Shares of Tianhe Chemicals dropped 4.9% before being halted on Tuesday after a research report claimed the company falsified prospectus details.
Anonymous Analysis, a short-selling group, gave a zero target price and a return of -100% for Tianhe, which has a market value of HK$62 billion (US$8 billion). It strongly recommended investors to sell Tianhe’s shares.
Tianhe raised $654 million through an initial public offering in June, the fifth-largest IPO in the city this year. However, the IPO process stirred the market in January when JP Morgan stepped aside from the deal amid an investigation by US authorities into its hiring practices in China.
The bank exited because of concerns over the hiring of Joyce Wei, daughter of Tianhe’s chairman, who worked at the bank in its Hong Kong office during the company’s IPO preparation.
Wei resigned from JP Morgan and moved to UBS, which was one of four joint global coordinators on Tianhe’s IPO.
Tianhe claims in the prospectus to be the largest player in the lubricant additives and specialty fluorochemicals at the time of listing.
However, Anonymous’ report claims Tianhe overstated its scale, scope and profitability in its listing prospectus, subsequent earnings announcement and other data.
In response to the allegations contained in the report, Tianhe issued a statement on Tuesday night, posted on the Hong Kong Stock Exchange website.
"[Tianhe notes] that the report contains errors of fact, misleading statements and malicious accusations against the Company and its Directors. The Directors are preparing the response to the Report and clarification announcement(s) will be made by the Company to address the allegations in the Report as soon as practicable," it said in the statement.
It is not a new strategy for short selling companies to publish a report criticising a company and it is always difficult for investors to test the validity of the reports, with some ending up off target.
Muddy Waters in October issued a report poking holes in the finances of US-listed Chinese internet firm NQ Mobile but investors later found at least one of the claims to be unfounded.
Shares of NQ Mobile declined more than 60% three days after the report, then pared the loss to 44% in a few more days.
Nevertheless, Anonymous urged Hong Kong’s regulator to take action.
It is understood by market watchers that investors may blame the regulators, especially when watchdogs are strengthening supervision on IPOs and treating sponsors more strictly.
The Securities and Futures Commission said in August that IPO sponsors are subject to existing statutory civil and criminal liability for defective prospectuses.
The issue also raised concerns as to the corporate governance of Chinese companies, a topic that appears often in short-selling companies’ reports.
“The overall situation [in corporate governance] is improving in China,” said Rui Li, a research analyst with Asian Corporate Governance Association. “Privately owned firms perform better than some state-owned enterprises because of more competition.”
