Short sellers target China, this time from the shadows

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#1
A new wave of short-selling. This time is less credible as anonymous, rather as publicly known names e.g. Carson Block of Muddy Waters

Short sellers target China, this time from the shadows
22 Sep 2014 06:17
[HONG KONG] Short-sellers who profit from stock price declines have resumed targeting Chinese companies after a three-year lull, but many of the researchers who instigate the strategy are now cloaked in anonymity, shielding themselves from angry companies and Beijing's counter-investigations.

Three reports published this month separately accused three Chinese companies - Tianhe Chemicals, 21Vianet and Shenguan Holdings - of business or accounting fraud. All three companies said the allegations were baseless but their shares were hit by a wave of short-selling by clients of the research firms and then by other investors as the reports were made public.

The reports were written by research firms that did not publicly disclose names of research analysts or even a phone number.

In the last wave of short-selling that peaked in 2011 and wiped more than US$21 billion off the market value of Chinese companies listed in the United States, the researchers advocating short-selling were mostly public.
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Source: Business Times Breaking News
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#2
Anonymous Analytics which I alluded in the Noble thread that IMHO is more credible than Iceberg, actually published a strong buy report on Shenguan, in direct contradiction to Emerson. Interesting...

http://www.anonanalytics.com/2015/03/she...dings.html
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#3
Playing snakes and ladders

John Kehoe
1091 words
17 Apr 2015
Financial Review Smart Investor
FRSINV
English
Copyright 2015. Fairfax Media Management Pty Limited.
MASTERMIND

PROFILE

Name: Carson Block

Title: Muddy Waters Research CEO

Specialty: Identifying fraudulent Chinese corporates

Buying Chinese shares directly exposes investors to a new dimension of risk, as controversial short-seller Carson Block tells John Kehoe from San Francisco.

Carson Block’s reputation as a whistleblower on Chinese fraud is unrivalled. Five years after he set up independent research house Muddy Waters Research, his brand of investor activism has led to four Chinese companies being delisted, six separate formal regulatory investigations and numerous resignations.

Block first twigged that fraud was occurring on an epic scale while he was working as a corporate lawyer in Shanghai in the 2000s when he discovered the numbers at many Chinese companies didn’t add up.

He describes the extent of fraud in China as being the world’s biggest open secret.

“The rest of the world is so bullish on China but has no clue as to the problems that are piling up,” he says. The Muddy Waters team identifies fraud by picking apart company reports, unravelling complex related-party deals and analysing publicly available data.

In 2011, Block took on a Chinese company called Sino-Forest, worth $US5 billion, which had the backing of hedge fund legend John Paulson as its biggest shareholder.

Sino-Forest filed for bankruptcy less than one year later.

Revelations from Muddy Waters about fraud at China Media Express Holdings caused Deloitte to resign as its auditor, the chief financial officer and two directors to quit and the Nasdaq exchange to delist the company after its stock price fell 93 per cent in four months.

But perhaps the most intriguing examples uncovered by Carson Block have involved good old-fashioned shoe leather.

Such as the time his company paid a visit to the headquarters of a billion-dollar Chinese company only to find a dingy and unoccupied office suite. Or the time he tracked down the supposedly expert valuer of $US585 million worth of telecommunications infrastructure to a bullet-ridden building in Mexico.

Having firmly established himself as the short-selling expert, Block is now branching out in an attempt not to be pigeonholed. In late February he announced his first “long” after singling out the latent value in Bolloré Group, a conglomerate owned by a French billionaire. Whether he will be as successful in playing the long game remains to be seen.

Why did you set up Muddy Waters Research?

I founded Muddy Waters Research in 2010 really by accident. My father was an investment analyst and got interested in some of these US-listed Chinese companies.

I helped with due diligence and was shocked to find an audited public company was a complete fraud. It [Orient Paper] reported revenue of $US100 million [but actual] revenue of about $US2.5 million or $US3 million. I then knew there was a real business to be built.

Why are you so concerned about fraud in China?

I lived in China for about six years. Is China that much more riddled with fraud and more corrupt than other developing markets? Not necessarily. But what makes China unique is the vast amount of Western capital that has flowed in.

Surely fraud can’t be all that entrenched?

It’s pretty widespread. Certainly, not all of them are inventing more than 90 per cent of their revenue. [But] I think a lot of them are committing fraud. Back in the 2000s, when these companies were hitting the US market, American investors were considered a joke in China, being so ready to believe any stupid growth story they were fed. So there was a massive wave of people trying to take advantage of US investors willing to pay, and a lot of frauds were floated.

The investment case for emerging economies such as China is pretty strong. How do you reconcile that with what you do?

The problem is the economy is not like Australia’s or the US’s. It’s a planned economy. The markets in China are very tightly controlled in terms of what companies are allowed to list. There aren’t that many great companies that have gone public because of the political system. The commodity companies are very leveraged to China so, if you believe in the China growth story, maybe you could shop around the commodity producers. But I’m not recommending that.

What about the Chinese e-commerce business Alibaba for instance? Its $US200 billion initial public offering was the biggest float of all time.

Surely that’s beyond reproach.

It’s a real and very impressive business, but they could completely be making up their numbers and nobody would know. Jack Ma is the guy who literally took Alipay from his shareholders without telling them for a few months. Then they found out later and he came up with some excuse how the government made him do it. If the fraud is widespread, how can they get away with it?

No Chinese fraudster, until recently with one [exception], has ever been materially punished for duping US investors. The governments don’t co-operate and US regulators have an incredibly hard time getting information out of China.

Are Western investors naive about the risks?

A mistake a lot of Western business people make in China is they ask “why would he be lying to me?” But you have to ask, “Why would he be telling the truth?” Why can’t Western regulators act?

Whether it’s the US or Australian regulator, translating documents a Chinese company provides takes a lot of resources. The companies can also claim China’s state-secret laws prevent them supplying information.

Do you scrutinise other areas outside China?

Some of the biggest frauds in history have occurred in the US.

We don’t just focus on China. We look at other companies all the time. You don’t generally see anything as egregious among Western companies. The arguments in the West tend to be more around capitalising expenses.

Muddy Waters recently announced its first long position in French company Bolloré Group. Can we expect more long positions in the future?

We’re still as sceptical about companies and the overall market as ever; however, that doesn’t mean we won’t ever find situations in which it pays to be long. Bolloré is the mirror image of our short research process. We have to see through a good deal of opacity to understand what it is worth, which is what created the opportunity to go long.


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