True or not, short-seller reports hurtEditorial | Mary Ma 25 Jun 2019
Bosideng International Holdings, China’s largest winter clothing maker, had a flash-like crash after stock trading opened yesterday – thanks to a damning report by short seller Bonitas Research.
The Hong Kong-listed mainland company halted trading after its share price slumped 28 percent in less than two hours, ending down 25 percent at HK$1.73.
It wasn’t the first time mainland firms traded on the SAR’s bourse have been attacked by a foreign-based short seller. Some victims, like napkins-diapers maker Hengan International, have regained stability after answering queries satisfactorily, while others remain crippled.
It’s been the common understanding that global warming is a threat to winter clothing makers like Bosideng. So investors weren’t surprised when the Suzhou-based company’s annual turnover during the past five years fell from a high of 8.2 billion yuan (HK$9.31 billion) to a low of 5.7 billion yuan.
Last year, its turnover rebounded to 8.8 billion yuan after the firm diversified its products to include other fashions – a tremendous achievement in normal commercial terms.
During the same period, Bosideng’s yearly net profit also fluctuated from 690 million yuan to 130 million yuan, before climbing to 610 million yuan last year. Corresponding fluctuation was mirrored in its stock price.
The company is poised to announce its annual results tomorrow. Prior to the short selling report, it was expected to mark another year of success.
However, the damning report has raised doubts about Bosideng’s extraordinary rebound, alleging the firm overstated its revenues and profits – with particulars of various essential transactions not sufficiently disclosed.
As Bosideng moved to suspend trading, it countered that the accusations contained “untrue and misleading information.” But the company has yet to provide details to dispute Bonitas’ allegations.
While it remains to be seen if Bosideng can successfully clarify the queries to assure market investors, there can only be two probable outcomes in the present case: first, the report contains no truth as insisted by the down clothing maker; second, there are grains of truth in the accusations.
If the Bonitas report is unfounded, it would raise an issue that the Hong Kong stock exchange is being used as an automatic teller machine by short-selling agencies that may readily cash in by building short positions on a selected target, ahead of publishing a so-called report full of fabricated information, and at the same time remaining free from the watch of the SAR’s market regulator.
Since most of these research agencies are based overseas, they’re so far afield that the regulator’s arm would be unable to reach them. Then, how can the legitimate interests of retail investors be suitably safeguarded?
Or if the report is unfortunately true, it would call into question the merits of the entire market operation here, ranging from HKEX and the Securities and Futures Commission, to accounting and auditing professionals responsible for the truth of company statements.
In such a scenario, investors’ interests aren’t being appropriately protected.
In either case, it would be bad for Hong Kong’s reputation as an international financial center.
Shouldn’t Financial Secretary Paul Chan Mo-po do something about it?