#accounting

Cut the crap

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Labor Party MP Richard Marles posted this picture to his Facebook page pointing to the threat of the 2014 budget ahead of the 2013 election. It is all on the public record to see that this is blatant rubbish. Of course, the hope is that the “stupid” voters will not bother to fact check these claims 2 days ahead of an election. CM was fascinated to see how these numbers stack up against the actual budget papers. Complete fiction.

Entire health spending in 2013-14 was $64.6bn. In the 2014-15 projection, it was $68.1bn. Up $3.5bn. How does Labor get to -$57bn? In 2018-19, health spending was $78.8bn. The budget paper notes, “The increase in expenses of 6.8 per cent in real terms from 2013-14 to 2014-15 reflects the Commonwealth’s commitment to provide additional hospital funding from 2014-15 under current agreements with the States.

Education spending was $29.75bn in 2013-14 and projected $30.39bn the following year. (+$640mn). Technically if $30bn was cut from schools there would be no budget at all. In 2018-19, education spending was $34.7bn.

Government school spending in 2013-14 was $2.8bn which leapt to $5.1bn in the 2014-15 budget. In 2018-19 it was $7.7bn.

Indigenous Affairs welfare fell by $104m in the 2014-15 budget. In 2018-19, this budget was DOUBLE the 2014-15 number at $2.1bn.

ABC spending (split into TV & Radio – refer page 6-39) went up $18mn not -$35.5mn. In 2018-19 the budget was $1.03bn. As CM has written before, the ABC is a shoddily run organisation. Staff engagement at the ABC is 46%, down 6% from the previous survey. It isn’t a money problem. It is a management problem.

On page 6-11, income support for seniors went  UP from $39.5bn to $42.1bn). In 2018-19 it was $46.8bn. Total assistance to the aged went UP from $54.98bn to $57.97bn in 2014-15. In 2018-19 that sum was $66.77bn.

Welcome to pre-election political accounting 101.

GE’s Angolan Kwanza exposure

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Sell-side analysts rarely read through the fine print of an annual report. Hidden away in the prose, one can find some pretty eye-opening paragraphs. From GE’s 2017 Annual Report,

“As of December 31, 2017, we held the U.S. dollar equivalent of $0.6 billion of cash in Angolan kwanza. As there is no liquid derivatives market for this currency, we have used Angolan kwanza to purchase $0.4 billion equivalent bonds issued by the central bank in Angola (Banco Nacional de Angola) with various maturities through 2020 to mitigate the related currency devaluation exposure risk. The bonds are denominated in Angolan kwanza as U.S. dollar equivalents, so that, upon payment of periodic interest and principal upon maturity, payment is made in Angolan kwanza, equivalent to the respective U.S. dollars at the then-current exchange rate.”

On that basis the marked to market figure is actually another $250mn hole in 2017. One wonders what the exchange rate will be in 2020? Furthermore at what level will Travelex or Thomas Cook exchange that for? It would be safe to assume the ‘bid/offer’ spread will be horrendous. GE might find it more useful to run a Nigerian mail scam to hedge the expected losses. For a company as large as GE, potentially losing $850mn should look like a rounding error unless the company is bleeding as the monster is. GE took a pretax charge of $201mn on its Venezuela operations.

We shouldn’t forget that “GE provides implicit and explicit support to GE Capital through commitments, capital contributions and operating support. As previously discussed, GE debt assumed from GE Capital in connection with the merger of GE Capital into GE was $47.1 billion and GE guaranteed $44.0 billion of GE Capital debt at December 31, 2017. See Note 23 to the consolidated financial statements for additional information about the eliminations of intercompany transactions between GE and GE Capital.

As 13D Research noted, “GE spent roughly $45 billion on share buybacks over 2015 & 2016  despite the shares trading well above today’s levels all the while ignoring the $30 billion+ shortfall in its pensions. Management disclosed in a recent analyst meeting that it would have to borrow to fund a $6 billion contribution to its pension plans next year, as well as chopping capex by 26% in 2018.

As mentioned yesterday, there are some who have faith in the sustained turnaround in medical. Indeed it has seen some top line and margin improvement but management seems more concerned with focusing on cutting costs than pushing innovation. Efficiency drives should be part and parcel of all businesses but one must hope CEO John Flannery has far bigger hopes for its market share leading product line (which GE admits facing pricing pressure in some segments) than trimming the staff canteen cookie tin.

GE remains a risky investment. Flannery has it all to prove and to date his performances have been anything but inspiring. GE feels like a business suffering from the divine franchise syndrome synonymous with former CEO Jack Welch. That dog eat dog culture seems to be biting its own tail.

 

 

China – the worse, the worst and completely awful

China industry

Is anyone paying anyone in China? Yesterday we looked at accounts receivable to revenue in industrial. In some cases companies had accounts receivable close to 500 days when normal payment cycles are 90 days or 180 days if truly generous. China’s Sinovel Wind (wind farms – my favourite 😉 hmmm) has 4.8 years equivalent receivables to revenue… yes 1,752 days before being collection! Looking at numbers globally, China held all 36 positions for industrial companies with receivables above 1 year of revenue….of course industrial companies usually sell expensive items still…1,800 days…hmmm

So do other sectors in China suffer? Short answer? Hell yeah. Xi’an Tian He Defense Tech has 5.4 years equivalent receivables or  almost 2,000 days. Shares are down 75%

service china

Even the process industry sector is awful. Shangying Global which makes plastics, plates and pipes has 3.5 years outstanding. Bad debts a risk anyone?

proicess china