China Hongqiao files court action to block negative research by Emerson Analytics

Aluminium maker China Hongqiao has filed a court injunction against Emerson Analytics to block circulation of negative research, including those reports previously published and any ‘further defamatory reports’

PUBLISHED : Tuesday, 07 November, 2017, 9:32am
UPDATED : Tuesday, 07 November, 2017, 11:01pm

Shares of China Hongqiao, the nation’s largest aluminium smelter by capacity, gained for a sixth straight trading day on Monday, after it announced over the weekend that it is seeking a court order to block previously published as well as any future “defamatory” reports by Emerson Analytics.

China Hongqiao shares ended Monday’s session at HK$12.6, a gain of 0.64 per cent from its close on Friday.

Last week, shares of China Hongqiao rose by 77 per cent in resumed trade following a seven-month hiatus after the release of the first negative report by Emerson Analytics on February 28.

Some analysts believe a bullish Hong Kong equity market and an increasing inflow of capital from southbound investors is making short selling against Chinese companies increasingly difficult.

“The southbound investors are starting to win the fight for pricing power against foreign investors,” online stock research publication Gelonghui said on Sunday, citing the inflow of capital by mainland based institutional investors.

Several other companies that have been targeted by short sellers earlier this year have also rebounded vigorously.

Property developer China Fullshare Holdings has risen sharply, shrugging off a 12 per cent drop on April 25, after it was written up in a report by short seller Glaucus Research.

Apple supplier AAC Technology has surged 28 per cent this year, even as it tumbled more than 10 per cent on May 11, the day it was featured in a report by short seller Gotham City Research.

However, other experts say that the rebounding share prices have more to do with improving fundamentals, in addition to the squeeze on short sellers.

“The cut of capacity by Hongqiao under President Xi’s call for supply-side reform, and the rebound of commodity prices to some extent supports the business performance. But the key to the stock price rebound is the strong buy in by the major shareholder,” said Bocom International Holdings Co. strategist Hong Hao.

He said that China Hongqiao’s rising share price would have forced those with short positions to capitulate.

Zhang Shiping, founder and chairman of China Hongqiao Group, invested HK$568.5 million (US$72.8 million) in 12 transactions, bringing his personal holding in Hongqiao to 5.9 billion shares, or almost 82 per cent of the company’s issued capital.

The transactions means that about 18 per cent of Hongqiao’s shares are held by the public, 7 percentage points lower than the private shareholder limit.

According to the Hong Kong stock exchange’s rules, companies with a market capitalisation above HK$10 billion can be exempted from trading suspension as long as the public holds at least 15 per cent of the company’s shares. Hongqiao’s market value stook at around HK$90 billion on Monday.

In a filing to the Hong Kong stock exchange on Sunday night, Hongqiao disclosed that the company had filed a lawsuit against Emerson Analytics to the High Court of Hong Kong on November 3. It has applied for an order to “restrain” the publication of the two negative reports issued by the short seller and “further defamatory reports against the company”, China Honqiao said in the statement.

Emerson was not available to comment.

The short seller issued a negative report on February 28, accusing Hongqiao of under-reporting production costs to inflate profitability by purchasing electricity and alumina from connected parties at “exceedingly” low prices. A second “negative report” was published on October 30.

Shares of Hongqiao were suspended from trading from March 22. Effective from April 27, accounting firm Ernst & Young formally resigned as auditor at China Hongqiao, after the two failed to agree on the need for an independent review of the company’s books.

Hongqiao replaced the auditor, delayed its 2016 financial results and sought government help. In June, the company gained a US$3 billion credit line from China’s CITIC Bank, which also agreed to take a stake in the company of up to 10 per cent.

According to its annual results filed on October 27, signed by its new auditor ShineWing, revenue increased by roughly 39.2 per cent to 61.4 billion yuan, while gross profit increased by roughly 57.2 per cent to 14.2 billion yuan.

In August, Hongqiao shut nearly a third of its capacity, under the so called “supply-side reform” campaign. About 88 per cent of aluminium plant capacity shut under those reforms last year and this year were privately owned, according to Bloomberg.