The case of Techtronic Industries Co. has stirred memories for Hong Kong equity investors of the times when wild swings triggered by attacks by short sellers shook the market.
(Bloomberg) — The case of Techtronic Industries Co. has stirred memories for Hong Kong equity investors of the times when wild swings triggered by attacks by short sellers shook the market.
Hong Kong is familiar with the tactics of investors who bet on stock declines, given the ranks of small-cap companies that are sometimes the target of allegations of murky accounting, market manipulation or fraud. High profile-short sellers such as Muddy Waters and Blue Orca Capital have had rewarding Hong Kong campaigns, though their activity has slowed in recent years.
Read: Mystery Short Seller Wipes $4 Billion Off Hong Kong’s Techtronic
Conditions may be growing favorable for a revival.
“Right now, market sentiment is quite weak and turnover is so low,” said Mike Leung, investment manager at Hong Kong-based Wocom Securities Ltd. “To the short sellers, it’s favorable and they have definitely picked the right timing,” he said. It’s hard to say for sure if they are making a comeback, he added.
Success is far from certain in a market that holds an extra level of jeopardy for short sellers. A risk unique to Hong Kong is the practice of slapping trading suspensions on stocks subjected to the strategy. These can last for weeks, months and even years, trapping short sellers for prolonged periods and potentially exposing them to snowballing costs on the shares they have borrowed.
Whether or not short sellers are about to become a regular feature of Hong Kong’s market again, here’s a reminder of some of their best-known attacks:
Huishan Dairy (Muddy Waters, December 2016)
China Huishan Dairy Holdings Co. was arguably the most celebrated and clearest victory for short sellers targeting Hong Kong-listed companies. Once among the biggest operators of dairy milk farms in China, the firm was described by Muddy Waters founder Carson Block as “worth close to zero” in December 2016. The company’s management was quick to dismiss all the allegations, but it emerged later that Huishan Dairy had massive debt issues, while an executive in charge of its finances and cash went missing. After crashing 85%, the stock was suspended and eventually delisted from the Hong Kong exchange.
AAC Technologies (Gotham City Research, May 2017)
In May 2017, Gotham City Research issued a report against smartphone components maker AAC Technologies Holdings Inc., questioning its accounting and accusing it of engaging in undisclosed transactions with related parties. The stock plunged more than 25% in the wake of the claims and was suspended for 10 trading sessions. In an unusual turn, Anonymous Analytics — another short seller — sprang to AAC Technologies’ defense, saying Gotham’s assertions were misleading and giving the stock a buy recommendation.
Man Wah Holdings (Muddy Waters, June 2017)
Man Wah Holdings Ltd. provided a case study of how a company can fight back against a short seller’s assault and clear its name. The furniture maker was the subject of a 2017 report by Muddy Waters, which said there were inconsistencies in Man Wah’s taxes and that it had undisclosed liabilities, with debt at least 48% higher than declared levels. Two days after Muddy Waters published its allegations, Man Wah issued a nine-page denial, prompting a record surge in the shares.
Samsonite (Blue Orca Capital, May 2018)
Samsonite International SA was the first short target for Blue Orca Capital, which questioned the luggage maker’s accounting and corporate governance, and characterized the company as “a mid-level brand masquerading as a premium luxury player.” Samsonite said the claims were incorrect. The allegations were aired shortly after the shares reached an all-time high in April 2018, a level they have yet to regain.
Hengan International (Bonitas Research, December 2018)
Bonitas Research homed in on Chinese personal hygiene product manufacturer Hengan International Group Co. in 2018, accusing the firm of using a web of inter-company transactions to inflate profits and its cash balance, and saying its stock was “ultimately worthless.” The shares fell nearly 6% on the day of the critical report and were subsequently suspended. Hengan denied the allegations and once trading resumed, major shareholders actively increased their stakes to stabilize the share price.
Anta Sports (GMT Research, Blue Orca Capital, Muddy Waters, 2018-2019)
Sportswear maker Anta Sports Products Ltd. defied the bets against its stock by climbing to a record high after multiple short-seller attacks. Anta Sports was in the crosshairs of three short sellers, including Blue Orca Capital and Muddy Waters, who questioned the company’s financial reporting and relationship with distributors. After Anta Sports denied the allegations, its stock resumed surging and eventually peaked in mid-2021.
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