Updated, 8:45 a.m. |
HONG KONG — Trading in shares of Tianhe Chemicals, a Chinese company that raised about $650 million in a Hong Kong listing in June, was suspended late Tuesday morning after a report on a website affiliated with short-sellers described the company as “one of the largest stock market frauds ever conceived.”
Before the trading halt, Tianhe shares fell nearly 5 percent after the midmorning publication of the report by Anonymous Analytics, a faction of the hacking group Anonymous, which said Tianhe had grossly overstated its revenue and profit in recent years, in some cases by as much as 85 percent.
Anonymous Analytics says it seeks to expose fraud and corruption at public companies, and it has taken aim at Chinese businesses before. It said in a disclosure Tuesday that it held no position in Tianhe shares but that readers should assume that other people and companies with ties to Anonymous Analytics had sold short Tianhe stock or debt “and therefore stand to gain substantially in the event that the price of the stock decreases.”
In an announcement to the stock exchange Tuesday evening, Tianhe, which makes lubricant additives, said the Anonymous Analytics report “contains errors of fact, misleading statements and malicious accusations,” and that Tianhe’s directors were preparing a response to clarify the situation “as soon as practicable.”
Tianhe added that it was “committed to providing full and accurate disclosures to investors and to rebutting any false allegations that attempt to undermine confidence in the company’s business, management, and operations.”
“The company reserves its right to take legal action for damages or other relief,” Tianhe said.
Before listing in Hong Kong, Tianhe became enmeshed in a bribery investigation into the hiring practices of Wall Street banks, after JPMorgan Chase removed itself from a potentially lucrative underwriting role in the company’s share sale.
The bank is one of several being investigated by the United States Securities and Exchange Commission, which is trying to learn whether the practice of hiring the children of China’s political and business elite was directly linked to winning deals. JPMorgan had employed the daughter of Tianhe’s chairman.
The woman, Wei Jiao, also known as Joyce Wei, moved last October to UBS, which was also acting as an underwriter on Tianhe’s I.P.O. UBS suspended two bankers in February during an internal investigation into the hiring of Ms. Wei and its role in the deal. One of those bankers has since left the company, which remained an underwriter for Tianhe.
Tianhe had planned to raise as much as $1 billion but lowered the target for its I.P.O. in June to 5.07 billion Hong Kong dollars, or $654 million, pricing its shares at 1.80 Hong Kong dollars each. The stock has since risen sharply and despite the decline on Tuesday was trading at 2.31 dollars, or 28 percent above the I.P.O. price. Tianhe’s market value stood at about 59 billion dollars.
In recent years, it has not been uncommon for short-sellers and their affiliates to publish highly critical reports alleging fraud or dubious accounting at Chinese companies. Shares in the targeted companies often fall in immediate response to such reports, meaning a short position — or a bet that the stock price will fall — can yield significant profits, even before the company has a chance to respond to the allegations, which may or may not turn out to have substance.
Other outfits, including Muddy Waters Research, Glaucus Research Group and the website Alfredlittle.com, have exposed several accounting issues at Chinese companies that in some cases have led to steep declines in stock prices, delistings and regulatory investigations. But China has been making it more difficult to conduct their kind of on-the-ground research. The Chinese authorities have been curtailing access to domestic corporate filings and have even jailed analysts conducting research in the country.
In its report on Tuesday, the contents of which could not be independently verified immediately, Anonymous Analytics said that original filings made by Tianhe’s main Chinese operating subsidiaries to the State Administration for Industry and Commerce, or S.A.I.C., showed revenue and profit that were 85 percent less and down to nearly nonexistent, compared with what the company declared in its filings to investors in its Hong Kong I.P.O.
“The S.A.I.C. filings show that at best, Tianhe is a relatively small company which generates only a fraction of the business it claims,” the Anonymous Analytics report said. “Given these discrepancies, Tianhe’s I.P.O. prospectus appears to contain some of the most fabricated financial statements we have ever encountered.”
The report also claimed that Tianhe’s Chinese units kept two sets of books, both of which were filed to the S.A.I.C. but only one of which was shown to the company’s Hong Kong auditor, Deloitte Touche Tohmatsu.
“The original set was audited by a registered local auditing firm and shows that Tianhe is a fraud,” the report said. “A second set was audited by Deloitte and matches with Tianhe’s I.P.O. prospectus.”
A spokesman for Deloitte declined to comment.
Tianhe’s I.P.O. had four lead underwriters, UBS, Goldman Sachs, Morgan Stanley and Bank of America’s Merrill Lynch unit. Representatives of all four declined to comment Tuesday.
Anonymous Analytics first rose to prominence among short-sellers of Chinese stocks in September 2011, when it published a report on its website alleging that Chaoda Modern Agriculture, a Chinese vegetable grower, had been deceiving investors and perpetrating corporate fraud for a decade. Chaoda’s shares were immediately suspended from trading in Hong Kong, and the company later fiercely rejected the report’s claims.
But Chaoda has struggled since — the stock remains suspended from trading, and a recent filing of its unaudited results for the past three years shows the company losing money after a sharp decline in revenue. Chaoda blamed the Anonymous Analytics research report, saying the report had tarnished its reputation and led its business partners to lose confidence in it.
Other reports have not had the same effect. Since Anonymous Analytics published a critical report against it in July 2012, shares of Qihoo 360, a Chinese Internet company listed in New York, have risen about 400 percent.
In May of this year, Anonymous Analytics made its first “buy” recommendation on a stock, Demand Media, an American digital media company listed in New York. The shares have since risen only slightly.
Short-sellers borrow a company’s stock and sell it, in a bet they can buy it back more cheaply before the shares need to be returned. As of Friday, a record-high 2.3 percent of Tianhe’s shares were out on loan, a key indicator of short-selling activity, according to data from Markit, a financial information services company. Demand to borrow the stock was heavy, with Markit’s data showing almost 80 percent of the shares that could be borrowed from stock lending programs were already loaned out.
In response to emailed questions seeking more information about the group and whether it made money from the report, such as by preselling its research findings to short-sellers or others, Anonymous Analytics wrote in an email: “We don’t really talk about AA’s structure and how we operate. However, regarding your question, none of us (AA) have any sort of financial interest in Tianhe. In fact, we haven’t made a penny from our work on this report. We did this report because it’s what we do and it’s the right thing to do.”