The short selling world has been buzzing this week after a secretive research firm launched an attack on recently-listed Tianhe Chemical (HKEx: 1619), sparking a sell-off in the company’s shares. The shady short-seller, appropriately named Anonymous Analytics, has now issued a statement defending its actions, saying it made its attack for the public good. Perhaps that’s true, though I have my doubts. But far more interesting is the prospect that a group of sophisticated short sellers that have feasted for the last 3 years by attacking US-listed Chinese firms could be preparing to move their show to Hong Kong and even to China itself.
US-listed Chinese firms are only now recovering from a barrage of attacks that began in early 2011, starting with an assault on the now-defunct Longtop Financial. The list of firms that came under attack included lots of smaller companies, many of which came to the US through murky back-door listing vehicles. But a number of big-name companies also came under attack, including leading education services provider New Oriental (NYSE: EDU) and security software maker Qihoo 360 (NYSE: QIHU).
Most of the major US-listed companies that were attacked were backed by western venture capital in their early stages, and thus at least had accounting systems that were roughly in line with global standards. The same can’t be said of companies like Tianhe, which mostly come from state-run backgrounds and often get creative with their accounting to inflate profits and hide bad news.
That fact makes companies like Tianhe much easier targets for sophisticated western short sellers, who have a much easier time raising suspicions about these more poorly managed companies. Most such companies, which come from traditional industries like manufacturing, energy and industrial materials, are listed in their home China market. But quite a few are also listed in Hong Kong, where they can better access global capital and also avoid long waits for domestic listings that often favor big state-run firms.
Tianhe became one such company when it listed in Hong Kong in June. Since then its share price had jumped nearly 40 percent from about HK$1.80 when it first went public, to as high as HK$2.50 about a month ago. But the price dropped after Anonymous Analytics released its report on Monday, accusing Tianhe of falsifying financial statements. Tianhe shares have been suspended while the company prepares a response.
Anonymous Analytics has now put out a statement saying it didn’t profit from the share drop, and that it released its report for the public’s interest. (English article) But the research house also acknowledged that some of its clients or other affiliates might have short positions in Tianhe. I seriously doubt that Anonymous released its report for purely selfless reasons, and the company probably is keeping its low profile to protect itself from potentially powerful state interests close to Tianhe.
Hong Kong has always allowed short selling, but we haven’t seen too many high-profile attacks like the ones in the US launched by names like Muddy Waters and Citron. Perhaps that’s partly because these short sellers don’t want to get too close to China, and also because they prefer to attack private companies that don’t have ties to powerful government interests.
Still, this new attack by Anonymous shows that Hong Kong-listed companies may be too tempting a target for the short sellers to ignore. If that’s the case, we may see more such attacks in the months ahead. Such assaults could even eventually spread to China as the domestic securities regulator begins to experiment with short selling, which was only recently legalized on a very limited basis.
Bottom line: A short seller assault on a traditional Chinese company listed in Hong Kong could auger a new wave of similar attacks, as sophisticated short sellers move from New York closer to China.
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