Wall Street added value(Buy Ratings)

Longtop Financial Technologies Ltd. (LFT), facing an inquiry by U.S. securities regulators over its financial reports, was sued by an investor alleging the company overstated profit margins and concealed adverse facts.

Joe Mikus, the investor, seeks to represent people who purchased shares of Longtop from June 2009 through April on claims that they lost money when the shares fell 33 percent around April 26 after reports questioned the company’s finances, according to documents filed in federal court in Los Angeles.

http://www.bloomberg.com/news/2011-05-25/longtop-financial-technologies-sued-by-investor-claiming-securities-fraud.html

With Longtop there is something clearly wrong with the accounts - but it is awful hard to determine what.

Here are the things we know:

1). It generates cash like there is no tomorrow and yet it went to the market and raised cash. It currently has cash equal to 250 quarters of capital expenditure and 26 quarters of all expenditure. By contrast Microsoft - a company with way too much cash burning a hole in its pocket (witness Skype) has cash equal to about 13 months of all expenditure. The company is - on the accounts - absurdly cash rich.

2). The last time I saw a set of accounts like it was CCME which had cash on hand of $170 million and quarterly capital expenditure of about 200 thousand. Obviously the cash was fake there.

3). The company claims a margin at the very top of software companies globally which indicates that it does something proprietary. Proprietary stuff requires protection - you would expect to pay the staff well, have retention processes to keep them from going anywhere, have racks of servers and different computer systems to test/develop your software on protect your product from being stolen. You would have some capital expenditure per incremental staff member.

4). The company claims almost no incremental capital expenditure per staff member. The last nine months are showing capital equipment equal to about a laptop per individual staff member (if that). Previous years have shown incremental capex per incremental staff member of 1500 dollars or so. This is too low a level of capital expenditure per staff member to be doing genuinely proprietary stuff. (Just think how you would be running a business growing that fast doing proprietary stuff based on the intellectual property of your staff. Actually you probably do run a business that looks like that... and the numbers are quite different from Longtop.)

5). It's possible to have very low incremental capital per staff member if you work like the computer outsource houses of the pre-internet era (the so called "body shops"). In the 1980s a staff member would turn up for a few days and hot-desk at the office whilst getting ready for their next assignment (say to a bank to work on their computer system). Then they would go out for a year working on the bank's computers and with the bank's air-conditioning, desks, carpet, vehicles etc. This requires almost no incremental capex per staff member. However it is a 10 percent margin business.

6). Conclusion: either the capex number is wrong or the margin is wrong (or both). I do not know which though. Its the morphology of sin problem.

http://brontecapital.blogspot.com/2011/05/longtop-financial-lessons-in-morphology.html

Note that equipment and fixtures rose from $9.65 million to $13.02 million - an increase of 3.37 million. In that time the staff numbers went from 2602 to 4258 - an increase of 1656 employees (63 percent growth).

I want to observe something: the equipment and fixtures - before depreciation - rose by only two thousand dollars per employee.

Lets spell this out: this is a world beating software development firm with world-class economics and enormously fat margins. By its own admission it is critically dependent on the research and development done by its staff. And the incremental capital spend per new staff member would buy good desktop computer and a cheap desk and chair. Given things like power protection, backup servers etc are included in this additional fittings and equipment ($2000 per incremental employee) we can safely conclude that the new employees are treated skint. Very skint.

http://brontecapital.blogspot.com/2011/05/more-comment-on-longtops-capital.html

The fraud at Longtop Financial Technologies, a Chinese financial software company, was exposed this week in an amazing letter from its auditors, Deloitte Touche Tohmatsu. It appears to be a tale of corrupt bankers and their threats to auditors who had learned of the lies.

Deloitte, which had given clean audit opinions to Longtop for six consecutive years, apparently was well on its way to providing a seventh, for the fiscal year that ended March 31. But for some reason — Deloitte did not say why —the auditor went back to Longtop’s banks last week to again seek confirmation of cash balances.

It appears Deloitte sought confirmations from bank headquarters, rather than the local branches that had previously verified that Longtop’s cash really was on deposit. And that set off panic at the software firm.

“Within hours” of beginning the new round of confirmations on May 17, the confirmation process was stopped, Deloitte stated in its letter of resignation, the result of “intervention by the company’s officials including the chief operating officer, the confirmation process was stopped.”

A few days later, Deloitte said, Longtop’s chairman, Jia Xiao Gong, told a Deloitte partner that there was “fake cash recorded on the books” because there had been “fake revenue in the past.”

The stock has not traded since that confrontation. The final trade on the New York Stock Exchange was for $18.93, a price that valued the company at $1.1 billion. At its peak in November, it had a market capitalization of $2.4 billion.

http://www.nytimes.com/2011/05/27/business/27norris.html

So the question is when Wall Street puts out Buy Ratings what do they actually look at?

Why stop at a mere six posts to start a thread that has absolutely nothing to do with NY residential real estate?

Isn't your goal to outdo yourself at every opportunity?