Short sellers are increasingly targeting Hong Kong-listed Chinese companies they allege have committed accounting tricks, market manipulation and fraud.
And that is despite mounting hostility faced by investors who bet against stocks.
This year there have been nine campaigns by short sellers against Hong Kong-listed companies as of mid-July, a record for the period, according to data from Activist Insight. This time last year there had been only two and in 2015 six.
Short sellers said increasing capital flows between mainland China and Hong Kong, spurred by Beijing’s recent moves to open up its equity markets, were exacerbating corporate governance problems in Hong Kong.
“We suspect the increased capital flows between the mainland and Hong Kong have encouraged more stock manipulations and frauds in Hong Kong,” says Carson Block, the founder of Muddy Waters and among the most prominent short activists.
But calling out these frauds is not for the faint-hearted. Those betting against companies encounter a bitter response from their targets, as well as from the shareholders in those companies and from the Chinese authorities. The short sellers say the backlash can come in the form of litigation, smear campaigns, arrests, hacking of their information, surveillance, physical assault and death threats - against them, their staff and even their families.
Dan David, the 48-year-old co-founder of the US-based short activist GeoInvesting, says he has received emails detailing how he might die, has been the target of multiple attempted hacks, sued three times unsuccessfully, and confronted in his driveway by an angry investor.
"People would rather make money on a fraud than lose money on the truth,” says Mr David, who unveiled his most recent campaign against the food manufacturer China's Dali Foods Group in June.
Mr David claims the company has implausibly low expenses and salary costs, while its tax filings display troubling inconsistencies. The company has denied the allegations, which it says are misleading and based on selective information.
The short sellers borrow stock in a company and then sell it to take a short position - their hope being that they can buy the stock back at a lower price and close out the position at a profit.
Mr David and other short sellers focused on mainland Chinese stocks listed in Hong Kong say that poor regulation, weak enforcement and small public floats means there are more stocks overvalued in the territory than in other major markets.
China’s strict investment rules make it all but impossible to take short positions in individual domestic-listed Chinese stocks from overseas.
Some companies may have used accounting tricks to overstate their profitability, or have over-promised - perhaps they have a fad product whose popularity will fade quickly.
Critics say short sellers are cynical opportunists who destroy shareholder value for their own gain. The shorts counter by saying they are a force for good, going to great lengths to expose fraud and persistent problems with listing and governance standards in the city.
In June, Christopher Cheung, who represents financial services and business interests in Hong Kong’s legislative chamber, called on Hong Kong's securities and futures commission (SFC) to more tightly scrutinise short sellers, saying they had caused “serious disturbance to market order” in Hong Kong and hurt investors.
An SFC spokesman says: “The SFC considers that responsible research can all contribute to the overall market quality and price discovery process and has no intention to suppress legitimate commentaries on listed companies, whether positive or negative.”
Although less prominent than peers such as Mr Block, Mr David - who is also the chief investment officer of the hedge fund FG Alpha - has been seeking to expose dodgy dealings at Chinese companies listed outside the mainland since 2010.
He typically sets to work screening for a range of tell-tale signs, including auditors, brokers and investment banks that have a track record of working for questionable companies.
Some firms, such as the Asia-based Blazing Research, also solicit tips and will pay "handsomely" for useful information, it says.
Many firms hire private investigators to review a company’s operations in China. They can spend months pulling business registrations, poring over tax filings, counting truck traffic or point of sale terminals (sometimes after installing cameras), appraising land claims, and quizzing nearby residents. They are often looking to see whether the reality on the ground matches executives’ statements.
But such tactics can backfire. On one occasion, a member of Mr David's team was beaten-up by security guards who spotted him counting trucks driving in and out of the company's factory. Sometimes it is worse than that. AlfredLittle.com's researcher Kun Huang, a Chinese-born Canadian, was convicted of criminal behaviour and jailed in China for two years and then deported.
Mr David and Mr Block have also received anonymous threatening emails. One received by Mr Block in 2010 mentioned his wife Kathy, asking: "Are you, Kathy and your dad ready for a bullet?" Mr Block moved to California the same year and now minimises his time in Hong Kong, which he says is becoming a riskier environment for short sellers because of Beijing's increasing influence in the former British colony.
As Chinese companies grow savvier to short tactics, betting against them has become riskier. They are faster to rebut allegations and they also more often openly attack the short sellers’ credibility, making for more drawn-out, expensive campaigns.
They will call on large shareholders or friendly funds and brokers to help prop up the share price or to suck up the supply of borrowable stock, making it more expensive to cover short positions.
"Some Hong Kong stocks have a very limited public float, making it easy for the controlling shareholder to prop up the share price even though the company is indeed fraudulent," says Blazing Research.
It is unclear if Mr Block made or lost money on his December campaign against China Huishan Dairy after the company quickly halted its stock and announced the chairman was increasing his stake. The share price subsequently rose and stabilised until plummeting 85 per cent on March 24.
"Being right and making money are two different things. Most of the time they do intersect for us, but not all of the time,” says Mr Block.
