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Hong Kong's Short-Seller Invasion Spurs Unusual Defense Plan

  • Fullshare proposes an ‘anti-malicious short seller alliance’
  • Last 12 months were busiest on record for Hong Kong campaigns

One of Hong Kong’s most high-profile targets of activist short sellers has hatched an unorthodox plan to fight back.

It’s called the “anti-malicious short selling alliance.’’ The idea is for companies to band together when bearish traders pounce, sharing crisis-management advice and in some cases even offering equity investments. Fullshare Holdings Ltd., the property company that unveiled the plan on Monday, has faced allegations from two short sellers in the last month.

The proposal highlights how ubiquitous short sellers have become in Hong Kong. Bearish research firms tracked by Activist Insight have started 18 campaigns in the city during the past 12 months, the most since at least 2012.

Short sellers including Muddy Waters and Glaucus Research dismissed Fullshare’s idea, saying it would be bad for shareholders. The stock dropped 0.6 percent to the lowest level in almost three weeks on Tuesday.

“The best idea is to have open and transparent reporting, which the accounts are supposed to reflect,” said Andrew Sullivan, a managing director for sales trading at Haitong International Securities Group Ltd. in Hong Kong. Still, “in a free market short sellers can circulate their reports, and companies and their allies are welcome to spend money to defend their stocks.”

Short sellers have started focusing on Hong Kong’s stock market because they’ve already targeted most of the “low-hanging fruit” among Chinese companies listed in the U.S., Paul Gillis, a professor at Peking University’s Guanghua School of Management in Beijing, said by phone last week.

"As long as there’s opportunity, such as companies not doing things correctly or misleading investors, short-seller attacks will continue,” Gillis said. “Hong Kong right now has fairly weak regulatory practices, particularly in the accounting area.”

Read more: A QuickTake explainer on short selling

Fullshare was targeted last month by Glaucus Research, which questioned the company’s intraday trading patterns and said the stock was “poised to crash.” A few days later, FG Alpha Management criticized Fullshare’s accounting and its controlling shareholder’s bank loans. Fullshare disputed the findings of both short sellers. The stock has climbed since Glaucus’s report, thanks in part to a financing agreement from a state-owned Chinese bank.

In an interview with the Hong Kong Economic Journal published on Monday, Fullshare Executive Director Wang Bo said the company had held talks with other firms about an alliance. The group would create a forum to discuss legal and public relations strategies and to identify “deep value direct-investing situations” that result from short-seller campaigns against “performing” companies, Wang said in an interview with Bloomberg News.

He emphasized that the proposal was “very preliminary,” that Fullshare has respect for “normal” short sellers and that the company intends to follow Hong Kong regulations. The alliance wouldn’t become a “lender of last resort” to targeted companies, Wang added.

Contagion Risk

At least one other target of short sellers in Hong Kong has expressed interest in the idea. Credit China FinTech Holdings Ltd., which denied allegations published by short seller Anonymous Analytics in December, said in an emailed response to questions from Bloomberg News that the company would be happy to find out more details about the proposal.

The short sellers who targeted Fullshare said they were undeterred by the plan, with Glaucus’s head of research Soren Aandahl saying “only companies with something to hide” would consider it.

“These companies would be better off if they have a ‘truth’ alliance,” said Dan David, chief investment officer of FG Alpha Management. “If they tell the truth about their real financial condition, they will not have to worry about critics.”

Shareholders are unlikely to approve of their company helping another firm that’s been accused of wrongdoing, according to Carson Block, the founder of Muddy Waters.

“It’s hard to think legitimate investors would be interested in funding alleged frauds or manipulations,” said Block, who targeted Hong Kong-listed China Huishan Dairy Holdings Co. in December. The stock plunged 85 percent on March 24 and has since been halted by Hong Kong’s securities regulator.

Block’s sentiment was echoed by David Webb, a Hong Kong-based private investor and a former board member of the city’s exchange.

“Companies that join such an alliance to invest in shares or debt of other companies risk contagion,” Webb said. “Companies whose boards feel they are at risk of attack should look in the mirror and ask themselves why.”

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