market predators

Selling Hong Kong Short

Bearish traders help to keep the markets honest by identifying bad apples.

Hong Kong has nothing against short sellers. That may be just as well. 

When regulators around the world banned these bearish investors during the financial crisis, Hong Kong declined to follow, former Securities and Futures Commission head Martin Wheatley pointed out on Wednesday. The city went on to develop the world's best and most robust short-selling system, he said.

Recent events suggest Hong Kong's stock market has no shortage of work for these frequently vilified market predators, who play an important role in providing liquidity and enabling price discovery besides their more lurid reputation for exposing corporate misconduct.

Muddy Waters LLC's Carson Block and GeoInvesting LLC’s Dan David unveiled two more targets on Wednesday at the Sohn Hong Kong conference, the same forum where Wheatley spoke. Man Wah Holdings Ltd. and Dali Foods Group Co. join an ever-growing list of Hong Kong companies that have found themselves becoming short sellers' prey.

At least 20 have come into the cross-hairs over the past 12 months, well above the showing in previous years. This may be partly attributable to hedge funds exhausting what one academic has called the "low-hanging fruit" of New York- and Nasdaq-listed Chinese firms. Hong Kong's market offers many of the same characteristics: in essence, an abundance of mainland Chinese businesses whose accounting practices are less transparent than they might be. 

Man Wah, a furniture maker, plunged 10 percent on Wednesday before being suspended pending a statement, having slumped 8.6 percent the previous day on speculation it was a target. Muddy Waters' Block said he found evidence of undisclosed debt at the company and was shorting the stock.

Dali Foods, maker of the Hi-Tiger energy drink, dropped 6.5 percent after GeoInvesting's David questioned the company's accounting and disclosed his short position. The shares rebounded to trade higher at the midday break on Thursday after Dali Foods said allegations against it were misleading.

Attacks by short sellers haven't always panned out, but they have scored enough victories to send investors scurrying once a new victim is identified. In December, Block alleged that China Huishan Dairy Holdings Co. had overstated its sales, misrepresented its self-sufficiency in alfalfa and made an unannounced transfer of assets. Six months later, Huishan shares are suspended after falling 85 percent in one day, all its directors have quit or been removed bar the chairman, and the company is facing multiple legal proceedings.

On the other side of the ledger: AAC Technologies Holdings Inc. The supplier of components to Apple Inc. has been the subject of a rare duel between short-focused researchers, with Anonymous Analytics defending the company against allegations by Gotham City Research. AAC shares, which plunged after Gotham's report in May, jumped the most in eight years on Wednesday.

The contention by Wheatley, also a former head of the U.K.'s financial regulator, that short selling can add value to markets may have raised some eyebrows among his audience. Andrew Left of Citron Research was banned for five years and fined last year after a Hong Kong tribunal found he published false and/or misleading information about China Evergrande Group. Critics said the case, brought by the SFC, would have a chilling effect on independent analysis.

Some short-seller reports have presaged action by the regulator. The SFC won a court order in 2015 to wind up China Metal Recycling Holdings Ltd., once the nation's biggest scrap-metal recycler. Glaucus Research Group called the company a fraud in a January 2013 report.

Tianhe Chemicals Group Ltd. has been halted from trading since March 2015 after Anonymous Analytics alleged overstatement of profits and other accounting irregularities, months after the company's Hong Kong IPO. The SFC last month ordered Tianhe to remain suspended under a rule that allows it to call for a halt when it believes there's evidence of misleading, false or incomplete information.

These cases show how independent researchers can alert investors to problems that may have been missed by regulators and other gatekeepers. The shorts do indeed provide value to the markets. Perhaps it's time all the hard stuff wasn't left to them.

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