Short shrift for Chinese firms
Eric Ng and George Chen
For mainland businesses seeking to raise capital on overseas stock exchanges, it's increasingly become a case of 'seller beware'.
Chinese companies tapping markets from Hong Kong to Canada to the US are getting stung more and more by short sellers brandishing accusations of suspicious accounting and weak governance.
Short sellers typically make their money by borrowing stock in the hope of repaying it when the stock price falls, thus pocketing the difference. Their reports frequently knock down the stock price of the targeted company, leaving the target little recourse but to deny the accusations. Because such reports fall outside a regulator's purview, the authorities can offer little help unless they suspect market manipulation. And legal avenues may be daunting for companies to pursue.
Just last week, Andrew Left of US short-seller Citron Research targeted Evergrande Real Estate, the second-largest mainland property developer by sales. In a 57-page report, Left accused Evergrande of accounting misstatements and claimed the developer was insolvent.
Hong Kong-listed Evergrande rejected the accusations and says it filed a report with the Hong Kong police's Commercial Crime Bureau. The police declined to comment.
Other Chinese companies have been singled out by short sellers - including Muddy Waters' Carson Block and Bronte Capital's John Hempton in Australia - causing more than US$21 billion of market capitalisation to be wiped off those stocks in recent years, according to Reuters data last year.
The ones that made the biggest headlines include China MediaExpress, a provider of bus advertising, Focus Media Holding, which makes outdoor electronic display ads, and software maker Longtop Financial Technologies, all three listed in the US. Canada-listed forestry firm Sino-Forest has also attracted attention.
While these short sellers have identified themselves and put their reputations - and personal security - on the line, other groups such as Alfredlittle.com and Anonymous Analytics have published allegations of accounting and other shenanigans at mainland firms without naming the author.
On its website, Alfredlittle.com said its reports were solely the opinions of 'Mr Carnes', adding that he and his associates might benefit by trading securities of firms mentioned in the reports.
The situation at Anonymous Analytics is murkier. On its website, the group claims to be a corporate offshoot of Anonymous, which is a loose group of computer hackers who contend their work exposes malfeasance and promotes political transparency.
In e-mailed replies to the South China Morning Post in late May, an unidentified spokesman for Anonymous Analytics said the group's blog was not run by short sellers.
'We are an organic movement with no specific mission statement, we aren't short sellers nor do we profit from a fall in share prices,' the e-mail said. 'But that aside, we have no problem' generally with people making money from 'uncovering and exposing companies with questionable business practices'.
The group has published reports on Hong Kong-listed vegetable producer Chaoda Modern Agriculture and Huabao International, a Hong Kong-listed maker of fragrances and flavourings, alleging that both companies overstated their respective production and profits. Chaoda did not comment on the report; Huabao denied it inflated its earnings.
Contrary to Anonymous Analytics' stance that it doesn't short sell, a spokesman for the group said last October that some of its members shorted Chaoda shares before publishing a report on the vegetable company in September. The spokesman maintained that the money made was just to cover expenses involved in producing the group's research.
Some members of the investment community believe research by short sellers and bloggers provides valuable information that is lacking in reports offered by stock brokerages. The controversial reports have led to auditors resigning, trading halts in shares of targeted companies and delistings. Regulatory investigations have sometimes backed up the allegations. For instance, the Ontario Securities Commission has charged Sino-Forest, which was delisted from the Toronto Stock Exchange, and some of its former executives with fraud involving the company's Hong Kong-listed unit, Greenheart Group. A hearing is set for next week.
Critics, however, liken the short sellers to stock-market gangsters, who get a kick out of the attention their reports get.
Listed companies usually deny the allegations, but in many cases the reports weigh on their stock price for weeks or months.
So far, few listed firms have taken legal action against the short sellers or bloggers, either because they are difficult to pursue, or because it may not be worth the effort.
'In the US, the First Amendment to the Constitution protects journalism, freedom of speech, which lawyers say can also cover those independent research results,' an asset manager at a US investment bank said. 'Once you are in court, it's a long process and you need to explain everything, and perhaps you do have something that you don't want to tell your investors.'
According to one informed source, Focus Media chief executive Jason Jiang Nanchun seriously discussed suing Muddy Waters with lawyers, but eventually gave up, calculating that the chance of winning was slim. Focus Media, listed on the Nasdaq in New York, did not reply to an e-mail seeking comment.
As for companies listed on the Hong Kong stock exchange who find themselves in the short sellers' crosshairs, listing authorities offered some advice. 'When faced with rumour or speculation in the market, listed firms' directors should promptly and carefully assess whether a disclosure obligation arises,' Mark Dickens, HKEx's head of listing, said. 'While they are not expected to respond to all market comments, if any comment has, or is likely to have an effect on the firms' share prices, such that there may be a potentially false market, they should make a clarification announcement or request a trading halt pending the clarification.'
The amount, in Hong Kong dollars, that was wiped off the value of Evergrande in two days of trading after Citron's report