Short sellers target China, this time from the shadows
21/09/2014 22:00
By Lawrence White and Pete Sweeney
HONG KONG, Sept 22 (Reuters) - Short-sellers who profit from
stock price declines have resumed targeting Chinese companies
after a three-year lull, but many of the researchers who
instigate the strategy are now cloaked in anonymity, shielding
themselves from angry companies and Beijing's
counter-investigations.
Three reports published this month separately accused three
Chinese companies - Tianhe Chemicals 1619.HK , 21Vianet
VNET.O and Shenguan Holdings 0829.HK - of business or
accounting fraud. All three companies said the allegations were
baseless but their shares were hit by a wave of short-selling by
clients of the research firms and then by other investors as the
reports were made public.
The reports were written by research firms that did not
publicly disclose names of research analysts or even a phone
number.
In the last wave of short-selling that peaked in 2011 and
wiped more than $21 billion off the market value of Chinese
companies listed in the United States, the researchers
advocating short-selling were mostly public.
Carson Block of Muddy Waters, one of the most prominent
short sellers, openly accused several Chinese companies of
accounting fraud. Block said in 2012, according to several media
reports, that he moved to California from Hong Kong because he
had received death threats.
"If you have researchers who are based in China, it makes
sense to operate anonymously because some of the mainland
Chinese companies have a history now of retaliating against
people who do negative research," said short-seller Jon Carnes
in an interview with Reuters.
Carnes's research firm Alfred Little has the best track
record among short sellers, according to data compiled by
Activists Shorts Research that shows the share performances of
companies it targeted.
Carnes has said he was threatened by representatives of one
of the companies he reported on in 2011. His researcher Kun
Huang was jailed in China for two years and then deported.
Kun, a Chinese-born Canadian, told the New York Times after
returning to Vancouver this year that he was charged with
criminal behaviour and convicted in a one-day private trial.
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A series of incidents in recent years has highlighted
China's growing willingness to investigate, detain and prosecute
people for crimes involving the use of information for
commercial purposes. Short-selling has particularly irritated
the authorities, financial industry analysts have said.
In 2012, China's state news agency Xinhua described the
short-selling reports as malicious and aimed only at making
quick money. In an editorial, the agency said short-sellers did
find genuine problems at some companies but that they later
unfairly targeted quality Chinese firms.
Now, research firms are becoming more adept at using online
tools to mask their locations and identities, said John Hempton,
an Australia-based short seller at Bronte Capital.
"It's getting more anonymous, because the attitude of the
Chinese authorities is becoming more and more dangerous," said
Hempton.
THE TIANHE ATTACK
This month's round of short-selling began with the
publication of a report by Anonymous Analytics, which describes
itself as a "faction" of the hacker group Anonymous, against
Hong Kong-listed Chinese company Tianhe Chemicals Group.
ID:nL5N0RC05U .
Anonymous Analytics said Tianhe "vastly misrepresented the
size and scope of its business, and has produced false and
misleading statements to the market." The research group said
its findings were based on "months of due diligence, field
research and analysis". It said the analysis included
government and State Administration for Industry and Commerce
(SAIC) documents, and that it also conducted interviews with
clients, competitors and former employees of Tianhe.
Tianhe said in a statement it "unequivocally denies and
vigorously refutes the groundless allegations in the report"
while Hong Kong stock exchange authorities, contacted by
Reuters, refused comment.
Tianhe requested that its shares be halted from trading on
Sept 2, the day after the Anonymous report.
The same day, another research group, Emerson Analytics,
accused Hong Kong-listed sausage casing maker Shenguan Holdings
Group Ltd of doctoring its books, and said its report was based
on government and SAIC documents, company filings, and an
analysis of the casing industry.
"In 2013, Shenguan inflated its revenue by at least 10-15
percent and hid part of its raw materials costs (the actual cost
is about 124 percent higher than the reported amount). This
bloated its (earnings) margins from our estimated 19.8 percent
to a reported 52.4 percent," Emerson said.
Shenguan said in a statement that the report contained
errors and misleading statements. ID:nL3N0R464G
The company also requested a halt in trading of its shares.
On Sept. 10, Trinity Research Group published a report on
Nasdaq-listed Chinese data centre company 21Vianet Group Inc
saying it had "overwhelming evidence that the company is
committing accounting and securities fraud". It said the report
was based on a six-month investigation by a team of accountants,
lawyers, telecom industry executives and insiders, as well as
former employees, current and former customers and current and
former service providers of the company.
In a public statement and in a letter to shareholders from
its CEO, 21Vianet called the report malicious and baseless. Its
shares fell as much as 35 percent before recovering slightly
after the company statement.
None of the research reports listed contact names or
telephone numbers - only e-mail addresses. The groups declined
to disclose their location or give other details when contacted
by Reuters.
In the previous short-selling wave, several Chinese firms
were delisted as their share values sank at the cost of billions
of dollars in destroyed investor capital.
But the very success of the shorting campaign also hastened
its end: Chinese stocks began underperforming their respective
peers, while the cost of borrowing shares to short skyrocketed,
cutting into profit margins.
At the same time Chinese law enforcement began moving
against the due diligence investigators on whom shorters relied
to dig up dirt on Chinese firms.
The recent short-selling shows these traders have discovered
a new way to take on Chinese companies, relying on anonymity,
public information, and less upfront costs, allowing them to
profit more quickly and more safely than before, according to
China-based short sellers who declined to be named.
"The incentive structures are such that you're going to see
a lot of frauds (among Chinese companies), and a lot of
takedowns," said Hempton at Bronte Capital. "This will be a
feature of Chinese capital markets until those incentives
change."
(Additional reporting by Shilpa Murthy in BANGALORE, Engen Tham
in SHANGHAI, Saikat Chatterjee in HONG KONG and Vikram Subhedar
in LONDON; Editing by Raju Gopalakrishnan and Emily Kaiser)
((lawrence.white@thomsonreuters.com)(+852 2847 2094)(Reuters
Messaging: lawrence.white.thomsonreuters@reuters.net))
Keywords: CHINA SHORTSELLING/