Short-sellers smell blood as Japan Inc wounded by accounting scandals
19/08/2016 24:00
* Short sellers shifting focus from Chinese companies to
Japan
* Citron's Cyberdyne attack is sixth ever on Japan company
* Toshiba scandal sparked investor concerns over governance
issues
* Short sellers see Japan trading companies as potential
targets
By Umesh Desai and Michelle Price
HONG KONG, Aug 19 (Reuters) - Short-sellers who made their
names and fortunes wiping billions off Chinese and Southeast
Asian companies are setting their sights on Japan after a series
of accounting scandals amplified concerns about weak corporate
governance there.
Until recently, corporate managers in Japan have enjoyed
relatively limited scrutiny of their governance standards and
accounting rigour, and a cosy tradition of cross-holdings
between companies has relegated the status of minority
shareholders and the importance of adequate disclosure.
But as the government of Prime Minister Shinzo Abe has tried
to clean up corporate culture and activist investors have begun
to kick the tyres of Japan Inc, short sellers are finding
fertile ground for profit.
On Tuesday, prominent U.S.-based short-seller Citron
Research launched an attack on Japanese robotics company
Cyberdyne 7779.T , claiming it was "the most ridiculously
priced stock in the world" and had misled retail investors over
its technology assets.
Cyberdyne, which closed down 7 percent on Tuesday, dismissed
the report as an attempt to push its stock price down.
It is not known whether Citron holds a short position in
Cyberdyne.
It is the second attack on a Japanese company in less than a
month and the sixth since December 2015, when Well Investments
Research challenged trading firm Marubeni 8002.T , the first
such campaign in Japan tracked by Activist Shorts Research.
According to Activist Shorts, the six Japan campaigns, half
of them directed at Cyberdyne, have generated average losses of
23 percent, which means profit for short-sellers, who sell
borrowed stocks and buy them back more cheaply.
It said that is among the top half of the 46 activist
short-sellers to have launched campaigns in the past year and is
more than double the year-to-date return of Asia's main
benchmark .MIAPJ0000PUS .
The phenomenon of short-sell attacks took hold between 2009
and 2011, with investment and research firms such as Muddy
Waters Research and Alfred Little attracting international
attention for their campaigns against overseas-listed Chinese
companies including Sino-Forest and Silvercorp SVM.TO .
HIGHER STANDARDS
Short-sellers and analysts said they expected more attacks
on Japanese companies as regulators in China and Hong Kong fight
back against short-sellers, and Abe's campaign flushes out
deficiencies.
"As Japanese markets embrace the values of Abenomics,
investors of all types, shareholders, short-sellers will insist
that listed companies hold themselves to higher standards of
transparency, accountability and corporate governance," said
Soren Aandahl, director of research at Glaucus Research.
"That in turn makes short investment opinions more
impactful," he added.
Glaucus itself sent shares in trading firm Itochu Corp
8001.T tumbling 10 percent last month by claiming it had
inflated profits through creative accounting, the biggest attack
on a Japanese company by market value so far. Itochu denied the
claims.
Aandahl declined to say if Glaucus was preparing more Japan
campaigns but confirmed it was conducting research on other
Japanese companies.
Revelations last year that Toshiba 6502.T , the
laptops-to-nuclear conglomerate, had overstated profits by $1.3
billion over several years sparked a public debate over Japan's
inward-looking corporate culture, in which boards have typically
held investors at arms' length.
The Toshiba investigation identified a corporate culture in
which the management could not be challenged and didn't always
heed its external auditors.
The scandal led the Japan Financial Services Agency to step
up scrutiny of auditors, while the Japan Institute of Certified
Public Accountants has conducted several quality-control
inspections of its members.
In June 2015 the government also implemented a new corporate
governance code in a bid to stimulate foreign investment.
"Right now, there's an interesting mix of factors at play in
Japan. The Toshiba scandal could be seen as a blow to investor
confidence, but that and Abe's moves also created the
opportunity for short-sellers to spark a conversation on
overvalued companies," said Claire Stovall, research analyst at
Activist Shorts.
"In a country where Well Investments has described an
acceptance of poor disclosure, partly built on corporate
relationships and a laissez-faire trust in management, investors
and regulators will likely be sensitive to negative research."
OPPORTUNITIES
Analysts and short-sellers said they saw ripe shorting
opportunities among Japan's commodities trading companies, which
could be prone to aggressive accounting tactics following the
global commodities slowdown.
GMT Research, which analyses company accounts for hedge
funds, said earlier this year that the book values of Japanese
trading companies were overstated by as much as two thirds in
some cases.
"Companies reclassify their investments and affiliates all
the time. In this case, it is probably the pervasiveness and the
magnitude that warrant closer scrutiny on the practice," said
trader and short-selling specialist Laurent Bernut.
Short-sellers burnished their credentials from 2010 onwards
by exploiting concerns over poor corporate governance and
accounting practices at more than 100 Chinese companies, in some
cases exposing outright frauds at the likes of Sino-Forest and
China Metals Recycling.
But a crackdown by authorities in Hong Kong, the main market
for offshore Chinese stocks, has made such attacks riskier
urn:newsml:reuters.com:*:nL3N1AT4MV, while investors are increasingly pricing in doubts
over Chinese companies, making such attacks less lucrative.
Citron Research's head Andrew Left is currently awaiting a
Hong Kong tribunal ruling over allegations by the Securities and
Futures Commission he manipulated the market when he targeted
Chinese property developer Evergrande 3333.HK in 2012.
Left, whose influence has grown following his campaign
against U.S.-listed Valeant, did not respond to a request for
comment but has said he does not plan to target more Hong Kong
companies, while market conditions in Japan were attractive.
(Additional reporting by Emi Emoto in Tokyo; Editing by Will
Waterman)
((michelle.price@thomsonreuters.com; +85228472095; Twitter:
@michelleprice36;))
Keywords: JAPAN SHORTSELLERS/