China's Tianhe Chemicals hits back at allegations over pre-float statements (updated)

Chaoda Modern Agriculture (Holdings)

02/09/2014 16:06

* "Hacktivist" short-seller research firm alleges massive 
fraud 
    * Tianhe says Anonymous report has errors, misleading 
statements 
    * Tianhe stock targeted in advance by short-sellers 
    * Stock down 5 percent on Tuesday before trading suspended 
 
 (Adds Tianhe response to accusations) 
    By Pete Sweeney and Lawrence White 
    SHANGHAI/HONG KONG, Sept 2 (Reuters) - China's Tianhe 
Chemicals Group  1619.HK  has hit back at allegations that it 
falsified statements to auditors and investors ahead of its Hong 
Kong listing in June and forced trading in its shares to be 
suspended on Tuesday. 
    The allegations were made in a report by Anonymous 
Analytics, a stock researcher that describes itself as a 
"faction" of the hacker group Anonymous, which Tianhe says 
contained factual errors and "malicious accusations". 
    "The report contains errors of fact, misleading statements 
and malicious accusations against the company and its 
directors," Tianhe said in a statement posted on the website of 
the Hong Kong stock exchange on Tuesday evening. 
    The company added that a more complete response to the 
report is being prepared for publication "as soon as 
practicable". 
    Shares in Tianhe dropped 5 percent on Tuesday morning before 
trading was suspended at the company's request. 
    Tianhe's statement said its directors are aware that there 
has been active short-selling on the company's shares recently. 
    Short-selling involves the sale of borrowed shares in the 
belief that the price will fall, allowing the stock to be bought 
later at a lower price to close the position with a profit. 
Firms specialising in shorting will often publish a negative 
report on a stock that can accelerate its decline. 
    The Anonymous Analytics report, which did not include 
authors' names, is the first short-selling report targeting a 
leading Hong Kong-listed Chinese company in recent years - and 
it looks an ambitious one, given Tianhe's large size and 
investor base. 
    While offshore short-sellers have targeted smaller companies 
in Taiwan, Singapore and Hong Kong in recent months, Tianhe is 
extraordinary both for its massive market capitalisation, which 
last stood at $8 billion, and its stature as a recent IPO 
darling. 
    The Anonymous report alleged that Tianhe, which listed on 
for $654 million with the sponsorship of Bank of America Merrill 
Lynch  BAC.N , Morgan Stanley  MS.N  and UBS  UBSN.VX , 
generates only a fraction of the revenue that it claims. 
    Morgan Stanley, Bank of America Merrill Lynch and UBS all 
declined to comment. 
    Reuters was unable to confirm any of the allegations 
independently, but if they are proven accurate, it would be 
embarrassing for China and the institutions involved in clearing 
mainland businesses to list in Hong Kong. 
    It could also create heavy losses for some foreign 
investment firms. The company's second-largest investor is 
Morgan Stanley Private Equity Asia III fund, which owns 8.6 
percent of Tianhe's shares, the fund's largest single equity 
investment. The firm originally invested $300 million in Tianhe. 
    If the allegations are proven false, however, it would lend 
weight to Beijing's complaints that foreign short-sellers try to 
to exploit investor fears and slander Chinese firms for profit.  
     
    TARGET OF OPPORTUNITY 
    Tianhe looks to have become the target of massive shorting 
soon after listing, a Reuters analysis shows. As soon as the 
Hong Kong exchange put the company on its designated 
short-selling list in early August, about 60 percent of its 
daily turnover was short-transactions, compared with the 10.5 
percent average for the Hong Kong market. 
    Data from Markit shows that nearly 80 percent of Tianhe 
shares that can be borrowed for shorting are currently on loan. 
    The company has strongly outperformed the Hong Kong China 
Enterprises Index (HSCE) .HSCE  since it listed, rising nearly 
25 percent against a 5 percent rise in the HSCE. 
    The Anonymous Analytics report said that Tianhe provided 
falsified documents to its auditor, Deloitte, before its IPO 
that did not match previous filings. 
    Deloitte officials in Hong Kong did not respond immediately 
to requests for comment. 
    "One would have thought that a fraud of the magnitude 
envisioned here could not have gotten by the regulators and 
investment bankers who do not want to see another one," said 
Paul Gillis, professor at the Guanghua School of Management at 
Peking University. 
    Anonymous's report included examination of Tianhe's tax 
statements to imply false reporting, which Gillis said could be 
damaging to Tianhe. 
    "They're in a small town and the company doesn't even appear 
on the list of the top 10 taxpayers in the county. If these 
facts are actually true, that's a real 'gotcha' there," Gillis 
said. 
    JPMorgan Chase & Co  JPM.N  bailed out of IPO discussions 
with Tianhe in January, a move sources said was driven by 
concerns about the bank's employment of Joyce Wei, the daughter 
of Tianhe Chemicals Chairman Qi Wei.  ID:nL3N0KV0ZB  
    Anonymous Analytics has published reports critical of other 
Chinese companies in the past, including Huabao International 
 0336.HK , Qihu 360  QIHU.N  and Chaoda Modern Agriculture 
Holdings  0682.HK , though investors shrugged off allegations 
made against Qihu and Huabao. 
 
 (Additional reporting by Saikat Chatterjee in HONG KONG and 
Vikram Subhedar in LONDON; Editing by Matt Driskill and David 
Goodman) 
 ((pete.sweeney@thomsonreuters.com; +86 21 6104 1777 / +86 158 
2104 8958; Reuters Messaging: 
pete.sweeney.thomsonreuters.com@reuters.net)) 
 
Keywords: TIANHE CHEMICALS REPORT/