Chi­nese groups’ habit of halt­ing trades fails to deter short sell­ers

Financial Times USA - - MARKETS & I NVESTING - Jen­nifer Hughes

Heard about the Hong Kong-listed Chi­nese com­pany al­leged to have smoothed its earn­ings us­ing a host of con­nected groups, or the chair­man ac­cused of tak­ing mil­lions out of a com­pany? Those are just two of the ac­cu­sa­tions lev­elled in re­cent months by short sell­ers against com­pa­nies listed in Hong Kong. The flurry of claims by funds that profit from fall­ing share prices is rais­ing con­cern over whether this is the be­gin­ning of a wave of short at­tacks on Chi­nese groups.

The his­tory of short sell­ers tar­get­ing Chi­nese com­pa­nies is a rel­a­tively long one. A first wave in 2011 made house­hold names of Citron Re­search and Muddy Wa­ters, among oth­ers. Their ac­cu­sa­tions trig­gered spec­tac­u­lar share price col­lapses for two Chi­nese com­pa­nies: Long­top, a soft­ware provider, and Sino-For­est, a forestry group.

Tak­ing aim at Chi­nese com­pa­nies listed in Hong Kong is not new, but the tar­gets are get­ting big­ger.

Huis­han Dairy has been the most head­line-grab­bing. Muddy Wa­ters, a US short seller, in De­cem­ber ques­tioned the group’s re­ported profits and high debt load. In March, a day after a cred­i­tor meeting to dis­cuss missed in­ter­est pay­ments, its shares plunged 90 per cent in less than an hour.

The same month that Huis­han shares tum­bled, Hongqiao Alu­minium, the world’s largest pro­ducer of the metal, was the sub­ject of a re­port by Emer­son An­a­lyt­ics that claimed Hongqiao had un­der-re­ported its costs and over-re­ported its cash po­si­tion. The com­pany said the al­le­ga­tions were “un­true and un­founded”. Since then Hongqiao has de­layed pub­lish­ing its ac­counts, sus­pended trad­ing in its shares and changed au­di­tor.

The big­gest group to face scru­tiny is AAC Tech­nolo­gies, an au­dio spe­cial­ist worth $13bn that sup­plies to Ap­ple. An­other short seller, Gotham City Re­search, last week asked how AAC achieved bet­ter mar­gins and smoother earn­ings than its big cus­tomer. Yes­ter­day it pub­lished a fol­low-up. AAC, which de­scribed the re­port by Gotham as “in­ac­cu­rate and mis­lead­ing,” sus­pended its shares on the same day after they fell 10 per cent.

Gotham is fa­mous for its at­tacks on Euro­pean com­pa­nies, in­clud­ing ex­pos­ing fraud at Gowex, the Span­ish WiFi provider that sub­se­quently de­clared bank­ruptcy. AAC is its first tar­get in Asia, but Gotham’s founder says this is not about China.

“We’re not after China and I want to be clear about that. In fact, I would say that we are in­clined to be bullish China and bear­ish AAC, over the long term. That does not mean that China’s economy will go straight up, nor that AAC’s stock will go straight down,” says founder Daniel Yu, who ob­jects to his re­search be­ing de­scribed as an “at­tack”.

“I don’t see what we do as at­tacks, I see what we find com­pa­nies do­ing as an at­tack on the truth of mar­kets.”

Hong Kong has, how­ever, proved tricky ter­ri­tory for short sell­ers. They must deal with com­pa­nies’ habit of sus­pend­ing their shares in the wake of at­tacks — as all of the above did. Those with short po­si­tions then risk be­ing trapped and un­able to take profits.

“Hong Kong does seem to be a mar­ket that needs attention and that’s what we’re look­ing for,” says Dan David, co­founder of GeoIn­vest­ing. “But it is a dif­fi­cult mar­ket in that it’s a bit­ter fight for sure.”

A mar­ket rally in Hong Kong this year has also lifted most stocks, pro­vid­ing a bet­ter level from which to bor­row shares and sell short. The city’s blue-chip Hang Seng is up 14 per cent this year, out­per­form­ing most ma­jor bourses.

The wave of at­tacks has also come as Hong Kong is de­bat­ing how best to man­age its mar­kets fol­low­ing a se­ries of stocks en­joy­ing stun­ning ral­lies and sud­den col­lapses such as Han­ergy’s in 2015, where a five­fold rally over one year was fol­lowed by a near-halv­ing in half an hour.

The Hong Kong Se­cu­ri­ties and Fu­tures Com­mis­sion is re­view­ing the list­ings process. Of­fi­cials, mean­while, say in­vestors should put the dra­mas in perspective.

“In a mar­ket there are go­ing to be head­line cases — frauds and the like. But we shouldn’t get it out of pro­por­tion — we’re talk­ing about a very small num­ber of com­pa­nies and mar­ket cap,” said a se­nior of­fi­cial.

But if the head­lines keep com­ing, that perspective will get harder to main­tain.

‘I see what we find com­pa­nies do­ing as an at­tack on the truth of mar­ket’

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