* Reuters
Kanguva
Director: Siva
Stars: Suriya, Bobby Deol, Disha Patani, Yogi Babu, Redin Kingsley
From Zero
Artist: Linkin Park
Label: Warner Records
Number of tracks: 11
Rating: 4/5
The biog
From: Upper Egypt
Age: 78
Family: a daughter in Egypt; a son in Dubai and his wife, Nabila
Favourite Abu Dhabi activity: walking near to Emirates Palace
Favourite building in Abu Dhabi: Emirates Palace
What is Diwali?
The Hindu festival is at once a celebration of the autumn harvest and the triumph of good over evil, as outlined in the Ramayana.
According to the Sanskrit epic, penned by the sage Valmiki, Diwali marks the time that the exiled king Rama – a mortal with superhuman powers – returned home to the city of Ayodhya with his wife Sita and brother Lakshman, after vanquishing the 10-headed demon Ravana and conquering his kingdom of Lanka. The people of Ayodhya are believed to have lit thousands of earthen lamps to illuminate the city and to guide the royal family home.
In its current iteration, Diwali is celebrated with a puja to welcome the goodness of prosperity Lakshmi (an incarnation of Sita) into the home, which is decorated with diyas (oil lamps) or fairy lights and rangoli designs with coloured powder. Fireworks light up the sky in some parts of the word, and sweetmeats are made (or bought) by most households. It is customary to get new clothes stitched, and visit friends and family to exchange gifts and greetings.
The specs
Engine: Long-range single or dual motor with 200kW or 400kW battery
Transmission: Single-speed automatic
Max touring range: 620km / 590km
Price: From Dh250,000 (estimated)
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Thanksgiving meals to try
World Cut Steakhouse, Habtoor Palace Hotel, Dubai. On Thursday evening, head chef Diego Solis will be serving a high-end sounding four-course meal that features chestnut veloute with smoked duck breast, turkey roulade accompanied by winter vegetables and foie gras and pecan pie, cranberry compote and popcorn ice cream.
Jones the Grocer, various locations across the UAE. Jones’s take-home holiday menu delivers on the favourites: whole roast turkeys, an array of accompaniments (duck fat roast potatoes, sausages wrapped in beef bacon, honey-glazed parsnips and carrots) and more, as well as festive food platters, canapes and both apple and pumpkin pies.
Ruth’s Chris Steakhouse, The Address Hotel, Dubai. This New Orleans-style restaurant is keen to take the stress out of entertaining, so until December 25 you can order a full seasonal meal from its Takeaway Turkey Feast menu, which features turkey, homemade gravy and a selection of sides – think green beans with almond flakes, roasted Brussels sprouts, sweet potato casserole and bread stuffing – to pick up and eat at home.
The Mattar Farm Kitchen, Dubai. From now until Christmas, Hattem Mattar and his team will be producing game- changing smoked turkeys that you can enjoy at home over the festive period.
Nolu’s, The Galleria Mall, Maryah Island Abu Dhabi. With much of the menu focused on a California inspired “farm to table” approach (with Afghani influence), it only seems right that Nolu’s will be serving their take on the Thanksgiving spread, with a brunch at the Downtown location from 12pm to 4pm on Friday.
COMPANY%20PROFILE
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COMPANY PROFILE
Name: Rain Management
Year started: 2017
Based: Bahrain
Employees: 100-120
Amount raised: $2.5m from BitMex Ventures and Blockwater. Another $6m raised from MEVP, Coinbase, Vision Ventures, CMT, Jimco and DIFC Fintech Fund
if you go
The flights
Fly to Rome with Etihad (www.etihad.ae) or Emirates (www.emirates.com) from Dh2,480 return including taxes. The flight takes six hours. Fly from Rome to Trapani with Ryanair (www.ryanair.com) from Dh420 return including taxes. The flight takes one hour 10 minutes.
The hotels
The author recommends the following hotels for this itinerary. In Trapani, Ai Lumi (www.ailumi.it); in Marsala, Viacolvento (www.viacolventomarsala.it); and in Marsala Del Vallo, the Meliaresort Dimore Storiche (www.meliaresort.it).
What is an ETF?
An exchange traded fund is a type of investment fund that can be traded quickly and easily, just like stocks and shares. They come with no upfront costs aside from your brokerage's dealing charges and annual fees, which are far lower than on traditional mutual investment funds. Charges are as low as 0.03 per cent on one of the very cheapest (and most popular), Vanguard S&P 500 ETF, with the maximum around 0.75 per cent.
There is no fund manager deciding which stocks and other assets to invest in, instead they passively track their chosen index, country, region or commodity, regardless of whether it goes up or down.
The first ETF was launched as recently as 1993, but the sector boasted $5.78 billion in assets under management at the end of September as inflows hit record highs, according to the latest figures from ETFGI, a leading independent research and consultancy firm.
There are thousands to choose from, with the five largest providers BlackRock’s iShares, Vanguard, State Street Global Advisers, Deutsche Bank X-trackers and Invesco PowerShares.
