Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

A plunge in the stock of Fullshare Holdings Ltd., the Hong Kong-traded developer alleged by Glaucus Research Group to be one of the largest stock manipulation schemes in the world, is a worry for investors.

But a bigger concern should be how a company that isn't covered by any investment-bank or brokerage analysts tracked by Bloomberg has forged close links with China's biggest maker of gearboxes for wind turbines as well as the nation's largest bad-loan manager.

Fullshare dropped 12 percent on Tuesday and was halted from trading following the release of the short-seller's report. Also feeling pressure were China High Speed Transmission Equipment Group Co., down 4 percent, and China Huarong Asset Management Co., whose shares declined 9.3 percent. Fullshare has a 74 percent stake in China High Speed and is 13.4 percent-owned by Huarong.

It's perhaps no coincidence that Fullshare's problems began when it joined the list of stocks that could be sold short in early February. Glaucus, which highlighted a pattern of late-day gains in the stock, said on Tuesday that Fullshare was poised to crash.

Glaucus says an investor who bought Fullshare between Nov. 14, 2016, and April 21, 2017, would have suffered a 34 percent loss. But anyone buying the shares in the last hour of trading, selling at the close and repeating the process daily would have made a 76 percent return.

According to the short-seller, unrealized gains from Fullshare's stake in fellow developer Zall Group Ltd. were equal to 108 percent of the company's net income last year. Fullshare owns 8.83 percent of Zall, which in turn holds a 3.45 percent interest in the former. Zall shares have exhibited the same pattern of rising in the last hour of trading, Glaucus says.

All Together Now
Shares of China Huarong Asset Management and China High Speed fell as outperformers Fullshare and Zall dropped
Source: Bloomberg

The parallels don't end there. Both companies have pledged shares as collateral against loans, drawing comparisons with Huishan Dairy Holdings Co. -- another Hong Kong-listed company that was the target of a short-seller and whose stock is now suspended after plunging.

Fullshare and Zall have rejected the Glaucus report as misleading and unfounded.

While Fullshare has much to contend with, including the slump in value of stock that's been pledged as collateral in exchange for loans, a more serious issue confronts shareholders of China High Speed and Huarong.

Fullshare acquired control of state-backed China High Speed through a share swap, using stock that had surged 138 percent last year prior to its September buyout offer. It was most definitely a David-buying-Goliath purchase: Following the transaction, Fullshare's employee numbers swelled to 9,325 from 402, data compiled by Bloomberg show.

Nomura Holdings Inc. reiterated a "reduce" recommendation on China High Speed stock on Wednesday, saying the Glaucus report underscored its concern about the gearbox maker's cash flows. The brokerage pointed to two transactions since the takeover, including a 900 million yuan ($131 million) investment in a Fullshare-related firm.

Getting Among It
Huarong's revenue from investing and asset management has been growing
Source: Bloomberg

As for Huarong, while Fullshare's stock plunge probably won't have a permanent impact, it does raise questions about the asset manager's diversification beyond soured debt. Investment is becoming a bigger part of its business, and the Fullshare stake -- held via Hong Kong-listed unit Huarong International Financial Holdings Ltd. -- may cast doubt on its expertise for that role.

There will always be small companies on the hook to short-sellers, and ones like Fullshare, which used to trade at a staggering 431 times recurring operating profit, should ring alarm bells. But no firm is an island, and that's especially true in a market like China.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net