Dahua's 'Profits' Investigated

At this point they are not making money on currency but betting that they will make money on currency in the future.

While they might be right (and might be wrong) they are a CCTV company and not a securities trading company. They should present profits from what they do and if they don't, in the long run they will have no profit at all.

Other companies that have a large load of cash, open a "group" and create other companies that invest in real-estate or the stock market but in these cases the profits or loses are attributed to these daughter companies and not cloud the earnings of sister companies.

2015 Q1, imo, was a "Big Bath", meaning that the Dahua management purposefully made this quarter look bad so that when the next year-to-year quarter performance resumes "normal", investors will see a big jump and award the company with higher stock price.

Except that none of the usual motives or even suspects of a Big Bathing are in view here.

If this were indeed a Big Bath, then we would imagine that the earnings were substantially higher, but intentionally reported lower. But the higher the real earnings were, the less reason for the bath. Consider if the real earnings were at 180M, is it a really a better strategy to unhinge investors and to erode confidence in future earnings reporting by reporting an abnormally low number?

Why not just smooth by fudging up a little? And then take the Bath when you really need it, with a much larger hit, so more dirt can be swept under the rug in one pass?

...the Dahua Management purposefully made this quarter look bad.

Of course, a common reason for the Bath is management trashes a bad period, and makes it worse because they are out of the bonus money anyway for that period. Or a incoming CEO bathes the outgoing CEO's last quarter to make his rookie year look better.

This selfish gain comes at the expense of investors and the long term share price which will be adversely affected by the perceived volatility, even after the presumptive "good" quarter reinstates the earnings.

But in the case of Dahua, we have an owner/founder/president who owns ~50% of the stock. No such explanations are likely when management are principals because the net effect is likely negative in such cases.

3, feedback from our expert:

I'm not sure exactly what numbers he/she is looking at. According to WIND, the Chinese version of Bloomberg, which you can see in the spreadsheet I have attached and highlighted with a green cell shading, non-operating revenue was 161m RMB and non-operating expenses were 3.3 million. There is not a specific financial line item for non-operating profit so I calculated that based upon non-operating revenue minus non-operating expenses. The non-operating and operating profit do NOT add perfectly to total profit but that is actually expected. Operating income (highlighted in blue) is listed at 87million; nonoperating income is listed as 161m RMB. Together those two items sum to 248m RMB. Net profit (highlighted in yellow) in Q1 is listed as 214m RMB for a difference of only 14%. Given expected charges to net profit such as taxes and related items, this difference is close enough to be reasonable. The reason I mention this is to highlight that official stated operating profit and my calculation of non-operating profit reconcile rather closely to the official net profit amount.

As for your 'Big Bath' response, his feedback:

This is absolutely most likely what happened. I would note however a couple of things. First, this is relatively common practice the world over with significant gray area. Managers will rush to count revenue or hold off writes offs until there is a bad quarter or year. I almost take this as a given. Second, I think as an outsider we put ourselves on very slippery slope unless we have lots of better information and can provide hard information to start building "shadow" financials. The gentleman/lady writing this is likely correct about how they time shifted certain items. For many reasons though, I think we are on a slippery footing unless we decide to do a comprehensive rebuttal AND how this would materially impact results. By that I mean, let me use a simple example. Taking their Q1 numbers, let's assume the profit should be 125m RMB in Q1 2015 and 175m Q1 2016. That is 6m RMB less than their total numbers and the profits are shifted a little between time but does that materially impact the numbers? Third, most investors build this type of behavior into their thinking. They know this happens, they know it is very hard for them to tell the difference, or stop it, just they just build it into their thinking. The sun rises in the east, politicians lie, and CFO's shift costs and revenue to make themselves look good. In short, the commenter is probably right. In fact, if this is the biggest accounting problem this company has then count yourselves lucky. However, it would be exceedingly difficult to produce better numbers as an outsider and investors know this and treat companies accordingly.