Shorting Chinese Stocks 101
WANT to make a fortune short selling allegedly shonky Chinese stocks?
Then why not follow these easy steps.
Short sellers have, over the past year, taken to pieces a number of China-based companies. Hong Kong-listed Winsway Coking Coal Coal Holdings, which processes and transports coal from Mongolia to China, is the latest to fall victim to short sellers.
Just before the Chinese New Year break, Winsway was the subject of an anonymous "research" report accusing it of being a "massive fraud".
It spread around the internet in no time. In the space of a couple of hours, the stock had plummeted by about 15 per cent, wiping around $HK1 billion ($121 million) off its value. Looking through the Winsway report, and the other similarly aggressive reports that have triggered slides in other Chinese companies, it's clear a number of steps must be followed when attempting to bring the groups down.
First, come up with a catchy name for your research house. Short selling group Muddy Waters is arguably the godfather of the Chinese take-down, having got the ball rolling last June when it issued a scathing report into China-based, New York-listed timber company Sino-Forest.
The fraud accusations triggered a 93 per cent fall in the value of Sino-Forest, which, despite its protestations, has to date failed to overwhelmingly refute the allegations. The investment fund of billionaire fund manager John Paulson was one of the biggest casualties of the attack, taking a loss on its investment that was originally estimated at $US720m but which Paulson said was only $US107m.
The moniker Muddy Waters is not a homage to the legendary bluesman of the same name but taken from an old Chinese proverb: "Muddy waters make it easy to catch fish." In other words, according to the Muddy Waters website, opacity creates opportunities to make money. "This way of thinking has been part of Chinese culture for centuries, and is institutionalised in the modern (People's Republic of China)".
The attack on Winsway came from a previously unknown group called Jonestown Research, which takes its macabre name from the infamous Jonestown massacre of 1978 in which over 900 cult members simultaneously committed suicide.
Jonestown uses the phrase "Urging Investors Not to Drink the Kool-Aid" as its slogan.
Once you have a clever name, you'll need to find a company to target. That is easy as ratings agency Moody's has done all the work for you. Last year, Moody's released a list of 61 Chinese companies it had "red-flagged" for possible governance or accounting risks. Sino-Forest "only" picked up seven red flags, while Winsway picked up 11.
Next, when preparing your research report, don't beat around the bush. Jonestown, despite its faux protestations that "we do not say 'fraud' lightly", includes the words "fraud", "fraudulent", "fraudulently" or "fraudsters" no fewer than 22 times in the 10-page report, including five times on the first page alone.
In its latest attack, in which it has taken apart Chinese advertising company Focus Media Holding over its decision to purchase a ginseng plantation from one of its employees, Muddy Waters described Focus Media as "the Olympus of China".
In addition, make sure you include some on-the-ground reconnaissance in your research. Showing you've been on the ground easily distinguishes you from the mainstream analysts tucked away in their offices in New York, London and Hong Kong, and offers an example of why you've been able to detect fraud where others have failed.
Establishing your own credentials is completely optional.
Muddy Waters founder Carson Block, a former lawyer, has done nothing to protect his identity.
He has earned himself some fame but also plenty of death threats along the way and says he lives in hiding as a result.
There's no light shed into who is behind Jonestown.
You would think a lack of credentials would prove a hindrance, particularly when Muddy Waters and Jonestown openly disclose that they are actively shorting the companies that they are investigating.
But when it comes to choosing between the credibility of an unknown, unregistered "research house" throwing around fraud allegations at companies they are openly shorting, and a publicly listed and audited company that happens to have operations in China, the market appears more willing to back the former.
Part of the reason for that seems to be the great strike rate among the short sellers. Sino-Forest shares have been suspended since their 90 per cent plummet and its own inquiries haven't conclusively buried all the allegations against it.
It remains to be seen if Jonestown's Winsway accusations are as damaging as Muddy Waters' Sino-Forest accusations have been, and it's important to note that a number of analysts have (tentatively) backed Winsway's version of events.
Until Chinese companies can get their transparency and trustworthiness up to, if not above, the standards expected in the rest of the world, outfits like Jonestown look set to take a few more Chinese scalps.
It won't be a motivation for Jonestown or Muddy Waters, but the short sellers are playing an important role in developing that transparency -- arguably a better job than regulators and auditors that have struggled to identify the inconsistencies unearthed by the short sellers so far.
source: The australian.com.au
*The key to this saga is transparency, thats what Chandler is trying to do.
