china-break-trace

china-break-trace

Purpose

Conduct A-share financial verification — forensic analysis to identify potential issues in Chinese financial statements.

Data Sources

Primary: iFind MCP (Tier-1 paid) / AkShare MCP (Tier-2 free alternative)

get_financials(ticker, "income")     → Revenue, profit trends
get_financials(ticker, "balance")    → Balance sheet anomalies
get_financials(ticker, "cashflow")   → Cash flow quality

Secondary Sources

• CNINFO — filings, notes
• Audit report — auditor opinion, emphasis of matter
• Announcements — unusual transactions
• CSRC/Stock Exchange — inquiries, penalties

Workflow

Step 1: Revenue Quality Analysis

Revenue red flags:

Indicator	Check	Red Flag
Accounts receivable/Revenue	AR / Revenue	>40% or rising fast
Accounts receivable growth rate vs revenue growth rate	Growth comparison	AR growing >> Revenue
Operating cash flow/Net profit	OCF / Net Income	<0.5 or negative
Revenue recognition policy	Notes review	Aggressive recognition
Customer concentration	Top customers	>30% from one customer
Related-party transactions	Related party	High % of revenue

Revenue quality score:

Metric	Score (1-5)	Notes
OCF/NI ratio		5 = OCF >> NI
AR days		5 = low/stable
Revenue concentration		5 = diversified
Growth quality		5 = organic, recurring
Cash conversion		5 = excellent

Step 2: Profit Quality Analysis

Profit red flags:

Indicator	Check	Red Flag
Operating profit vs net profit	Operating profit vs net	Large gap
Non-recurring gains and losses	Non-recurring items	>20% of profit
Government subsidies	Government subsidies	High % of profit
Asset impairment	Impairments	Irregular timing
Investment income	Investment income	Unsustainable
Gross margin trend	Gross margin	Unexplained changes

Profit decomposition:

净利润 = 营业利润 + 营业外收支 - 所得税

分析重点:
1. 营业利润占比 (营业利润/净利润): 应>80%
2. 非经常性损益: 识别一次性项目
3. 政府补助依赖度: 补助/净利润
4. 减值损失波动: 是否平滑利润?

Step 3: Cash Flow Quality

Cash flow analysis:

Metric	Formula	Healthy	Concern
OCF/NI	OCF / Net Income	>1	<0.5
FCF	OCF - CapEx	Positive	Negative
OCF/Revenue	OCF / Revenue	>5%	<0%
Cash flow from investing activities	Investing CF	Outflows (growth)	Large inflows (asset sales?)

Cash flow quality score:

Indicator	Healthy	Warning
OCF consistently positive	✓	Negative OCF
OCF tracks NI	✓	Large divergence
CapEx sustainable	✓	CapEx >> OCF
No frequent asset sales	✓	Asset disposal income

Step 4: Balance Sheet Anomalies

Balance sheet checks:

Area	Red Flags
Monetary funds	Large cash + high debt (possible restriction)
Accounts receivable	Rapid growth, aging issues
Other receivables	Unusually large (possible tunneling)
Inventory	Rapid growth, no explanation
Construction in progress	Never completed (capitalized costs?)
Goodwill	High % of equity (>30%)
Long-term deferred expenses	Unusually large
Liabilities	Off-balance sheet items

Specific balance sheet ratios:

Ratio	Formula	Concern
Interest-bearing debt/Net assets	Interest-bearing debt / Equity	>100%
Monetary funds/Interest-bearing debt	Cash / Interest-bearing debt	<0.3
Goodwill/Net assets	Goodwill / Equity	>30%
Other receivables/Assets	Other receivables / Total assets	>5%
Inventory turnover days	Inventory days	Sudden increase

Step 5: Related Party Analysis

Related party red flags:

Indicator	Check
Related-party transaction amount	% of revenue/costs
Related-party transaction pricing	Arm's length?
Related-party receivables and payables	Balances with related parties
Fund misappropriation	Funds tied up with related parties
Guarantees	Guarantees for related parties

Common tunneling mechanisms:

• Prepayments to related parties
• Other receivables from related parties
• Fund lending without interest
• Asset sales to related parties at non-arm's length prices
• Guarantees for related party debt

Step 6: Earnings Management Detection

Earnings management indicators:

Method	Detection
Expense capitalization	CapEx unusual, D&A low
Early revenue recognition	AR rising, advances from customers falling
Delayed expense recognition	AP falling, accrued expenses low
Selective impairment provisioning	Timing of impairments
Changes in accounting policies	Policy change benefits
Changes in estimates	Reserve changes

Beneish M-Score (adapted for China):

Variable	Calculation
DSRI	Days sales in receivables change
GMI	Gross margin deterioration
AQI	Asset quality index
SGI	Sales growth index
DEPI	Depreciation index
SGAI	SG&A index
LVGI	Leverage index
TATA	Total accruals / Total assets

Step 7: Auditor & Filing Analysis

Audit report review:

Item	Review
Audit opinion	Standard / Modified / Adverse
Emphasis of matter paragraph	Any emphasis of matter?
Key audit matters	Key audit matters
Auditor change	Recent change?
Audit fees	Unusual changes?

Filing review:

• Annual report vs interim report consistency
• Notes completeness
• Segment disclosures | Related party disclosures | Commitments and contingencies

Step 8: Regulatory Signals

Regulatory red flags:

Source	Signals
Stock exchange inquiry letter	Inquiry letters
CSRC letter of concern	Regulatory attention
Administrative penalty	Fines, penalties
Stock exchange disciplinary action	Disciplinary actions
Investor litigation	Shareholder lawsuits

Common A-share Fraud Patterns

Pattern	Description	Detection
Inflated revenue	Fictitious revenue	AR anomaly, tax mismatch
Understated costs	Understate costs	Margin anomaly
De-related-partization of related-party transactions	Related party disguised	Customer/supplier analysis
Fund circulation	Round-tripping	Cash flow analysis
Asset swaps	Asset swapping	Unusual asset changes
Accounting estimate manipulation	Estimate manipulation	Reserve changes

Quality Checks

Before delivering report:

• All red flags investigated
• Evidence documented
• Severity assessed
• Conclusions supported
• Regulatory signals checked
• Report structured clearly

Data Source Mode Switch: Set env var IFIND_DATA_SOURCE_MODE to control data source preference.

• ifind-only (strict): Use iFind only, error if unavailable
• ifind-fallback (default): iFind preferred, fallback to AkShare
• akshare-only, wind-only (Wind only), wind-fallback (Wind first, fallback to iFind → AkShare): Skip iFind, use AkShare only