solibro for $252mm.

·         Acquired the MiaSole CIGS IP for $444.5m

In 1H2014,

·         Acquired a solar PV module production line for $15.2mm USD or $120mm HKD

In summary, Hanergy buys PV assets from Parentco and derives 100% revenue from ParentCo.  I can’t help but ask why does Hanergy exist?

Where is the cash?

On a GAAP basis, Hanergy earned $3.4B in 2012-13.  Cash from operations during the same period was only $172mm.  Where is the cash?

The working capital accounts suggest that inventories, receivables, and prepayments are bleeding cash. 

Inventories was $360mm at the start of 2012  It is now at $1.53B. Receivables were $2.9B and now $6.24B.  Cumulative changes from 12/31/2011 – 6/30/2014 are $1.17B and $3.34B for inventories and receivables respectively.  

The cash flow indicates that the company has trouble collecting from ParentCo and yet pays cash promptly.  Revenue, EBITDA and net income are divorced from economic reality.  It is clear that the financials and the operations of the company is being manipulated.

Why does Hanergy exist? My Theory

Logically, Hanergy, the listed company has no reason to exist.  I believe, aside from the classic pump and dump stock scam, (this is 100% speculation, as I have no proof) that the ParentCo is using Hanergy to faciliate a bigger scam in Mainland China.

Below is a page from the investor presentation.