Markets

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.

Fullshare Holdings Ltd. looks to have overcome the naysayers, going from one of the MSCI China' Index's most heavily shorted stocks to gaining 32 percent in two days.

The Hong Kong-listed developer started changing hands again Thursday after a critical report by Glaucus Research triggered a 12 percent plunge and a suspension on April 25. Glaucus questioned the group's intraday trading patterns and said the shares were poised to crash.

Baby Got Back
Fullshare's stock has rebounded 32 percent in two days
Source: Bloomberg

According to Glaucus, 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. In addition, it noted that 108 percent of Fullshare's 2016 income came from a cross-holding in fellow property firm Zall Group Ltd., and that both companies had pledged stakes in the other to get loans.

Last week, GeoInvesting LLC's short-biased FG Alpha Management fund came out with its own critical report, claiming Fullshare's Chairman Ji Changqun had pledged shares he holds in Fullshare to various banks as collateral.

Those allegations are all cause for concern, to be sure. Sounding alarm bells about the prevalence of dominant shareholders and small free floats in several Hong Kong publicly traded Chinese companies has made them targets for short sellers. China Huishan Dairy Holdings Co., the subject of an attack by Muddy Waters, is still suspended.

Fullshare called the remarks groundless, and said China Citic Bank Corp. had agreed to make at least 10 billion yuan ($1.45 billion) available to it over two years. Zall Group and Ji have both said they're buying the stock.

Popular Play
Fullshare, the most actively traded stock on the southbound leg of the Shanghai-Hong Kong connect on Thursday, was still the second-most traded on Friday, with 566 million shares changing hands
Source: Hong Kong Exchanges & Clearing

Since the suspension was lifted, Fullshare has become one of the most actively traded companies on the Shanghai and Shenzhen share connect programs, which allow mainland investors to purchase Hong Kong stocks.

It's worth remembering that China's biggest bad bank, China Huarong Asset Management Co., is a large owner of Fullshare, controlling a 13.4 percent interest as of April 6. Fullshare is also a big employer on the mainland, by virtue of its 74 percent stake in China High Speed Transmission Equipment Group Co., the nation's major maker of gearboxes for wind turbines.

In China, things aren't always what they seem, so Fullshare's sudden recovery may have nothing to do with its connections across the border. But at least for now, the short sellers are finding their prey isn't as vulnerable as it appeared.

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