Shares in Hong Kong-listed branded luggage maker Samsonite International plummeted by more than 11 per cent in early trading in Hong Kong on Thursday, after being accused of “questionable accounting practises” and “poor corporate governance”, in a report by newly formed activist short-seller, Blue Orca Capital. Trading in the shares was halted at 11.18am. “We suspect Samsonite has concealed slowing growth through debt-fuelled acquisitions and that it has massaged earnings and inflated margins through highly questionable purchase price accounting,” Blue Orca said. “Samsonite should trade at a discount to its peers because of corporate governance concerns regarding its audit profile,” it added, and questioned transactions between the company and Indian entities controlled by its CEO Ramesh Tainwala and his family. “We call on Samsonite’s board of directors, and in particular the audit committee, to appoint an independent audit firm to scrutinise all transactions involving its South Asian joint venture, the company’s treatment of inventory, its purchase price accounting and disclosed and undisclosed connections between Samsonite and its CEO. “Ultimately, we believe that Samsonite is simply carrying too much baggage to trade at such a high premium,” said Texas-based Blue Orca. Samsonite, which is headquartered in Luxembourg, told South China Morning Post it is currently preparing an official response. While the short seller’s accusations against the company centred on a growth strategy that focuses on takeovers, analysts said they still approved of this way of expanding the company’s business. “We aren’t worried about the growth strategy and the group’s leading market position,” said Mariana Kou, Head of China Education and Hong Kong Consumer at brokerage and investment group CLSA. “But the quality of the accounting and financials as well as the CEO-related transactions would have major impact on the stock,” she said. The Blue Orca report added the company, the world’s largest branded luggage maker, should be trading at HK$17.59, which would be 43 per cent below its last traded price, HK$30.7 (US$3.91). The company actually reported a robust set of first quarter sales ending March 31, rising 21.1 per cent to US$888.2 million while net profit increased 18.6 per cent to US$43.9 million for the three months. Net annual income was US$334.3 million for 2017, a 30.7 per cent increase from 2016. Close to 40 per cent of its sales come from the United States, while it also sells widely in Asia, Europe and Latin America. We suspect Samsonite has concealed slowing growth through debt-fuelled acquisitions and that it has massaged earnings and inflated margins through highly questionable purchase price accounting Activist short-seller, Blue Orca Capital It bought eBags, a Colorado-based online retailer of handbags and luggage, in May 2017 for US$105 million, saying the purchase helped the company achieve 138 per cent increase in net sales in the direct-to-consumer e-commerce channel last year. It also acquired high-end Luggage brand Tumi in 2016, which achieved net sales of US$678.1 million in 2017. Soren Aandahl, formerly the director of research and chief investment officer at international short-seller Glaucus Research, launched Blue Orca on May 17, and Samsonite is the first high-profile target the company chosen for scrutiny. Aandahl said when the company was being launched that Asia and China in particular, are at the epicentre of global innovation and that he “will not hold back from exposing dishonest or complacent companies”. Short-selling in the Hong Kong market has become fashionable of late, with practitioners having intensified their offensives, sending jitters through the market. They suggest investors should watch out for companies with high valuations, poor cash flow, concentrated ownership and frequent connected transactions, conditions for potential shorting, said Hong Hao, head of research at Bocom International, in a report last year. Hong Kong market has already seen one of the biggest collapses in company shares in history, last year when Chinese dairy maker Huishan’s shares plunged 85 per cent in 90 minutes in March. Huishan had been targeted by Muddy Waters since 2016, a high-profile short-seller focused on shorting Chinese companies.