Short attack on Vitasoy proves to be a damp squib

Business | Ivan Tong 21 Jan 2020

Last week, an obscure short seller issued two reports on Vitasoy International (0345) on consecutive days starting Thursday, declaring that the Hong Kong drink maker's shares were only worth HK$10 apiece.

But the attack fizzled as Vitasoy's shares closed 5.6 percent higher after falling 5 percent in morning trade on the first day.

The roller-coaster performance left the short seller red-faced while also reflecting the troubles faced by these institutions in recent years.

The short seller goes by the name of Valiant Varriors with the latter word seemingly a pun on "warriors." Perhaps the founders wanted a clever alliteration using the letter "V" but it sounds rather odd to me.

The ambush on Vitasoy was Valiant Varriors' first attack on a Hong Kong-listed company.

On its website, Valiant Varriors claims to be a "truth seeker in incorrectly priced businesses" and says it was formed by a group of activist investors to unravel and assess the real value of listed companies by going deep into the books and beyond standard regulatory disclosures.

The short-selling report on Vitasoy appears foolhardy, as it drove Vitasoy's share price higher. Hyperbolically speaking, the short-selling report became a long-buying report and valiant warriors could perish in battle due to their wrong tactics.

As a matter of fact, the short-seller made at least two technical errors. Firstly, the report was issued at a time when Hong Kong stocks had risen for seven consecutive weeks. So unless the data in the short-selling report was correct and able to hit home, the chances of a win were pretty slim.

Secondly, Vitasoy's shares had risen to a peak of HK$47.25 last June from HK$3.5 a decade ago but had since fallen back to a lower level of HK$29.8 as of yesterday.

So the chances of success were slimmer compared with targeting the company when its share price was high.

Vitasoy is an 80-year-old homegrown brand that has become a household name in the city.

In recent years, Vitasoy expanded into the mainland and became one of the hottest brands in a market with over 1.4 billion people, propelled by funny internet memes declaring that drinking Vitasoy lemon tea is "cooler than smoking marijuana."

Valiant Varriors accuses Vitasoy of overstating its Chinese and Australian profits as well as capital expenditures and says its cash flow is poor.

It also questions Vitasoy's margins, given that its main competitors such as Uni-President China (0220) and Tingyi (0322) are all reporting lower margins due to higher costs.

The short seller says Vitasoy's margin of over 50 percent is too good to be true, as it's much higher than the industry average of around 35 percent.

Moreover, the report says though Vitasoy has established a stronghold in southern China, it has failed to make headway in the north, and that it has a poor record of launching new products.

Hence, Valiant Varriors reckons Vitasoy's current price-to-earnings ratio of 44.41 is too high, given the stiff competition.

To some degree, the decline in Vitasoy's price over the past year already reflects these problems, so it is unlikely this news will deal a fatal blow to Vitasoy.

Also, Vitasoy did not react like other listed firms which were previously attacked and suspend trading, and its price fell only over a short spell.

It appears Vitasoy was unperturbed over the report, possibly because its contents were weak.

Short sellers have found it difficult to make a killing in Hong Kong in recent years.

Previously, in the worst of cases, shares under attack fluctuated for at least three days and firms had to suspend trading to prepare their responses.

But this did not happen with Vitasoy. Therefore, I don't see many retail investors being able to make a quick buck from the short attack on a beloved brand.


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