Soren Aandahl Short ERSO: Invest For Kids Chicago Presentation ~ market folly

Friday, November 6, 2015

Soren Aandahl Short ERSO: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Soren Aandahl of Glaucus Research who pitched short EROS.

Soren Aandahl's Invest For Kids Chicago Presentation

•    “Activist” short sellers.
•    Emerging markets focus.
•    Short EROS. The Company is a distributor of Bollywood movies.
•    Price has come down significantly (from $30), but thinks no one addressed core short thesis.
•    $0 price target for equity and debt.
•    Bull case/growth thesis is that they will leverage content library to be Netflix of India. 2015 – Said they could sell EROS Now at a $800MM valuation (10% stake). 
•    “30MM” new registered users supposedly. Higher than Savan and Hotstar, as well as YuppTV and Spuul with a couple million subs.
•    Think EROS actually has lower subs around a couple mm versus 30mm or higher. App annie, GT data, etc. point to smaller traffic as well as Google play. App activity is 90% lower than Savan and Hotstar.
•    Hotstar added 10MM users first 40 days and 43.7 app reviews. Erros claimed 13MM new subs in same time with only 203 app annie reviews.
•    Tried to back out and say the company has never claimed to be Netflix. Chairman says opposite in a CNBC review. Clip has been taken down.
•    Primary biz is to acquire and distribute Bollywood movies – and then amortized.
•    80% - 90% of Bollywood movie earned in the first few months, more aggressive than Hollywood. Only in theaters for 2/3 weeks, and then have already monetized other items due to piracy concerns.
•    Amortize movies year 1 at 40%-50% and then years 2-9 at 5%-7% versus via/other film operations at 80%-90% in year 1. Fails the matching principal.
•    Hides the cost of acquiring over later periods. Overstates operating profits.
•    EBIT margins for FY15 would go from 28% to -4% and gross margins from 45% to 16%.
•    Not a profitable biz. EROS cash flow consistently negative. Spends more money buying film rights versus FCF. Neg ev biz.
•    Will never be FCF positive.
•    Fabricating revenues, particularly overseas. Only 7% in India film industry rev generated outside of India. EROS says 39% is generated by India, 61% overseas, mainly from Dubai/UAE (37%).
•    80% of EROS gross box office movies are earning in India and 5% from Gulf States, yet this doesn’t match its revenues/UAE (37%).
•    Pulled statutory filings in Singapore/UK etc. Overseas subs not profitable.
•    You can back out India and other financials. In order for US financials to be true the biz ex India needs to have 77% gross margins and 56% EBIT margins.
•    Receivables have ballooned, DSOs global from 139 to 277, while India 95 to 135.
•    Suspicious payments to chairman’s family. 93.5MM in film rights from Netgen films owned by chairman’s sister. Only made 8 movies, combined budget 39MM and loss money. Distributor share gross (EROS) 16MM.
•    Chairman’s family are all executives.
•    2 CFO’s resigned last months, low quality auditor and off balance sheet liabilities.
•    Debt is trading at 50 cents, from par over the past 3 weeks. Only assets of value are the rights to some of the content library. Located in India, junior in Indian secured/unsecured creditors.
•    Worth $300 to $360MM.

Check out the rest of the presentations from Invest For Kids Chicago 2015.

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