Vipshop Climbs After Calling Short Seller Allegations Unfounded

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Vipshop Holdings Ltd., a Chinese online fashion retailer, rose in New York after denying allegations from a short seller that it has manipulated its financial data, and said the report contains “key errors.”

American depositary receipts of Guangzhou, China-based Vipshop gained 3.4 percent to $26.66 on Wednesday. The ADRs lost 5.6 percent on Tuesday as Mithra Forensic Research in a post on investing website Seeking Alpha said “forensic models suggest that the firm has manipulated sales, receivables, profit and other asset accounts.” Mithra is betting against Vipshop shares and will profit from a decline in their price, it said.

“Vipshop believes these allegations are unfounded and contain numerous errors, unsupported speculation, and a general misunderstanding of the company’s business model,” Vipshop said in a press release Wednesday, not identifying Mithra by name.

Mithra said in a response to Bloomberg News that it prefers to keep its analysts and principals anonymous, providing the name A. Petrie as the author of the Vipshop report. The investment firm also said it’s based in California and was founded in 2015. The short seller is made up of financial analysts and investigators, according to its website.

Mithra said it hasn’t been in China to review Vipshop’s business, a practice that has been used by short sellers such as Carson Block of Muddy Waters LLC, who uses local investigators to produce detailed reports about companies he claims have committed fraud.

Personal Money

“The fact that what it says in its financial statements or what it says on earnings calls is in direct opposition was more than enough for us to declare the company is manipulating its financial statements,” Mithra’s Petrie said in a phone interview Wednesday. “We didn’t send anybody to China and we don’t think that is even necessary for this company.”

Mithra is “in the process of registration” with financial regulators and its investments are funded by personal money, he said. Vipshop, which trades on the New York Stock Exchange and has a market value of about $17 billion, is the firm’s first target.

About 3.2 percent of Vipshop’s shares outstanding had been borrowed and sold short as of May 12, according to data compiled by Markit and Bloomberg. That compares with an average short interest of 3.6 percent for stocks in a Bloomberg index of the most-traded Chinese stocks in the U.S. The ADR benchmark rose 0.2 percent on Wednesday.

Earnings Report

Vipshop rose as much as 4.7 percent in late trading in New York on Wednesday after reporting better-than-estimated earnings. First-quarter sales were $1.4 billion, the company said, while analysts had forecast $1.3 billion, according to a Bloomberg survey. Adjusted profit for the period more than doubled to $77 million, also exceeding estimates. The company forecast second-quarter sales growth of at least 71 percent.

Chinese companies have come under scrutiny in the past five years as short sellers who profit from declining share prices have claimed accounting discrepancies or mismanagement. Muddy Waters accused in 2013 mobile-security company NQ Mobile Inc. of being “massive fraud,” triggering a more than 80 percent retreat in the stock. Sino-Forest Corp. was forced to file for bankruptcy after Muddy Waters said it was overstating its assets.

‘Extra Attention’

While Mithra’s analysis was “short on detail and true insight” and the firm lacks an investment track record, investors will now want to fully understand the questions the short seller has raised regarding Vipshop’s financial reporting, according to David Riedel, president of New York-based Riedel Research Group Inc.

“The balance sheet might merit a bit of extra attention,” he said by phone on Wednesday.

Mithra reiterated its concerns in an e-mailed statement before Vipshop’s earnings report, saying the company’s response “hasn’t provided any additional insight into the questions we raised.”

The short-seller report will have a limited impact on Vipshop’s stock because it doesn’t go beyond the financial accounting, according to Jun Zhang, head of China Research at Rosenblatt Securities Inc.

“The impact of the short-selling note should be very limited as it’s purely analysis without hard evidence of fraud,” Zhang said by phone from San Francisco, “It’s very hard to sell short this company, on which many investors hold very a bullish view.”

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