Sunday, 28 February 2016

Research reports: conflict of interest?

Interesting article in The Star: "Cautionary tale of research reports".

Some snippets and some comments by me:

The US$100,000 fine slapped on a former Deutsche Bank analyst for issuing a positive research report on a company when he actually had negative views on it is a stark reminder of why financial opinions should be taken with a pinch of salt.

More information can be found here. It paints a good picture of the often conflicted position for researchers. In this case the researcher wanted to help hedge funds (the best paying clients), but also stay loyal to the company he was writing about. The least served where the "normal" clients of the broker.

In Malaysia, of late, there have been some research reports that are conspicuously “lacking” in terms of material for proper analysis that it makes one wonder if the analysts who had crafted the reports really believe in the financial opinion stated.

The projections and assumptions used in arriving at earnings are long term in nature which makes it hard to justify a research report on the company in the first place. It could have been done when the assumptions had a higher degree of materialising.

The reports are particularly on small-cap stocks that do not have a track record.

For instance, a leading bank-backed research unit recently devoted 20 pages to a small-cap construction company.

The assumptions used in arriving at the profit projections were simply outrageous, to put it mildly.

And the basis of arriving at the profit numbers of the construction company was largely due to its connection with external parties that may pave the way for it to land some large construction jobs.

There was little devoted to the fundamentals of the company itself, its track record in carrying out large jobs and what happens if the “connections” do not pay off.

No names are mentioned in the article of The Star, but a friendly tip pointed at the possibility that this relates to the research report by CIMB on Instacom Group.

In the research report there are sentences like:

  • Unleashing the giant
  • Asset injection of Neata group to transform sleepy telco tower builder Instacom into construction giant Vivocom
  • Explosive two-year EPS CAGR of 456%
  • Undiscovered with massive re-rating potential
  • The untold story of an emerging construction giant
  • Strong orderbook pipeline underpins earnings visibility
  • Extraodinary growth outlook with sector-beating margin

The word "giant" is mentioned a whopping 14 times in the article. Will the company really become one? Time will tell, but buyers beware, best is not to rely on outside research and do one's own homework.

At the very least the reader should note that the share price has already risen quite a bit over the last few months before the above report was published. That alone should be of some concern.


  1. Nigel Foo and Marcus Chan are the "star" analysts of CIMB

  2. FT article is behind a paywall - do you have another link? Plus also for the Star article. Cheers

    1. The link of The Star works with me.

      The link of FT works also with me, but I had similar problems when other people send me links. Here is one of Reuters, they are normally ok:

    2. Thanks, I don't see the article about CIMB

  3. In its initiation report, CIMB said that Vivocom has RM2b outstanding order book.

    However, if we look at Vivocom's announcement on 5 Feb 2016, the group has outstanding order book of RM247mn as of 28 September 2015, plus RM616m of new contracts it has won subsequently.

    Therefore, the outstanding order book should be less than RM863m as some revenue from the outstanding order book has been recognised since September 2015.

    How CIMB got RM2b?