Man Wah sinks after short seller Block targets shares

HONG KONG: Shares of Man Wah Holdings Ltd sank in Hong Kong after short seller Muddy Waters questioned the firm’s profitability.

The stock fell 10% before trading was suspended, in its biggest twoday retreat since 2011. The sofa maker has inconsistencies in its taxes and undisclosed debt, Muddy Waters founder Carson Block said at the Sohn Conference in Hong Kong yesterday, citing it as evidence of fraud. He estimated that debt is at least 48% higher than disclosed.

Short interest in the stock accounts for about 2.9% of the free float, according to the latest data compiled by IHS Markit Ltd. Man Wah declined to comment on the allegations and is preparing a statement, according to an external media representative.

Short sellers have recently stepped up their scrutiny of companies in Hong Kong. Before yesterday’s conference, bearish researchers tracked by Activist Insight had already started at least 18 campaigns against companies headquartered or listed in the city during the past 12 months, the most since their records began in 2012.

Other shares rose on relief that Block hadn’t made them targets. Tongda Group Holdings Ltd climbed 12%, hitting its session high as Block spoke, and Sunny Optical Technology Group Co advanced 3.3%. Both stocks had retreated with Man Wah on Tuesday.

This is by no means the first Hong Kong target for Block, who is based in San Francisco. Shares of China Huishan Dairy Holdings Co have been frozen since they tumbled 85% on March 24, just months after Muddy Waters said the company was worth “close to zero”. Another success was Chinese timber company Superb Summit International Group Ltd, which Block targeted in 2014.

Block told Bloomberg TV on Tuesday that “a number” of companies listed in the city are committing fraud or tinkering with their shares. Hong Kong shares can be manipulated because of their low free-float requirements, he said, which also makes it a challenging market to short. Huishan Dairy had been one of the most stable stocks in Hong Kong before its sudden collapse.

Short sellers borrow and sell shares with the aim of acquiring them later at a lower price.

While most shorting is done by institutional investors to hedge or protect their investments, activist research companies find targets that they allege have dodgy accounting practices, spread the word and – if all goes to plan – watch the stock tumble. – Bloomberg