Short sellers in Hong Kong have a long track record of shaking up share prices to make short-term profits. But their influence is waning.
US short seller Muddy Waters is the latest to have fallen short of its own expectations when it launched a series of attacks on mainland sportswear retailer Anta Sports.
On July 7, the short seller published a report accusing the company of using numerous secretly controlled distributors to fraudulently boost its margins. This caused a 7% drop in the Hong Kong-listed company's share price before trading was suspended midday.
Over the next 10 trading days, Muddy Waters followed up with four separate reports accusing Anta of fraudulent financials. However, the stock price subsequently rallied strongly and by the market's open on July 29 had risen by 19%.
In another case, Chinese down clothing retailer Bosideng International saw its share price plunge by nearly 25% after activist short seller Bonitas Research accused it of overstating its revenue and profit on June 24. Similar to Anta Sports, Bosideng’s shares bounced back on the next day and recovered all its losses within the next five days.
An even more extreme case was Xinyi Glass. In a highly unusual case, the Chinese glassmaker's share price ended up 1.4% a day after GMT Research criticised it of using offshore debt and asset sales to fund its dividend payments.
For short sellers, the results of these recent attacks are much less satisfactory compared with some of their previous successes.
In 2014, notably, activist Anonymous Analysis launched what could be the most successful short-selling attack to date in Hong Kong. It claimed that Tianhe Chemicals, a Chinese manufacturer of lubricant additives and specialty fluorochemicals, had falsified its prospectus in the run up to its $654 million initial public offering in June.
As a result, Tianhe was forced to suspend trading of its shares just three months after the IPO. The attack also prompted Hong Kong’s securities regulator to investigate the company’s wrongdoings. Trading in Tianhe shares is still suspended.
And earlier this year, Tianhe’s IPO sponsors – UBS, Morgan Stanley and Bank of America Merrill Lynch – were fined by the Securities and Futures Commission (SFC) for their extensive due diligence failures during the company’s IPO process.
So as an external force to regulate publicly listed companies, short sellers can be a force for good for the market, which is partly why short selling is legal in Hong Kong.
What's gone wrong lately then?
However, the trend more recently in Hong Kong is that it's the short sellers themselves who haven't been doing sufficient due diligence because many of the allegations have been rebutted not only by the target company but also by independent equity analysts.
In the case of Xinyi Glass, for instance, analysts from China Galaxy International noted that some of the information quoted in the short seller’s report, including comparables and benchmarks, were not particularly relevant.
And as short-seller attacks become more common, so the public is getting used to them and appreciating the need for more analysis before rushing to sell their stocks.
Many listed companies are now also trained by advisors on how to best respond to short-seller attacks to minimise the potential market and even operational disruption. As a result, it is becoming harder for short sellers to shake up a company by just throwing around allegations without solid and credible information to back them up.
Short sellers have also come under increased regulator scrutiny as historic misdemanours have come to light.
Earlier this year, activist Citron Research was penalised by SFC’s Market Misconduct Tribunal for publishing a false and misleading report on Chinese property developer Evergrande in 2012.
Citron founder Andrew Left was banned from trading Hong Kong stocks for five years and forced to hand over the HK$1.6 million ($204,700) profit he made from short-selling Evergrande shares.
It is the first time that the SFC has taken action against short-selling firms and is a possible game-changer for short-selling activities in Hong Kong.
At the very least, it should make short sellers a bit more cautious – although judging by recent activity, not everyone seems to have got the memo.