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A Sydney-based analyst has come to the defence of job search platform Seek (ASX: SEK) after claiming to have found an almost $450 million hole in the calculations of a short selling attack from US-based Blue Orca Capital.
Soren Aandahl - who was behind successful short selling attacks on Quintis in 2017 and Blue Sky Alternative Investments in 2018 - has heavily criticised Seek's Chinese subsidiary Zhaopin, alleging a prevalence of fake job postings and questioning its debt position in light of high cash flows.
For now, the Blue Orca report has failed to illicit the kind of panicked investor response seen in the past with Blue Sky, WiseTech (ASX: WTC), Corporate Travel Management (ASX: CTD) and Rural Funds Group (ASX: RFF), the latter having since recouped its share price.
While the experiences of the aforementioned companies could be described as rollercoasters, that of Seek is more like a bumper car grazing the wall at low speed, falling 6 per cent since the report came out without much volatility or freefalls to speak of.
The dismissive response from investors demonstrates little appetite for shorting in a market buoyed by cheap loans as well as monetary and fiscal stimulus worldwide.
Inside the mind of Blue Orca's Soren Aandahl, the short seller targeting Seek
The situation has even reached the point where VGI Partners (ASX: VGI) - the same group that went after Corporate Travel Management in 2018 - has made drastic changes to its shorting strategy with a greater focus on stocks.
In an interview with Business News Australia, Aandahl highlighted the potential for shorting opportunities in ASX-listed companies with Chinese operations given the language barrier and an unwillingess from investors to engage in deep research in markets they don't understand.
Seek claimed the report was was "littered with inaccuracies", but the company's response that it did "not wish to engage in detail" was mocked by Blue Orca.
"Why not? Because we are right," the US group said in its rebuttal of the rebuttal.
Now Fraser McLeish, an analyst at MST Marquee, has pointed out a critical detail that was missing in Blue Orca's response.
"Blue Orca has a table showing that Zhaopin had net debt of A$221 million at June 2020," McLeish said.
"However, its debt calculation for some reason ignores A$442.8 million of cash that Zhaopin has on deposit (this is held onshore in China as security against drawn debt in a related offshore facility).
"If the drawn debt in the offshore facility is to be included in calculations, then the cash held as security in China also has to be included - you can't count one without the other!"
McLeish explained the debt structure may be complicated but what it means is that Zhaopin investors needn't physically transfer their cash out of China.
With these funds taken into account, he asserts the Chinese subsidiary actually has a net cash balance of $222 million.
"Zhaopin can continue to draw down on the offshore facility up to the US$322m limit (A$460m) as long as this is backed by additional funds in the deposit account in China," he said.
"SEK has had no issues refinancing this facility to date and we see no reason why it should be an issue going forward (as long as the funds are on deposit as security in China).
"You could argue that the funds on deposit aren't available to Zhaopin for everyday business use or for M&A (which is true), but that doesn't mean that they don't exist and should be excluded from the net debt balance (or omitted when trying to figure out Zhaopin cash generation)."
Blue Orca has questioned how Zhaopin, as a major growth driver for Seek's share price, has continued to see its cash flows rise in percentage terms for the overall business, yet has kept accumulating debt.
"In the past five years, Seek claims that Zhaopin generated AUD 400 million of free cash flow and AUD 287 million of net profits. We would expect that a growing, cash producing business would not need to borrow more and more money from the capital markets," Blue Orca said.
"Yet over that time, Zhaopin's debt increased from AUD 35 million in FY 2016 to AUD 467 million in FY 2020, an increase of AUD 432 million in five years. Inexplicably, Zhaopin's cash balance fell over that period."
In his analysis, McLeish pointed out Zhaopin's cash balance rose by $54 million from FY18 to FY20, and by $123 million ex-M&A.
Taking into account the group had to make a $49 million payment to Zhaopin dissenter shareholders in relation to the company's privatisation in October 2017, there is "nothing to see here" according to the analyst with NPAT of $97 million over two years.
"Cash flow is actually above profit since privatisation," he said.
"If you try to go back further then it gets tricky due to all the movements around privatisation in 2017, but on our high level estimates there doesn't appear anything untoward in this period either. Basically nothing to see here all as you would hope/expect."
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