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Hong Kong courts

Hong Kong court issues first ban on short seller report

Court blocks short seller Emerson Analytics from issuing any further reports on nation’s largest aluminium smelter, China Hongqiao, the first time such an injunction has been applied

PUBLISHED : Thursday, 14 December, 2017, 5:58pm
UPDATED : Thursday, 14 December, 2017, 10:57pm

A Hong Kong court has issued its first ban on a short seller releasing a negative report on a mainland company under its attack.

The Court of First Instance issued an injunction on December 12 to ban short-seller Emerson Analytics issuing any further reports about China Hongqiao, the nation’s largest aluminium smelter by capacity, according to a court order seen by the South China Morning Post.

The order, signed by deputy High Court judge Kent Yee on Tuesday, is expected to be posted on the judicial website soon, halting Emerson Analytics from further speaking of, or publishing any report about Hongqiao.

The banning order will stay in place until the court is presented with any further evidence which might change its decision, the court order said.

“If you disobey this order you may be found guilty of Contempt of Court and may be sent to prison, fined or your assets seized,” the court order wrote.

Hongqiao has filed a number of injunction document applications with the Hong Kong Court between October and early December, related to the one single application, but the latest appears to have persuaded the authorities that they had a case.

Zhang Shiping, chairman of China Hongqiao, said in an stock exchange filing, after announcing it had been successful with the injunction: “The company believes it necessary to seek legal action to safeguard its interests and those of its shareholders and [the company] will continue to adopt the legal action if there is any further malicious defamation/attacks on the company.”

China’s primary aluminium production fell for a fifth consecutive month in November, official data showed on Thursday, as the country’s winter restrictions on smelters pushed output to its lowest since February 2015.

Reuters reported the world’s top aluminium producer churned out 2.35 million tonnes of the metal last month, down 7.8 per cent from 2.55 million tonnes in October and down 16.8 per cent from a year ago, according to the National Bureau of Statistics.

The company believes it necessary to seek legal action to safeguard its interests and those of its shareholders and [the company] will continue to adopt the legal action if there is any further malicious defamation/attacks on the company
Zhang Shiping, chairman of China Hongqiao

In a first for China’s aluminium industry, smelters in 28 northern Chinese cities were told to cut output by at least 30 per cent during this year’s peak winter heating season – which kicked off in mid-November – to combat air pollution.

Analysts, however, noted that Hongqiao managed to avoid steep output cuts despite being based in Binzhou, Shandong province, one of the 28 cities, after closing 2.68 million tonnes of capacity in August, nearly a third of its capacity, under the so-called nationwide supply-side reform campaign.

According to its annual results filed on October 27, its revenue grew 39.2 per cent to 61.4 billion yuan (US$9.27 billion), while gross profit jumped by 57.2 per cent to 14.2 billion yuan.

Short sellers profit by selling stocks at high prices and then buying them back when prices have plummeted, pocketing the difference.

They often try and issue negative reports against a company in which they have short positions.

Emerson is one of several short selling analytical firms which started issuing negative reports on Hongqiao, accusing it of under-reporting production costs to inflate profitability by purchasing electricity and aluminium from connected parties at “very” low prices.

A second “negative report” was published on October 30.

Shares in Hongqiao were suspended from trading on March 22 and only resumed again early last month.

In the meantime it has changed its auditor from EY to ShineWing, while also seeking Chinese government financial support.

Citic Bank offered it a US$3 billion credit line in June, also agreeing to take a 10 per cent stake in the company.

Hongqiao closed the day at HK$9.02 on Thursday, down 2.7 per cent.

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