HK analyst eviction fuels fears that negative research being muffled

Pax Global Technology

15/08/2016 24:00

(Repeats article first published on Sunday. No changes to 
text.) 
    * Analyst forced from meeting was alone with 'sell' rating 
    * Regulatory crackdown on Moody's and Citron 
    * Some firms intimidate to silence critics 
    * Pressure often comes from tycoons, say activists 
 
    By Michelle Price 
    HONG KONG, Aug 14 (Reuters) - The ejection of an analyst 
from a company briefing in Hong Kong last week has laid bare the 
pressure on negative research in the Asian financial hub, 
fuelling concern that critics of companies are being muffled 
amid a broader clampdown on freedom of speech. 
    Macquarie  MQG.AX  analyst Timothy Lam was told to leave an 
earnings briefing by China's Pax Global Technology  0327.HK  on 
Wednesday after a heated exchange with chief financial officer 
Chris Lee that was videotaped and circulated on social media. 
 urn:newsml:reuters.com:*:nL3N1AS21D Lam was the only analyst at the time covering the 
stock with a 'sell' recommendation, according to Thomson Reuters 
Eikon data. 
    In social media posts, Lee said the analyst's reports had 
inaccuracies, though he later said he "welcomed all diverse 
points of view and perspectives toward the company". Pax Global 
said the "one-off" incident did not represent the standpoint of 
management. Macquarie declined to comment. 
    Former analysts and hedge fund managers, though, said Hong 
Kong-listed companies - 60 percent of which are incorporated in 
mainland China, often with shareholdings dominated by powerful 
founding families - are especially sensitive to criticism, and 
alienate researchers who question their business. 
    A former Hong Kong-based analyst covering Chinese financials 
at a global bank said she experienced significant pressure to 
recommend 'buys', and had been deliberately excluded from 
company briefings after recommending investors 'sell' the stock. 
    "This trend exists, but usually it's invisible and more 
timid," said Hui Man-cheong, a Hong Kong shareholder activist. 
"Chinese companies are less willing to embrace different 
opinions." 
    In extreme cases, companies resort to personal threats and 
intimidation, three hedge fund managers and a former regulator 
told Reuters.  
    Short-sell activist Carson Block, who took aim at several 
Chinese companies including Hong Kong-listed Superb Summit 
 1228.HK , has said he moved to California from Hong Kong 
because he received death threats, according to several media 
reports. Another prominent short seller who bet against Chinese 
companies, Jon Carnes, has said he was threatened by 
representatives of one of those companies. 
    A spate of attacks in 2010-12 on Chinese companies listed 
overseas heightened sensitivity among companies and regulators 
to this type of public criticism. Last year's Chinese stock 
market crash deepened that sensitivity, with local media blaming 
"malicious" shorting of Chinese stocks by foreigners. 
             
    TOUGHER REGULATOR 
    Entrenched hostility towards critics of Hong Kong companies 
has been compounded by a tougher stance taken by the Securities 
and Futures Commission (SFC), which in 2014 tried to fine 
Moody's Investor Services HK$23 million ($3 million) over a 2011 
report in which it raised corporate governance concerns about 
more than four dozen Chinese companies. 
    Moody's is appealing the SFC's claims that its report broke 
SFC rules by containing inaccuracies, and has said the SFC 
action is an attack on freedom of speech.  urn:newsml:reuters.com:*:nL3N17V1N3 
    The SFC has also taken Andrew Left, head of U.S.-based 
Citron Research, to Hong Kong's Market Misconduct Tribunal 
alleging he manipulated the market through the publication of a 
2012 report on Chinese property developer Evergrande  3333.HK . 
    "In Hong Kong, there's a culture of regulatory bias against 
critics," said David Webb, a prominent Hong Kong corporate 
governance activist and investor. He said the Moody's action in 
particular had a "chilling effect on negative research". 
    The SFC did not respond to requests for comment, but it has 
said previously it does not intend to stifle freedom of speech. 
    An individual familiar with the watchdog's thinking said 
negative research served an important purpose - provided it was 
accurate and responsible. 
     
    SHORT-SELL DECLINE 
    Short-sellers said the SFC's tougher stance has contributed 
to a marked decline in attacks on Chinese companies, with just 
seven so far this year compared with an annual average of around 
two dozen, according to Activist Shorts Research data. 
    "If it's not fear of retaliation from the target company, 
it's fear of a heavy-handed regulator" that is deterring 
attacks, Anonymous Analytics, which has targeted four Hong 
Kong-listed companies, wrote in an Activist Shorts newsletter 
last month. "The SFC has succeeded in suppressing negative 
opinions and views from being published and easily accessible to 
all." 
    The debate over negative research comes amid a broader 
tussle between China's Communist Party leaders and those backing 
democratic institutions in Hong Kong. Journalists and rights 
groups in Hong Kong have warned of greater censorship, with 
mainland Chinese officials influencing local newsrooms. 
    Some investor activists said they believe the SFC's actions 
reflect a broader policy push on the part of the Hong Kong 
government and elites to suppress negative views. 
    Webb, the activist investor, noted a recent SFC proposal to 
require companies to disclose more of their short positions. 
    "The policy on disclosure of short positions is coming from 
the government who are under pressure from tycoons who don't 
like people being critical of their companies and shorting their 
shares," he said. 
    The government's Financial Services and Treasury Bureau did 
not immediately respond to requests for comment. 
 
 (Reporting by Michelle Price, with additional reporting by 
Michelle Chen and Vensu Wu; Editing by Ian Geoghegan) 
 ((michelle.price@thomsonreuters.com; +85228472095; Twitter: 
@michelleprice36;)) 
 
Keywords: HONGKONG RESEARCH/NEGATIVE