Then why not follow these easy steps.
Short sellers have, over the past year, taken to pieces a number of China-based companies. Hong Kong-listed Winsway Coking Coal Coal Holdings, which processes and transports coal from Mongolia to China, is the latest to fall victim to short sellers.
Just before the Chinese New Year break, Winsway was the subject of an anonymous "research" report accusing it of being a "massive fraud".
It spread around the internet in no time. In the space of a couple of hours, the stock had plummeted by about 15 per cent, wiping around $HK1 billion ($121 million) off its value. Looking through the Winsway report, and the other similarly aggressive reports that have triggered slides in other Chinese companies, it's clear a number of steps must be followed when attempting to bring the groups down.
First, come up with a catchy name for your research house. Short selling group Muddy Waters is arguably the godfather of the Chinese take-down, having got the ball rolling last June when it issued a scathing report into China-based, New York-listed timber company Sino-Forest.
The fraud accusations triggered a 93 per cent fall in the value of Sino-Forest, which, despite its protestations, has to date failed to overwhelmingly refute the allegations. The investment fund of billionaire fund manager John Paulson was one of the biggest casualties of the attack, taking a loss on its investment that was originally estimated at $US720m but which Paulson said was only $US107m.
The moniker Muddy Waters is not a homage to the legendary bluesman of the same name but taken from an old Chinese proverb: "Muddy waters make it easy to catch fish." In other words, according to the Muddy Waters website, opacity creates opportunities to make money. "This way of thinking has been part of Chinese culture for centuries, and is institutionalised in the modern (People's Republic of China)".
The attack on Winsway came from a previously unknown group called Jonestown Research, which takes its macabre name from the infamous Jonestown massacre of 1978 in which over 900 cult members simultaneously committed suicide.
Jonestown uses the phrase "Urging Investors Not to Drink the Kool-Aid" as its slogan.
Once you have a clever name, you'll need to find a company to target. That is easy as ratings agency Moody's has done all the work for you. Last year, Moody's released a list of 61 Chinese companies it had "red-flagged" for possible governance or accounting risks. Sino-Forest "only" picked up seven red flags, while Winsway picked up 11.
Next, when preparing your research report, don't beat around the bush. Jonestown, despite its faux protestations that "we do not say 'fraud' lightly", includes the words "fraud", "fraudulent", "fraudulently" or "fraudsters" no fewer than 22 times in the 10-page report, including five times on the first page alone.
In its latest attack, in which it has taken apart Chinese advertising company Focus Media Holding over its decision to purchase a ginseng plantation from one of its employees, Muddy Waters described Focus Media as "the Olympus of China".
In addition, make sure you include some on-the-ground reconnaissance in your research. Showing you've been on the ground easily distinguishes you from the mainstream analysts tucked away in their offices in New York, London and Hong Kong, and offers an example of why you've been able to detect fraud where others have failed.
Establishing your own credentials is completely optional.
Muddy Waters founder Carson Block, a former lawyer, has done nothing to protect his identity.
He has earned himself some fame but also plenty of death threats along the way and says he lives in hiding as a result.
There's no light shed into who is behind Jonestown.
You would think a lack of credentials would prove a hindrance, particularly when Muddy Waters and Jonestown openly disclose that they are actively shorting the companies that they are investigating.
But when it comes to choosing between the credibility of an unknown, unregistered "research house" throwing around fraud allegations at companies they are openly shorting, and a publicly listed and audited company that happens to have operations in China, the market appears more willing to back the former.
Part of the reason for that seems to be the great strike rate among the short sellers. Sino-Forest shares have been suspended since their 90 per cent plummet and its own inquiries haven't conclusively buried all the allegations against it.
It remains to be seen if Jonestown's Winsway accusations are as damaging as Muddy Waters' Sino-Forest accusations have been, and it's important to note that a number of analysts have (tentatively) backed Winsway's version of events.
Until Chinese companies can get their transparency and trustworthiness up to, if not above, the standards expected in the rest of the world, outfits like Jonestown look set to take a few more Chinese scalps.
It won't be a motivation for Jonestown or Muddy Waters, but the short sellers are playing an important role in developing that transparency -- arguably a better job than regulators and auditors that have struggled to identify the inconsistencies unearthed by the short sellers so far.
source: The australian.com.au
*The key to this saga is transparency, thats what Chandler is trying to do.
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