While the best-known track major indices such as MSCI World, the S&P 500 and FTSE 100, you can also invest in specific countries or regions, large, medium or small companies, government bonds, gold, crude oil, cocoa, water, carbon, cattle, corn futures, currency shifts or even a stock market crash.
Company Profile
Company name: NutriCal
Started: 2019
Founder: Soniya Ashar
Based: Dubai
Industry: Food Technology
Initial investment: Self-funded undisclosed amount
Future plan: Looking to raise fresh capital and expand in Saudi Arabia
Total Clients: Over 50
Singham Again
Director: Rohit Shetty
Stars: Ajay Devgn, Kareena Kapoor Khan, Ranveer Singh, Akshay Kumar, Tiger Shroff, Deepika Padukone
Rating: 3/5
Disclaimer
Director: Alfonso Cuaron
Stars: Cate Blanchett, Kevin Kline, Lesley Manville
Rating: 4/5
COMPANY%20PROFILE
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Cricket World Cup League 2
UAE squad
Rahul Chopra (captain), Aayan Afzal Khan, Ali Naseer, Aryansh Sharma, Basil Hameed, Dhruv Parashar, Junaid Siddique, Muhammad Farooq, Muhammad Jawadullah, Muhammad Waseem, Omid Rahman, Rahul Bhatia, Tanish Suri, Vishnu Sukumaran, Vriitya Aravind
Fixtures
Friday, November 1 – Oman v UAE
Sunday, November 3 – UAE v Netherlands
Thursday, November 7 – UAE v Oman
Saturday, November 9 – Netherlands v UAE
COMPANY%20PROFILE%20
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Wicked
Director: Jon M Chu
Stars: Cynthia Erivo, Ariana Grande, Jonathan Bailey
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Nayanthara: Beyond The Fairy Tale
Starring: Nayanthara, Vignesh Shivan, Radhika Sarathkumar, Nagarjuna Akkineni
Director: Amith Krishnan
Rating: 3.5/5
Zayed Sustainability Prize
The biog
Favourite hobby: I love to sing but I don’t get to sing as much nowadays sadly.
Favourite book: Anything by Sidney Sheldon.
Favourite movie: The Exorcist 2. It is a big thing in our family to sit around together and watch horror movies, I love watching them.
Favourite holiday destination: The favourite place I have been to is Florence, it is a beautiful city. My dream though has always been to visit Cyprus, I really want to go there.
Global institutions: BlackRock and KKR
US-based BlackRock is the world's largest asset manager, with $5.98 trillion of assets under management as of the end of last year. The New York firm run by Larry Fink provides investment management services to institutional clients and retail investors including governments, sovereign wealth funds, corporations, banks and charitable foundations around the world, through a variety of investment vehicles.
KKR & Co, or Kohlberg Kravis Roberts, is a global private equity and investment firm with around $195 billion of assets as of the end of last year. The New York-based firm, founded by Henry Kravis and George Roberts, invests in multiple alternative asset classes through direct or fund-to-fund investments with a particular focus on infrastructure, technology, healthcare, real estate and energy.
COMPANY PROFILE
Founders: Alhaan Ahmed, Alyina Ahmed and Maximo Tettamanzi
Total funding: Self funded
Generation Start-up: Awok company profile
Started: 2013
Founder: Ulugbek Yuldashev
Sector: e-commerce
Size: 600 plus
Stage: still in talks with VCs
Principal Investors: self-financed by founder
COMPANY%20PROFILE
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Libya's Gold
UN Panel of Experts found regime secretly sold a fifth of the country's gold reserves.
The panel’s 2017 report followed a trail to West Africa where large sums of cash and gold were hidden by Abdullah Al Senussi, Qaddafi’s former intelligence chief, in 2011.
Cases filled with cash that was said to amount to $560m in 100 dollar notes, that was kept by a group of Libyans in Ouagadougou, Burkina Faso.
A second stash was said to have been held in Accra, Ghana, inside boxes at the local offices of an international human rights organisation based in France.
THE%20FLASH
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BAD%20BOYS%3A%20RIDE%20OR%20DIE
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Company profile
Name: Tharb
Started: December 2016
Founder: Eisa Alsubousi
Based: Abu Dhabi
Sector: Luxury leather goods
Initial investment: Dh150,000 from personal savings
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The biog
Favourite car: Ferrari
Likes the colour: Black
Best movie: Avatar
Academic qualifications: Bachelor’s degree in media production from the Higher Colleges of Technology and diploma in production from the New York Film Academy
In numbers: China in Dubai
The number of Chinese people living in Dubai: An estimated 200,000
Number of Chinese people in International City: Almost 50,000
Daily visitors to Dragon Mart in 2018/19: 120,000
Daily visitors to Dragon Mart in 2010: 20,000
Percentage increase in visitors in eight years: 500 per cent
If you go
Where to stay: Courtyard by Marriott Titusville Kennedy Space Centre has unparalleled views of the Indian River. Alligators can be spotted from hotel room balconies, as can several rocket launch sites. The hotel also boasts cool space-themed decor.
When to go: Florida is best experienced during the winter months, from November to May, before the humidity kicks in.
How to get there: Emirates currently flies from Dubai to Orlando five times a week.
