SHORT SELLING
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China stock market

Fullshare suspended after plunging on share manipulation allegation

PUBLISHED : Tuesday, 25 April, 2017, 1:28pm
UPDATED : Tuesday, 25 April, 2017, 11:06pm

Trading in Fullshare Holdings, a property to wind turbine component firm controlled by Nanjing businessman Ji Changqun (季昌群), whose shares rose nearly sevenfold in the 17 months to September last year, was suspended on Tuesday after plunging 10 per cent in 20 minutes on a negative research report.

The report by Glaucus Research Group California alleged that the firm’s share price has been manipulated, with consistent unusual gains in the final hour of every trading since last November.

It also alleged insiders have used the “smokescreen of a rising stock price to secretly transfer some of the company’s most valuable assets to the chairman and his family”, besides manipulation of an investee’s shares to “artificially” inflate its own reported income.

The research firm, which said it has short sold Fullshare’s shares and may gain from its share decline, claimed Fullshare is “one of the largest stock manipulation schemes trading on any exchange anywhere in the world”.

It resembles Hong Kong-listed Tech Pro Technology, Huishan Dairy and Hanergy Thin Film Power whose shares collapsed from 47 to 91 per cent within a few hours, it added.

Fullshare said in a stock exchange filing last night “[Glaucus’] report contains misleading statements and unfounded speculations” and it was preparing a response to the claims and to refute the attempt to undermine the confidence in its business and financial condition.

It also said it reserved the right to sue for damages.

This staggering difference is highly unusual ... and in our opinion, strong evidence of manupulation
Glaucus Research Group report

Glaucus said its research found that if investors bought and held onto its shares between November 14 last year to last Friday, they would have incurred a loss of 34 per cent.

But had they purchased the shares at the beginning of the last trading hour each day, sold them at the close of the trading day and reinvest the proceeds on each trading day in the period, they would have scored a return of 76 per cent.

“This staggering difference is highly unusual ... and in our opinion, strong evidence of manipulation,” the report said.

Glaucus claimed that Fullshare relied on unrealised accounting gains from the appreciation of the stock price of property developer Zall Group, which amounted to 108 per cent of Fullshare’s net profit last year.

“Almost as soon as Fullshare purchased 8.2 per cent of Zall and Zall received 4.8 per cent of Fullshare’s shares, the stock prices of both companies began to mysteriously soar,” Glaucus noted.

A similar share price pattern was found with Zall, in which investors would have made a loss of 9 per cent by adopting a buy-and-hold game plan between November 14 and last Friday, but would have reaped a 58 per cent gain had they repeated the same last-hour trading strategy in Fullshare, it added.

Fullshare last traded 12 per cent lower for the day at HK$2.52, just before trading was halted at 10.56am on Tuesday, the lowest seen since May 10 last year. It plunged 10 per cent in 20 minutes before the suspension soon after the report was released. The stock traded as high as HK$4.61 early October last year.

Zall Tuesday closed 2.4 per cent lower at HK$4.50 after falling as much as 7.6 per cent. They have gained 154 per cent in the past 12 months.

Glaucus claimed that both Fullshare and Zall have pledged their cross-shareholdings in each other to lenders for short term loans.

“This creates a highly unstable situation where banks hold two absurdly overvalued stocks as collateral,” it said. “If share prices fall ... banks could be forced to sell the shares held as collateral to secure their loans.”

In addition, Glaucus alleged that Fullshare and its subsidiary China High Speed Transmission Equipment had sold a total of HK$1.96 billion worth of assets - from properties to marine equipment and green building consultancy businesses - to firms supposedly independent but were either controlled or connected to the chairman and his brothers.

It based the allegations on relations revealed by filings lodged to State Administration for Industry & Commerce.

In some cases, the buyers were allegedly the financiers of the purchases.

Glaucus said the alleged undisclosed connected party transactions were a “complete disregard for Hong Kong’s securities law and shareholders right that render its stock “simply uninvestible,” and that its shares are worth only 68 HK cents based on its core earnings and a price-to-earnings multiple of 11.8.

The Securities and Futures Commission’s spokesman declined to comment on the case.

Ji owns 51.3 per cent of Fullshare, while China Huarong Asset Management holds a net long interest of 10.7 per cent, stock exchange disclosures showed.

Brock Silvers, managing director of Shanghai-based financial advisory firm Kaiyuan Capital, said shorting opportunities in Hong Kong-listed Chinese shares are on the rise, given the SFC’s “remains steadfastly impotent” in face of rife stock market irregularities.

Chinese listed companies “commonly display unacceptable corporate governance, up to and including outright fraud ... the ongoing [cross-border] integration of [stock] markets should provide increased shorting opportunities,” he told the Post.

But borrowing of overvalued stocks for shorting selling is not easy as they are often not widely held by public shareholders, he added.

Fullshare booked a net profit of 3.1 billion yuan last year, up from 1.22 billion yuan in 2016 as revenue rose to 4.3 billion yuan from 3.1 billion yuan.

Excluding accounting gains from fair value change in financial assets and properties, gains on subsidiaries disposals, gains from asset purchases and other non-operating income and gains or losses, pre-tax profit grew to 47.2 million yuan from 22 million yuan in 2015.

Zall’s earnings before interest, taxes, depreciation and amortisation fell from 1.54 billion yuan in 2011 to 88 million yuan last year, while interest payment surged from 63 million yuan to 621 million yuan, according to Glaucus.

It had 2.6 billion yuan of bank loans not in compliance with terms imposed by lenders, although the latter had told Zall they would not demand early repayment, its annual report said.

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