Bottom line: New complaints about deceptive and unfair practices by short seller Andrew Left and online cosmetics seller Jumei have some validity, but such actions are ultimately just forms of normal market behavior.
A couple of headlines are shining a spotlight on the recent wave of privatizations and an older flurry of short-seller attacks involving offshore-listed Chinese companies, amid accusations of unfair practices and market manipulation. One headline has Hong Kong’s securities regulator bringing a case against notorious short seller Andrew Left and his company, Citron Research, claiming they knowingly published false information about locally listed Chinese real estate developer Evergrande (HKEx: 3333). The other is seeing several smaller US fund managers protest the low value of a new privatization offer for online cosmetics seller Jumei International (NYSE: JMEI).
These cases share the common theme that each is market driven, and thus each seems perfectly acceptable. Short sellers are famous for issuing misleading information in a bid to drive down a company’s share price, but can only succeed if other investors believe them. Similarly, most of the privatization offers for Chinese companies over the last year offer healthy premiums to the latest trading prices, even if those prices are down sharply from earlier IPO levels.
At the end of the day, I usually support a hands-off approach in both types of cases. Investors need to do their homework before buying any stock, and should always be very careful when considering any claims in a report from a known short seller. Similarly, they also assume risks when they buy into small companies from a lightly regulated market like China, even if such companies look solid from a financial perspective.
Let’s start with Citron, which was a big headline-grabber several years ago when it and fellow short seller Muddy Waters made big profits by questioning the veracity of financial reports from a number of Chinese companies. Their reports were actually a key element that ultimately undermined many of the smaller companies’ credibility, causing their share prices to sink and leading to the current round of privatizations.
According to the latest reports, Hong Kong has just begun a 2-week hearing against Left and Citron to determine if they deliberately misled investors with a report accusing Evergrande of using accounting tricks to mask its insolvency. (English article) Evergrande’s stock fell 20 percent after the report came out, and Evergrande filed its own police report afterwards. Left isn’t facing any criminal charges, but could be banned from dealing in Hong Kong’s financial markets if he’s found guilty of wrongdoing.
Next there’s Jumei, which announced its privatization bid last week at a price of $7 per American Depositary Share (ADS). (previous post) While that represented a big premium to its recent levels, it was just a third of the $22 price for Jumei shares less than 2 years ago when the company made a New York IPO.
Now some minority investors who bought Jumei’s shares at levels closer to the IPO price are crying foul at this latest privatization offer, saying it grossly undervalues the company. (English article) Their argument holds a certain logic, since many Chinese companies now privatizing are majority-controlled by their founders, meaning those founders own enough shares to approve the buyouts at any price they want.
Still, those same minority investors are the ones who drove down stocks prices for companies like Jumei to begin with, and at least some probably made big profits by shorting the stocks. So it seems a bit unreasonable now for some of the investors who lost money in the process now to be complaining. At the end of the day, both of these stories are about natural market behaviors, and investors need to understand those behaviors and associated risks before making their trading decisions.
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