Short-sellers take aim... and maul Hong Kong-listed Man Wah Holdings and Dali Foods Group
Furniture maker Man Wah Holdings and Dali Foods Group plunge in Hong Kong trade after bearish research firms names the companies as short-selling targets
Hong Kong-listed stocks Man Wah Holdings and Dali Foods Group were named as short-selling targets by two influential research firms on Wednesday, sending their shares tumbling in afternoon trade.
Furniture maker Man Wah’s shares plunged 10 per cent to HK$6.03 before they were suspended from trade after Muddy Waters Research LLC, one of the most prominent short sellers in the global financial markets, put out a note predicting a decline in the company’s stock price.
Man Wah, founded in 1992, has 48 per cent more debt than it had disclosed, Muddy Waters’ founder Carson Block said during the Sohn Conference in Hong Kong.
Short interest on Man Wah’s shares, which closed 8.6 per cent lower on Tuesday, rose to a three-year high of 2.9 per cent of its free float, according to Bloomberg data.
The stock, trading at HK$7.01 before Block announced his findings, plunged as much as 15.4 per cent within minutes of the short-seller revealing its latest target.
Man Wah is estimated to generate more than half of its net income through Macau, according to Block who also raised questions over its tax inconsistencies, exports data and sales growth in China.
He cast doubt on the company’s ability to transfer so much of its profit to Macau, and said the purpose of the operation there is “probably to facilitate fraud”.
“But look, I can take you back to the balance sheet and undisclosed debt....that tells me everything you need to know about the company and say that it’s a fraud,” Block said.
Man Wah makes and sells mattresses and reclining sofas, exporting its products to North America, Europe and China. Its net profit jumped 31.9 per cent to HK$1.75 billion (US$224.5 million) for the year ended March 31, with a 6.2 per cent increase in sales to HK$7.8 billion.
A spokeswoman for Man Wah said the company is looking into the claims made by Muddy Waters and may issue a statement.
Another short-seller, Daniel David, chief investment officer at F.G. Alpha Management, and co-founder of GeoInvesting, revealed a position in Dali Foods Group during a presentation at the Sohn Conference.
Dali has a number of “red flags” including “unbelievably” low operating expenses, questionable cash balances and reported capex spending, he said.
Dali shares plunged 6.52 per cent to close at HK$4.30.
Dali, which went public in 2015, has an extensive product line from pastries to herbal tea. The company reported 2016 net profit of 3.14 billion yuan (US$456.3 million), up 7.7 per cent on year. Revenue was 17.84 billion yuan, up 5.8 per cent on year.
Fan Peng, investor relations manager at Dali, said the company needs more information on the allegations and may release a statement.
Short-sellers such as Muddy Waters take short positions on their targets by borrowing shares in the hope of buying them back at a lower price, profiting from the decline of the shares. They typically release damning research or scandalous revelations to nudge the stock prices of their targets into steep declines.
Block’s last target China Huishan Dairy plunged as much as 91 per cent on March 24, four months after Muddy Waters accused the firm of inflating expenditure on its dairy farms by as much as 1.6 billion yuan, and that the company’s business was “worth close to zero”.
In the report released in December last year, Muddy Waters alleged China’s biggest operator of dairy farms was a “fraud” and since 2014, Huishan fabricated profits and its chairman Yang Kai had stolen at least 150 million yuan worth of assets from the company. Huishan denied the allegations, saying they were groundless.
However, the Shenyang-based dairy farm operator has since lost all of its board of directors and Ge Kun, who managed the company’s treasury, human resources and cash operations, has been missing since March. The cash-strapped firm is also facing a number of lawsuits on the mainland from its lenders.
On June 5, Huishan said in a stock exchange filing that it found a 2.5 billion yuan discrepancy in its cash position based on “incomplete” management accounts and confirmation received from banks. It also said it was in talks with its creditors over a possible debt restructuring.
Block said he’s working on other short-selling targets but “it’s not going to be China and Hong Kong”.
Muddy Waters, founded in California, is named after the Chinese proverb “it’s easier to catch fish in muddy waters” (渾水摸魚).
Block, who profits from exposing fraudulent accounting practises among China-based companies, rose to notoriety after betting on Toronto-listed plantations operator Sino-Forest Corp in 2011, claiming the company was a “fraud” and a “multibillion-dollar Ponzi scheme.”
Sino-Forest, which was later investigated by Canadian regulators, filed for bankruptcy 10 months after the release of Muddy Water’s research report.
Additional reporting by Yifan Yu.