‘Smell test’ a must for dodgy companies
Goldin’s boss, Pan Sutong, is a smooth talker and bedazzled both financial analysts and journalists with his grand visions often lubricated with fine wine; Li Hejun, the ‘lively’ boss of Hanergy, is the sort of fellow who emits flashing warning signs at every turn
One of the most simple and reliable tools for business and investment is the smell test. It hardly requires fancy business school studies; indeed it may be more easily applied without this encumbrance. The test simply involves looking at an issue and judging whether it smells right.
Some people might describe this as the exercise of commonsense but out here on the business pages and indeed in the wider world of business we like to convey a professional impression by employing ‘advanced terminology’ for old concepts.
The past week has provided some stellar opportunities for application of the smell test.
It was a week in which the Hong Kong-listed but Mainland controlled Goldin Group saw its shares loose some 40 per cent of their value in a single day. What was it about a company that has a portfolio combining horse breeding, wine, finance and property that could possibly have passed an even mildly applied smell test?
Goldin’s boss, Pan Sutong, is a smooth talker and bedazzled both financial analysts and journalists with his grand visions often lubricated with fine wine; maybe the latter distorted their perspective.
There were no fine vintages to be quaffed at Hanergy Thin Film but it experienced a share price plunge of rather larger proportions. Even if all was well over at the HQ of this solar energy-related glass maker which smell test would not have spotted the problems of a company reporting profits more than five times higher than its sales?
As the share price had soared by 3,000 per cent over a 3-year period, it was not difficult to predict where things were heading.
Li Hejun, the ‘lively’ boss of Hanergy, is the sort of fellow who emits flashing warning signs at every turn. One moment he boasts of a fantastic scheme for opening goodness knows how many retail outlets and then he talks of deals, deals and more deals.
Meanwhile he is running a business that mainly sells products to his own companies, is busying taking out loans using his shares as collateral and now we know he was even busier shorting his own company’s shares.
It’s hardly the case that this sort of behaviour is unprecedented; for example, even someone with cursory knowledge of the Enron debacle will have spotted similarities with the situation at Hanergy.
Yet surprisingly little was said about the dangers of this high profile company even though last month analysts at Citi got round to declaring that the business was not viable.
Nonetheless there are always investors who get mesmerized by a rapidly rising share price and think that history is just for wimps. They really believe that a graph showing stellar stock price gains is all you need to know; indeed this is their version of the smell test.
In my experience however the real smell test can be deployed in all spheres of business. During the time, not that long ago, when the words ‘dotcom’ attached to a business name did wonders for a company’s credibility, I have to admit to running a business with precisely this appendage.
And I cannot deny that it did wonders for our credibility to the extent that at one stage a group of people wandered into our office offering to buy it without performing a scintilla of due diligence- whether they actually had the money we never found out because they seemed so flaky that it was hard to take them seriously.
There were many occasions when I bustled along to meetings with my co-director for discussions with other companies brandishing their dotcom credentials with equal enthusiasm. It meant that the smell test was constantly in play.
My most vivid recollection is of going to meet a company official in some fancy offices over in Admiralty where we were regaled for what felt like hours, but probably was not, by an executive-type person telling us what we should be doing, although she knew more or less nothing about our company and most certainly did not pause to ask.
We were also bombarded with more bits of jargon than it has ever been my displeasure to encounter in a single session. Needless to say I have completely forgotten the original purpose of the visit but vividly recall staggering out of the office and collapsing with laughter after my partner made the only comment possible in these circumstances, ‘Christ’, she said there’s only one word for that company, ‘it stinks’.
It may be argued that reliance on first impressions for exercising the smell test is unduly hasty or maybe arrogant.
However application of the test requires a modicum of experience and an ability to detect the kind of warning signals that tend to present themselves with alacrity. Flow charts and the like are rather less use on these occasions.
Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster
