is responsible for auditing Evergrande PwC is officially under regulatory investigation!
burst! The Financial Reporting Bureau of the Hong Kong Special Administrative Region of the People's Republic of China officially launched the following actions:
(1) Inquiry on China Evergrande Group's annual statements ended December 31, 2020 and the interim financial statements for the six months ended June 30, 2021!
(2) An investigation into the audit of Luo Bingxian Yongdao Accounting Firm (Note: Luo Bingxian Yongdao is the translation of PwC in Hong Kong, China) on the 2020 annual accounts!
Source: Investment Banking Things Dahua Finance Comments
Extended Link:
Citron, I'm on the road to shorting Evergrande
Mass Entrepreneurship and Innovation 020-09-25
text | Play with Hong Kong stocks | Hong Kong Xiaoba
Hong Kong Government Market Improper Behavior Tribunal ruled on the evening of the 19th that Andrew Left, founder of the US short-selling research institution Citron (Citron Research), founder of Andrew Left) was sentenced to ban the Hong Kong market within five years for spreading false information, returning the profit of HK$1.6 million from shorting Evergrande and bearing the legal expenses of the case.
Who is Citron
In 2012, Citron founded by 41-year-old Andrew Left, there was only one boss and employee. Some people once said that he was a Wall Street freak who was banned from trading in the futures market for misconduct by his employer in his early years.
It is reported that 22-year-old Lefford joined a futures company after graduating from Northwestern University in the United States. Six months later, he was punished for improper behavior. Lefford switched to the securities market and founded the Stocklemon website in 2001, and was engaged in short-selling stocks.
This is the predecessor of Citron.
Lefund once expressed his purpose of shorting without hesitation. He once said: "My job is to try to combine this information for comprehensive analysis, and then selectively shorting. This is my main business, and I make a living."
The deadly "lemon"
From Lefund's founding of Stocklemon (stock lemon) to Citron, which was officially established in 2012, in the past 12 years, Lefund has shorted 150 companies in this way.
. Before 2006, his short-selling target was very active in the US listed companies, among which 46 US listed companies were forced to delist or suspended trading .
In 2006, Left turned its attention to Chinese companies listed overseas.
On September 2, 2006, LeFutt released its first short-selling report for China Technology Development Group (CTDC). In the following time, 15 of the 20 Chinese companies it shorted, and 7 were delisted and delisted.
Especially since 2010, LeFoot has significantly increased the frequency of shorting Chinese companies, among which Harbin Taifu Electric has been privatized and delisted at the end of 2011.
On November 1, 2011, Leford launched a sneak attack on Qihoo 360, saying that its stock price was seriously overvalued and its target price was actually only $5. Affected by this, Qihoo 360 opened sharply lower the next day, with its stock price falling 10.34% to close at $18.12.
And at this time, the shorting of Evergrande has just begun.
game with Evergrande
Left once told the media that during the more than three months of tracking Evergrande, he spent almost every day studying Evergrande's public information and news reports. He hired more than a dozen Chinese people to help translate and interpret Chinese documents part-time, and also conducted some necessary investigations through them, and also hired many people to conduct field investigations.
According to data, in the early morning of June 21, American research institution Citron released a 57-page investigation report, saying that Evergrande Real Estate used its accounting strategy to cover up the fact that corporate insolvency and obtained land at a low price through bribery.
At 10:30 am, Evergrande Real Estate's stock price began to change suddenly, and a large number of shorted in the market. The short selling amount on that day increased by nearly 30 times compared with the previous day, and the total trading volume also increased by more than 12 times compared with the previous day, reaching HK$3.714 billion, causing the share price of Evergrande Real Estate to plummet by 19.6%.
At this time, Evergrande Real Estate quickly formed an analysis team, mainly composed of PwC's accountants and some law firms. It analyzed the 57-page Citron report one by one and formulated a rebuttal.
At 12:30 noon, Evergrande Real Estate issued its first brief clarification announcement.
At 1:30 pm, Evergrande Real Estate Chairman Xu Jiayin personally held a telephone conference for global investors, communicated effectively with investors, and responded to issues that investors were concerned about.
Subsequently, Xu Jiayin and other senior executives of Evergrande Real Estate immediately rushed from Guangzhou to Hong Kong to make further targeted arrangements to counterattack international short-selling institutions.
html At 12 noon on June 22, Evergrande issued a 9-page clarification announcement, refuting Citron's accusations in detail one by one.
On the afternoon of the afternoon, Xu Jiayin attended the Global Investors Conference held in Hong Kong and met with many investment banks in Hong Kong to stabilize the situation.
However, Citron still made a nominal profit of more than 2.8 million yuan from the short selling of Evergrande incident, of which the actual profit reached 1.6 million yuan.
Some media once said that the short-selling incident caused Xu Jiayin to enter a "rassip" state, and responded with "Beijing scolding" and responded to the accusations of the report with "fasting him" and said that the entire report was all rumor, and the behavior was "purely his robbery", and it also pointed out that the relevant behavior could be shot, which means "it's not over with him"! It also said that it will use legal means to protect the company's rights and interests.
On July 4, 2012, Evergrande Real Estate Vice President Lai Lixin went to the Wan Chai Police Headquarters in Hong Kong to report the case.
citron is "yellow"?
short selling incident attracted the attention of the Hong Kong Securities Regulatory Commission. In December 2014, the Hong Kong Securities Regulatory Commission launched a counterattack, accusing LeFutt of misconduct in publishing a short selling report on Evergrande Real Estate and conducting inquiry procedures.
In August 2016, the Hong Kong Government's Market Misconduct Tribunal ruled that Left's use of exaggerated words in his report was false and misleading, and could cause panic among ordinary investors.
On October 19, the Tribunal announced the penalty for Left, forbidding him from entering the Hong Kong market in the next five years, and asked Left to repay the actual profits earned by shorting Evergrande. It also stated that Left will also be subject to an ban order , and if he repeats such behavior, it will be considered a crime.
Counterattack
In recent years, short-selling institutions frequently published reports to snipe Hong Kong listed companies and make profits from it. In addition to Citron, there is also Depp Technology, which was once sniped by the short-selling agency Glaux. Now there are even anonymous short-selling institutions that are eyeing Chinese companies.
However, the Hong Kong Securities Regulatory Commission finally began to fight back. This punishment for Citron is the first time that the Hong Kong Securities Regulatory Commission has taken action against short-selling institutions.
However, some analysts believe that the judgment sends a strong message to the market, and Hong Kong regulators will never be ruthless about any form of market manipulation, and may also curb the market's publication of reports to criticize listed companies.
It is worth noting that Lefult's lawyer said Lefult will actively consider appeals and believe that the ruling is a major regression in the Hong Kong market.
I believe that in the future, Citron will start a tug-of-war with the Hong Kong Securities Regulatory Commission on this judgment. Hong Kong small snatched from the window to look~
Why did short-selling institutions choose Evergrande
from Axiotech was shorted. The market was filled with short-selling sentiment in early May. At that time, the domestic real estate stock had a huge increase, and the central government continued to introduce suppression policies. The internal housing sector has also become a sector that is short-selled by some local or foreign capital. Fund managers have increased their investment in shorting domestic real estate stocks, and the first choice is Evergrande Real Estate, which has the highest debt and has been chased by short-selling institutions.
Still remember five years ago, on the Dragon Boat Festival in 2012, Citron reported that Evergrande Real Estate covered up its insolvency with false information and bribes. After the Citron report was issued, Evergrande Real Estate's stock plummeted. On June 21, Evergrande Real Estate fell 11%, and Evergrande's market value shrank by HK$7.626 billion that day.
. Evergrande was shorted again
From the figure below, we can see that short selling institutions have been continuously shorting Evergrande.
html After the market on April 13, the announcement of China Evergrande on the Hong Kong Stock Exchange revealed the tip of the iceberg of this showdown. Evergrande said it repurchased 203 million shares for a total of approximately HK$1.736 billion, accounting for 1.475% of the issued shares.
. High debt is the reason for shorting
The problem of Evergrande is not only high debt, but also the much-criticized perpetual bond. Of the annual net profit of Evergrande 17.6 billion yuan, the interest expenditure on perpetual bonds alone reached 10.646 billion yuan. According to 2016 interim data, China Evergrande's mid-term perpetual bonds reached 116.02 billion yuan in 2016, ranking first in total, up 124.5% year-on-year, while , the second largest perpetual bond, had only 16.6 billion yuan in perpetual bonds.
It seems that Evergrande has realized that perpetual bonds have eroded a large amount of corporate profits. At the performance meeting, Evergrande President Xia Haijun said that two-thirds of the perpetual bonds will be repaid throughout the year. Even based on the scale of perpetual bonds last year, this figure is close to 80 billion yuan. In addition, the various debts due this year are 202.9 billion yuan, and there are very few 300 billion yuan left on the books.
. From the perspective of the policy, the domestic real estate stocks have risen significantly so far, and many stocks have nearly doubled. Everyone believes that tightening policies will cause sales growth to decline, so they rationally choose to look down on the internal housing industry, while Evergrande has the highest debt among the internal housing units.
. short is not dead, and the bulls are not only
Evergrande has successfully attracted the attention of shorting fund , next is the script of Boss Xu to lead you into the trap.
. Repurchase shares and reduce market chips
According to data disclosed by the Hong Kong Stock Exchange, the public's shareholding ratio is 22.04%, which is close to the upper limit of repurchase.
reduces the market's bargaining chips by repurchasing from the secondary market. You may say that the public shareholding ratio of 22.04% is still very high, and it cannot be compared with 5% of the Porsche case. But don’t forget that Boss Xu and a group of wealthy friends and the southbound funds hold 3%, so the actual street goods are far less than what we see.
Evergrande has spent more than HK$6.5 billion on share repurchase so far, so there are fewer and fewer chips on the market.
, Real Estate fundamentals good add good news to return to A-shares
Of course, stocks with a market value of 200 billion cannot be speculated without any fundamentals.
First of all, the fundamentals of the internal housing industry and Evergrande are not as bad as imagined. Because first-tier and second-tier cities are actually facing a very important problem, the supply shortage will be suppressed in the future, and will not increase supply. On the one hand, small and medium-sized cities should vigorously destock . Against the backdrop of further tightening of real estate regulation policies, the possibility of a real estate crisis breaking out in the short term is low.
In fact, Evergrande's fundamentals are also very solid. According to company information, the contract sales amount in 2016 was approximately RMB 373.37 billion, an increase of 85.4% from the contract sales amount in 2015, achieving 124.5% of the contract sales target of RMB 300 billion. Currently, the company's contract sales in the first four months were RMB 144.78 billion, achieving 32% of the target sales in 2017.
Second, everyone has been worried about Evergrande's high debt problem , but recently the market has reported that the company's Pre-ipo financing is quite smooth. At present, this PRE-IPO plan has raised 30-40 billion yuan. With funds returned to A-shares, the company can raise funds directly, which will significantly reduce its debt and solve the weaknesses that have always restricted the company's valuation.
Today Evergrande's stock price rose strongly, and the stock price hit a new high this year, perfectly hitting the shorts.
. Conclusion:
Many short funds may not know why they lost in this battle with Evergrande long-short battle today. Strictly speaking, shorting Evergrande is equivalent to shorting real estate, and shorting real estate is equivalent to shorting China. If you understand this way, you may understand the reason for the failure of shorting.
. The incident of shorting Chinese stocks in the United States and short selling in my country for domestic margin trading
Since 2006, large-scale enterprises have appeared in the United States and reached a new climax in 2010. Since the U.S. securities issuance adopts the registration system , the Securities and Exchange Commission reviews the application materials only focus on corporate information disclosure without making "substantial judgments". Some Chinese companies will commit financial fraud, fabricate contracts and other behaviors when submitting materials with a fluke mentality.
Therefore, some investigative agencies specializing in shorting " Chinese stocks " took the opportunity to enter. They caused stock prices to fall or even delist by exposing bad behaviors such as corporate financial fraud, and were called "Chinese stocks slayers". From the second half of 2010 to the end of 2012 alone, as many as 75 Chinese stocks listed in the US were delisted from the US securities market, and 56 were forced to delist, triggering a crisis of trust in Chinese stocks listed in the market. This also made those third-party investigative agencies that hunted "Chinese stocks" famous, among which the more famous are Muddy Waters Research and Citron Research.
The author collected short-selling incident information from the official websites of SEC, Muddy Waters, Citron, and various domestic financial websites, and selected 20 representative short-selling incidents, and sorted out the short-selling sources, incident subjects and short-selling results. From 2010 to 2013, Muddy Waters and Citron respectively released "investigation reports" of 10 companies. After the report was released, the stock prices of target companies all fell sharply, among which 10 companies including China Express Media and Green Technology were even delisted.
Evergrande Real Estate's stock price fell by 17% within half a day, Oriental Paper's stock price fell by more than 40% within 3 days, and New Oriental 's stock price fell by more than 57% within 2 days. According to statistics, among the Chinese stocks listed in the United States that were shorted by Muddy Waters and Citron, 8 companies caused the stock price to fall, and 10 companies caused the stock price to fall, and 10 companies caused the stock price to be delisted or reorganized. However, Muddy Waters and Citron did not hit every shot. Qihoo 360 bravely fought back against Citron's continuous short selling, so the stock price gradually rebounded after a timely rebuttal and a head-on response.
In April 2012, Muddy Waters launched an attack on Fu's Copvious, but the latter's stock price did not fall but rose for three consecutive days. In addition, five listed companies have rebounded after being shorted through counterattacks, such as Evergrande Real Estate, New Oriental and .com Qin .After my country officially started margin trading in 2010, A-share market began to short stock . Taking the "Jiuguijiu incident" as an example, on November 19, 2012, Jiuguijiu was exposed to plasticizer exceeding the standard by 2.6 times, and "Liquor Plasticizer" incident broke out, and the price of liquor stocks fell sharply on that day.
Statistics the margin trading margin trading balance of four liquor label stocks in the margin trading market before and after the outbreak of the incident. It can be clearly seen that the margin trading margin trading balance has increased significantly since November 15, 2012, and reached its peak on the day of the outbreak of the incident. Therefore, the "liquid wine plasticizer" incident is likely to be the result of the media and some investors' intentional shorting of liquor stocks. Similar changes in the number of margin trading also occurred in August 2012, , Zhangyu A, the day before the incident of pesticide residues was exposed. In the
plasticizer incident, on November 16, 2012 (a trading day before Jiuguijiu broke out in plasticizer), the margin margin of four liquor stocks in the two markets, Wuliangye , Luzhou Laojiao , Kweichow Moutai and Yanghe shares were 1.2486 million shares, 539,800 shares, 386,300 shares and 332,900 shares, respectively. On November 19, the declines of these four liquor stocks were 5.82%, 6.13%, 4.61% and 5.25%, respectively. Regardless of interest and handling fees, these margin margin trading holdings have a total profit of nearly 10 million yuan in a single-day manner. Similar short selling incidents include: the "CITIC Securities Rumors" incident in August 2012 and the "Changyu Wine Contains Carcinogens" incident, and the "Zoomlion Financial Falsification" incident in 2012.
. Comparative analysis of short selling patterns between China and the United States
(1) Comparative comparison of short selling forces between China and the United States
First of all, the composition of short selling forces is different. The short selling forces in the United States include third-party investigative institutions, media, law firms, securities traders, etc. Among them, third-party investigative institutions are the dominant force in short selling incidents. As the creator of negative news, they publish formal negative reports through official websites; the media plays a pure spreader and processor in short selling incidents, expanding the influence of negative news through reprinting and in-depth reports; law firms further strengthen the short selling effect by acting as class action for small and medium shareholders ,
securities traders obtain the spread profit by selling securities before negative news is released and buying securities after the stock price falls. The composition of China's short-selling forces is relatively simple. China lacks third-party investigative institutions, and law firms cannot participate in short-selling incidents through class action lawsuits. Short-selling forces only include media or individuals who publish negative news, and margin trading traders who build short-selling target stock positions.
Some media columns are playing the role of a third-party investigation agency, playing a role in the short-selling chain through in-depth reports on Black Swan Event . For example, NetEase investigation uses the slogan "Investigation discovers value, truth creates wealth" to explore the truth behind suspicious incidents of listed companies; 21st Century Blade, as the brand investigation column of 1st Century Network, aims to expose the crises under commercial fraud, financial fraud and irrational prosperity.
Secondly, the short selling forces in the United States are more active. In the United States, since negative news is released in the form of a short-selling investigation report, the source and form of information are relatively certain, so the transmission efficiency of the message is higher and the success rate of short-selling is also higher; and China's short-selling forces are not active yet, and the overly scattered negative news sources have weakened the public's recognition of the news, resulting in a series of subsequent chain reactions not obvious. Overall, China's short-selling forces are still in its infancy, and the resulting reverse pressure mechanism in the market is not strong enough.
(2) Comparative analysis of short-selling objects in China and the United States
The characteristics of short-selling objects in the short-selling events in China and the United States are also different. The short selling forces in the United States usually only target specific target companies, and the problems exposed are only related to the target companies themselves and are micro-level issues.Chen Bin and Liu Huijun are in "What kind of company is suspected of financial fraud?" 》 summarizes the characteristics of short-selling companies, which mainly include:
, which is much higher than the gross profit margin of the same industry, inconsistency between documents submitted to the industrial and commercial tax department and reported to the SEC, concealment or dependence on related transactions, management integrity issues and suspicious shareholders and management stock transactions, auditor poor reputation, etc. The previous two cases are the most. It is not difficult to find that after Muddy Waters Citron releases the target company's investigation report, it will usually only cause a decline in the stock price of one company, and will not affect other companies in the same industry.
In addition to individual stocks, domestic short selling targets also have short selling targets for the overall situation of the industry, which may be motivated to expand the short selling area and obtain more short selling benefits. Therefore, domestic short selling forces are also paying attention to common issues in the entire industry and macroeconomic events. For example, drug safety issues have attracted widespread attention and are easily affected by the "Black Swan" incident . In May 2013, domestic short-selling forces attacked Tongrentang cinnabar and exceeded the mercury standard.
In fact, the entire pharmaceutical industry was affected. Short-selling forces took the opportunity to short Yunnan Baiyao , Hansen Pharmaceutical , Renhe Pharmaceutical and other companies. The events that also caused the decline of the entire industry were the "Jiugui Liquor Plasticizer Exceeding the Standard" incident in November 2012 that caused a depression in the entire liquor market. In August 2012, short-selling forces shorted the entire real estate industry by spreading "national changes to real estate policies."
(3) Comparative analysis of short selling paths between China and the United States
The author summarized the development process of the Sino-US short selling incident since 2010: In the United States, short selling forces of all parties form a community of interests in short selling incidents, and shorted "Chinese stocks" in a nearly fixed model - first, look for targets with potential adverse factors, and master sufficient information through in-depth research; then, establish The company's short stock position is ready to short the "Chinese stock listed in the United States". After it is ready, the investigative agency will independently release a bearish report and expand its influence through media communication;
As the negative news is exposed and the stock price falls, the short-selling company may face a series of crises, such as rating agency lowering the rating, law firm suing, etc., so that the stock price will further fall, and finally the short side closes the position and divides the short-selling income according to the prior agreement. Since all the investigation agencies are officially registered companies, publicly publishing short-selling reports requires responsibility for the authenticity of the content.
In order to avoid becoming the object of a short-selling company, the investigative agency must ensure the reliability of the short-selling report, which objectively requires it to conduct a detailed "due diligence". Although the flaws revealed in the report are suspected of being "exaggerated as much as possible", the evidence is generally true and reliable, making it difficult for the target company to argue. This is also a more mature place where American short selling is more mature than Chinese short selling.
The Chinese shorting operation process is more simplified. Domestic short-selling forces rarely conduct professional due diligence, nor do they have special short-selling reports, but directly spread short-selling forces through the release of negative news. Relying on the rapid development and popularization of information technology, these negative news spread rapidly through various channels, with a huge influence and quickly brought panic to the market. Typical Chinese rumor is to use Weibo , WeChat, social networks and other media for widespread dissemination.
What is even more worrying is that these short-selling forces often hide in the dark, the source of the information is unclear and difficult to distinguish the authenticity. After being widely spread on the Internet, even if the news is falsified, it is difficult for the victim companies to hold the "initiator" accountable. The root cause is that the existence of margin system objectively leads to the motivation of investors to actively build short-selling chains to promote the falling of the target stock price. Negative news is one of the direct factors that lead to the decline of the stock price of listed companies, and the media will also be willing to spread negative news in order to obtain economic benefits, which has enabled margin trading traders and the media to form a community of interests.
Not only that, the greater the intensity of negative reports, the greater the impact on the stock price, and the stronger the "lag effect" of stock price recovery after refuting the rumors. Based on the above logic, the author believes that margin trading traders and the media can form short selling forces and cooperate with each other to short listed companies and divide short selling returns.
. Analysis of the reasons for the differences in short selling patterns between China and the United States
The above comparison analyzes the differences in short selling patterns between China and the United States. The author believes that the deep-seated reasons for this difference mainly come from institutional differences. The Dodd-Frank Financial Reform Act promulgated by the United States in 2011 legally recognizes the role of short selling institutions in supervising the capital market. In the United States, third-party investigative agencies are independently registered legal entities, focusing on exploring commercial or financial fraud of listed companies and publicly publishing short-selling reports.
Third-party investigation agencies play the role of "supervisor" in the capital market, but they also need to be responsible for their reports. Once they publish false short reports and make malicious profits, listed companies and investors who have been damaged can also file a defamation lawsuit against them and require them to bear corresponding legal responsibilities. This mutually restrictive mechanism complements the SEC's formal supervision of listed companies and improves the efficiency of the capital market. China currently lacks laws and regulations to clearly define the nature of short selling behavior, and the short selling behavior of investigative institutions is at risk of legality and compliance.
In the existing short selling incident, the regulatory authorities recognized the behavior of third-party investigative agencies to publish factual articles, but did not clearly characterize the consequences related to this. In the "Kangmei Pharmaceutical Incident", Zhongneng Industrial Co., Ltd. was accused of "selling short selling of 6 million yuan to 10 million yuan in advance, and making profits through shorting stocks through reports." Its general manager Zhao Bing publicly clarified and requested the China Securities Regulatory Commission to intervene in the investigation.
Nengxingye's statement reflects similar institutions' legal and compliance concerns about short selling behavior - if the securities are found, they will first sell margin trading, and then release a bearish report (only to state facts) to seek benefits. Whether the "muddy water short selling" operation model complies with the laws and regulations related to securities trading.
In response to the request of Zhongneng Industrial to confirm the legality of short selling, China Securities Regulatory Commission said that it is possible to publish factual articles without securities investment consulting qualifications. However, for the issue of "releasing real and reliable investigation and research information, but affecting the fluctuation of securities price , and institutions make profits, and whether it is suspected of constituting market manipulation" and "if any questions found, securities are first sold in margin trading, then publishing bearish reports, and whether the behavior of seeking profit violates the " Securities Law " and related laws and regulations", there are no explicit provisions in the current laws and regulations, and relevant departments need to make determinations based on specific facts and evidence based on legal procedures.
's concerns about the legality and compliance of short selling institutions are one of the reasons why there are currently no special short selling institutions like Muddy Waters in China. In addition, there are also differences in litigation systems between China and the United States. Under the group litigation system in the United States, when a listed company experiences financial fraud or false statements, all stakeholders can be used as plaintiffs for the lawsuit, and as long as one person wins the case, all shareholders will receive the same compensation. In practice, group litigation in the United States adopts a risk agency model, where lawyers advance all the fees and sue on behalf of shareholders. After winning the case, the lawyer will receive a compensation of approximately 20% to 30% of the total compensation.
risk agency model has stimulated the enthusiasm of market supervision of listed companies. Group litigation has greatly reduced the cost of organization and coordination among victims. Both have also led to law firms entering the short-selling industry chain through group litigation and joining other forces to short-selling listed companies. In the United States, some law firms make a living by litigation in securities groups, and are like vultures who keep a close eye on the movements of listed companies. This also forces companies to improve their corporate governance, business behavior and information disclosure procedures. In China, there is almost no such reverse pressure mechanism.
Compared with class action lawsuits, my country's Civil Procedure Law adopts the representative litigation system . According to Article 54 of the Civil Procedure Law, for the same litigation object, the right holder must register with the people's court, and the right holder registered in accordance with the law will elect a representative to conduct a lawsuit. The representative's litigation behavior will only be effective for the parties he represents. The judgments and rulings made by the people's courts only have effect on all rights holders participating in the registration. The registration system makes the representative system far less litigation efficiency than group litigation, and the majority of small and medium shareholders and law firms lack the motivation to take the initiative to sue listed companies.
Finally, the United States has more short selling tools than China. In the United States, short selling tools that can be used for the market include stock index futures , ETF short selling, short selling funds, etc., while China currently only has stock index futures; and for individual stock short selling, the United States has short selling in addition to short selling in margins, there are also financial derivatives such as option short selling, ADS, etc., while China has only opened the margin trading market, and the scale of margin trading is very small. For the sake of stabilizing the market, the margin trading targets are basically high-performance large-cap stocks, and there are few stocks listed on the SME Board and GEM. Therefore, the flexibility of short selling on US capital market is much higher than that of China.
. Suggestions for guiding and developing short selling mechanisms for margin trading
(1) Realize the sunshine of third-party investigation institutions
First of all, the legal entity status of the third-party investigation institutions should be confirmed from the legislative perspective and clarify the rights and obligations it has, that is, the short selling institutions have the right to publish short selling reports independently, but must be responsible for the authenticity of the published reports. Through the determination of the legal entity status, a third-party investigation agency that specifically publishes short selling reports will officially become a member of the capital market and be responsible for its own economic behavior.
This also helps protect the legitimate interests of listed companies and investors so that they can effectively obtain judicial relief for the system and when they are negatively sexually abused by the short selling system. At the same time, after confirming the legal status of a third-party investigation agency, institutions or individuals who are not third-party investigation agencies should also be restricted from publishing negative news or reports, and to prevent from malicious shorting of from the source.
Secondly, the regulatory authorities should improve the legal systems related to the investigation agencies to eliminate regulatory blind spots. This is also to prevent vicious short selling in the market. The motivation for investigative agencies to supervise listed companies is that they can short-sell profits through the information loopholes found. This mechanism is also accompanied by certain moral risks - the excessive profit-seeking psychology may lead to distortion of this supervision mechanism and become a tool for malicious profit-making. Therefore, the behavior of the investigation agency should be subject to corresponding supervision.
Since the short report is mainly aimed at listed companies, the author believes that the behavior of third-party investigative institutions should be subject to the supervision of the China Securities Regulatory Commission. The CSRC should clarify the scope of supervision of third-party investigation agencies, as well as the corresponding administrative supervision means and punishment measures, so that there is a law to follow when handling short selling incidents.
(2) Regulate the media's public opinion supervision behavior
In the process of developing the short-selling market, the author believes that the media should be strictly regulated to prevent them from becoming participants in malicious short selling. Judging from the current short selling situation in my country, the media mainly plays the role of exposing negative news from the company. Although this right allows the media to play the role of public opinion supervision in the market, it may also cause news ethical risks to the news of the news.
On the one hand, media people may engage in news extortion in violation of professional ethics and charge listed companies with a "paid silence" hush fees on the condition that they do not publish negative news. On September 3, 2014, relevant personnel from the famous financial media 21st Century Network were arrested for suspected major news extortion. They rely on the platform of 21st Century Network to sign an "advertising agreement" with the target company by not reporting negative news as bait.This "advertising fee" business model has long become a "unspoken rule" between IPO companies, listed companies and the media in the industry.
On the other hand, as analyzed in the previous article, media people may use in-depth reports on negative events of listed companies to participate in the short-selling industry chain and divide the economic benefits obtained by short-selling. The author believes that after developing third-party investigation agencies, investigation agencies should jointly assume the public opinion supervision function of listed companies with the media by publishing in-depth investigation reports, while the media can continue to play their supervision function through tracking reports or reprinting, and avoid the professional ethical risks of journalists.
(3) Strengthen the quality requirements for information disclosure of listed companies in .
From the perspective of the entire short-selling market, the weak quality of information disclosure has increased the information asymmetry between listed companies and the majority of investors, which makes investors unable to truly understand listed companies and provides a space for malicious short-selling for a few speculators.
First, the weak information disclosure quality increases the cost of market identification information, which is conducive to short sellers maliciously shorting using false information;
Second, because the majority of investors have dishonest stereotypes of corporate dishonest , when negative news or reports appear, investors often adopt an attitude of "rather trust it" and take inappropriate overreaction to the news.
Finally, the weak quality of information disclosure has also become an obstacle for enterprises to clarify the facts in a timely manner, so that short-selling listed companies may not be able to achieve immediate results when refuting rumors. Therefore, in order to make the short-selling market more standardized, reduce the possibility of malicious short selling and enhance the efficiency of information transmission in the market, higher requirements should be put forward for the quality of information disclosure of listed companies.
htmlLuckin Coffee's stock price plummeted 75% on April 2, allowing Muddy Waters to come to the front of the Chinese public again. However, in a strict sense, the plummeting Luckin Coffee's stock price was not directly due to Muddy Waters' investigation:
First of all, the reason for the plunge on April 2 was not directly due to Muddy Waters' report, but Luckin Coffee self-destructed that it had 2.2 billion false income (of course, the reason for its self-destruction was the report issued by Muddy Waters);
Secondly, although Muddy Waters released the report as early as February 1, 2020, it claimed that the report was sent by anonymous person, and Muddy Waters also released the report through Twitter, not its official website.
There is no report on Luckin Coffee on the official website of Muddy Waters Company
Although the content of the report is very "mutty water" style, even more than that, the method used by the report is exactly the investigation method that Muddy Waters has always used, but looking at Muddy Waters' past reports, there are few cases of using such great power. Therefore, most people do not believe in the statement of Muddy Waters, but rather believe that the report is done by Muddy Waters. But the author doesn't think so, because if you understand the history of Muddy Waters, you will know that Muddy Waters was born to short the Chinese stocks. If the report is what it does, it doesn't have to be in the name of others. (Of course, this possibility cannot be completely ruled out. After all, Muddy Waters had similar practices before)
In fact, this company was established ten years ago on June 28, 2010, and countless Chinese stocks were attacked by them. According to statistics on its official website information, it has released a total of 96 reports since its establishment, involving 36 companies, including 16 Chinese companies (excluding Luckin Coffee), which are htm in chronological order. l13 Oriental Paper (2010) GreenNuo Technology (2010) China High Speed Channel (2011) Multi-Diverse Global Water (2011) Jiahan Forestry (2011) Spreadtrum Communication (2011) Focus Media (2011) Fu's International (2012) New Oriental (2012) Net Qin (2013) Qifeng International (2014) Huishan Dairy (2016) Minhua Holdings (2017) Shengyingxin (2017) Good Future (2018) Anta (2019).
. Carson Brock, who is
The founder of Muddy Waters is Carson Cutler Block. Like many foreigners engaged in Chinese business, it is a "China Communications". He graduated from the Marshall Business School of the University of Southern California and obtained a JD degree in law from the Kent Law School in Chicago. Regarding the two schools that Brock studied, people have asked on Zhihu and other websites that if you look at the ranking, both schools are not considered top universities. The rankings are about 30 in their respective majors. If you put them in China, it is roughly equivalent to the 985 or a slightly better 211 level.
According to media reports in the early years, the reason why Brock studied law was not because he wanted to do legal work, but because he felt that it was beneficial to engage in business work and learning law (I agree 100% with this idea). From this, it can be seen that his always thoughts were all about business.
Bullock came to China as early as college. After graduating in 2005, he started working in China. He first worked in Jones Day law firm for a year, and then opened a warehousing company. This company is said to still exist now and provides paid storage space for people working in white-collar workers. I have to say that this is a very creative idea, but because the creativity is too advanced, the business is not good.
During this period, he also co-wrote a book called "Doing Business in China For Dummies". In this book, Brock's title is Founder & Managing Director of YBS Investment Consulting, but in the Chinese name of this book, most people translate it as "doing business with fools in China."
Block's cover of his early works
After seeing Brock's resume, the first person that immediately came to my mind was Hurun, who was a "wealth ranking list". The latter was from a finance school, worked in a foreign accounting firm in China, and has been seeking opportunities in China, and finally realized his dream by doing wealth ranking list.
Hurun
If Brock's business in China is developing smoothly, he may become another Hurun, but the fact is just the contrary. His early experience in China was obviously not smooth, prompting him to eventually embark on another completely different path.
. The beginning of Muddy Waters research
Bullock's first Chinese stock company was Oriental Paper. It began to investigate the company. It was a very accidental opportunity. Someone recommended the company to his father who was an investment broker. His father asked Bullock, who was familiar with China, to investigate the company in order to determine whether to invest.
Oriental Paper was founded in Baoding City, Hebei Province in 1996. Compared with domestic paper giants, few people have heard of it in China, but it was listed on the OTCBB in the United States in November 2007 and transferred to the New York Stock Exchange on December 17, 2009. This is one of the typical ways for Chinese stocks to list in the United States and is also the hardest hit area that was later sniped.
In order to investigate Oriental Paper, Block formed a survey team composed of people with legal, financial and manufacturing backgrounds, but the investigation results surprised Block. Judging from various situations, Oriental Paper is not worth investing at all.
Subsequently, Brock established the "Musty Waters Company" that later caused bloody storms in the capital market. On June 28, 2010, the company was established, it released a short report for Oriental Paper.
Musty Waters Company shorted Oriental Paper report
In this report, Muddy Waters Company gave Oriental Paper a "strong sell" rating, with the target price of the stock being below US$1, while the stock price of Oriental Paper was US$8 at that time, and the report claimed:
- 5 Since 2009, Oriental Paper has embezzled more than US$30 million in funds;
- Oriental Paper has exaggerated its revenue in 2008 reached 27 times;
- Oriental Paper has exaggerated its revenue in 2009 reached 40 times;
- Oriental Paper has exaggerated its assets to reach 10 times.
Compared with previous various surveys, the most impactful thing about Muddy Waters is the on-site investigation that was tried and tested later. In the report on Oriental Paper, Muddy Waters also showed many such investigations. The report showed the old production lines of Oriental Paper, smoky workshops, and raw materials like garbage dumps. Compared with the data displayed by Muddy Waters, these on-site investigations may be more impactful to American investors.
The situation of Oriental Paper workshop shown in the Muddy Waters report
Mutched Waters Company released the report, Oriental Paper's stock price fell by more than 50%. Subsequently, in early July 2010, the SEC began to intervene in the investigation, which lasted for three years. On July 3, 2013, Oriental Paper announced that it had received a notice from the SEC, which had completed an investigation into the company and did not intend to take any law enforcement actions. In other words, the false performance claimed by Muddy Waters was not confirmed, but at this time, Oriental Paper's stock price had fallen by 80%, and it has not recovered yet.
When writing this article, the author checked and found that the current share price of Oriental Paper is about US$0.60, and has changed its name to IT Technology Packaging Company.
. Sniper GreenNuo Technology, become famous in one battle
Compared with Oriental Paper, what really made Muddy Waters famous in one battle was Sniper GreenNuo Technology. Lünuo Technology was founded in February 2003 and is mainly engaged in wastewater treatment, flue gas desulfurization and denitrification, energy conservation and resource recycling. Are these businesses very difficult to describe, but if they are replaced by another word "environmental technology", they will have much greater imagination.
Luno Technology and Oriental Paper have very similar listings. It was listed on the US OTCBB through reverse acquisition in October 2007 and transferred to the US Nasdaq stock market in September 2009. It was a successful case of Chinese stocks listed in the US at that time.
But the good times didn't last long. In August 2010, an article in the US Barrons magazine mentioned that Lünuo Technology has replaced 3 auditors and 4 CFOs in the past four years. Generally speaking, frequent auditor changes are often a precursor to financial fraud.
On November 10, 2010, less than 4 months after its establishment, Muddy Waters Research released a short report for Lunuo Technology.
Mush Waters Company's short report on GreenNuo Technology
In this report, Muddy Waters Company's rating for GreenNuo Technology is still "strongly selling", with a stock target price of US$2.45 (the stock price was US$15.52 at the time), and the main contents include:
- Lunnuo Technology's actual operating income is only about US$11 million, about 94.2% lower than its financial statements;
- Lunnuo Technology forged its performance, and 5 of its 9 customers claimed to have business dealings with it;
- Lunnuo Technology's management embezzled tens of millions of dollars of company funds.
Mutch Waters Company released its report, the share price of GreenNuo Technology fell by about 15%, and the decline exceeded 50% after six trading days.
Compared with Oriental Paper, Lünuo Technology has almost no ability to resist Muddy Waters' short selling. On December 17, 2010, Lünuo Technology was suspended. On December 3, when Lünuo Technology admitted that its customer contract was falsified and its financial data was incorrect, Nasdaq issued a delisting notice, which took only 23 days from Muddy Waters' release of the report to delisting. Compared with the results of Lunox Technology, what will Luckin Coffee be like? You can almost imagine it, so everyone should drink coffee quickly, and there may be no chance soon.
A week later, on December 9, Luno was delisted and transferred to the pink list market (Nasdaq's lowest-level first-level quotation market), and its stock price plummeted from $15.52 when it was questioned to $3.15.
. Chinese stocks who were sniped
As mentioned earlier, Muddy Waters has successively released short-selling reports for 16 Chinese companies, and most of the companies' final results were very tragic:
China High Speed Channel
On February 3, 2011, Muddy Waters released a short-selling report for China High Speed Channel, saying that it falsely reported its financial status and suspected of inducing investors. The company's stock fell by more than 90%, and was delisted from Nasdaq three months later.
Diver Global Water
On April 4, 2011, Muddy Waters Company released a short report on Duoyuan Global Water, saying that it had financial problems and forged audit reports. It claimed that Duoyuan Global Water's financial statements showed that sales were about US$154 million, but in fact it did not exceed US$800,000. When the report was released, Duoyuan Global Water's market value exceeded US$135 million and its share price was about US$5.5. However, in June 2012, the stock price fell to only US$0.41, and was later delisted by the New York Stock Exchange.
Jiahan Forestry
In June 2011, Muddy Waters Company released a short report on Jiahan Forestry listed in Toronto, calling it a "Ponzi scheme" and exaggerating assets and forging sales transactions.
The stock price of Jiahan Forestry plummeted by 64% that day. In August 2011, its stock was suspended and applied for bankruptcy protection eight months later. Then it withdrew sadly through restructuring. By January 2013, Jiahan Forestry's creditors took over all assets through restructuring, and the stocks were cleared and the investors lost all their money.
From the perspective of the incident, compared with many previous short selling, Muddy Waters has a lot of controversy over Jiahan Forestry's short selling. The actual controller of Jiahan Forestry has never admitted that there was fraud, but this cannot change its final ending.
Huishan Dairy
Huishan Dairy is a company that Muddy Waters has shorted in recent years. Muddy Waters released a short-selling report on Huishan Dairy in December 2016, claiming that Huishan Dairy has started financial fraud since 2009, and its value is close to zero.
Since 2017, Huishan Dairy broke out in debt crisis. By March, there was a flash crash of 90% drop in stock price one day. On December 18, 2019, the Hong Kong Stock Exchange announced that Huishan Dairy would be delisted.
and the above are all due to shorting in Muddy Waters, which eventually led to a tragic ending for Chinese companies. Some of them have shorting, and there are still great controversies today, such as Oriental Paper, Jiahan Forestry, etc., but most of the doubts have indeed been confirmed.
However, not every time Muddy Waters' short selling is effective. In fact, among its many short selling, there are many who end up losing to Maicheng, the most typical of which is short selling for New Oriental.
New Oriental founder Yu Minhong
On July 18, 2012, Muddy Waters Company released a short-selling report on New Oriental Education, claiming that New Oriental's gross profit margin reported by the past exceeded 60%, which is suspected of fraud. Because it discussed with other non-listed companies, the gross profit margin will be around 20% to 30%, but New Oriental's data is far higher than this.At the same time, Muddy Waters also claimed that the school facilities operated by New Oriental are state assets and expressed doubts about the merger of New Oriental assets.
On the day after Muddy Waters released its report, New Oriental's share price plummeted 35%, reaching a record low. But then, New Oriental responded one by one to the content of Muddy Waters' short report, and New Oriental's stock price began to rebound quickly.
On October 18, 2012, after three months of investigation, New Oriental finally passed the review of the US Securities and Exchange Commission. The SEC believed that New Oriental's VlE structure and the income of subordinate schools could enter the consolidated financial statements, and then New Oriental's stock price began to rebound significantly.
In 2018 and 2019, Muddy Waters also shorted another education company, "Good Future", and "Anta", a leading company in China's sports clothing, but they all ended in failure.
. Imitationist Citron Research
After Muddy Waters, there were many similar imitators, the most successful of which was Citron Research.
The founder of Citron is Andrew Lefford, who is about the same age as Brock. He was born in the mid-1970s. He graduated from Northwestern University in 1998 and later engaged in futures trading and other work. In 2001, he founded the Stock Lemon website, specializing in shorting stocks, but it was not until after 2010 that he began to short Chinese stocks.
Cittor of Citron Research Andrew Lefod
Citron Research's most famous short selling is Southeast Rongtong, which is the same as Luckin Coffee, and its headquarters is also located in Xiamen.
Citron Research released a short-selling report on Southeast Rongtong on April 26, 2011, questioning Southeast Rongtong's financial fraud. On May 17, 2011, Southeast Rongtong was suspended by the New York Stock Exchange, and on August 17, Southeast Rongtong was delisted. On August 31, Southeast Rongtong announced its dissolution, less than half a year from being shorted to dissolution.
The impact of this case is more than that. The auditor of Southeast Rongtong is Deloitte Accounting Firm. After Southeast Rongtong was shorted, the shareholders of Southeast Rongtong began to file class action lawsuits against Deloitte Accounting Firm. Although the lawsuit against Deloitte was eventually rejected, it also had a great impact on it. Since its establishment, Citron has researched and sniped Chinese companies including China Valve Technology (Nasdaq: CVVT), China High Speed Channel (Nasdaq: CCME), Skynet (Nasdaq: MOBI) and Double Gold Bio (Nasdaq: CHBT).
Among the many short-selling targets, the ones most familiar to China are Qihoo 360 and Evergrande Real Estate.
On November 2, 2011, after shorting Southeast Rongtong, Citron Research began to short Qihoo 360, and has released six short reports.
During this period, Kai-Fu Lee, former Google executive and founder of Innovation Works, joined the battle. On August 27, 2012, Kai-Fu Lee published an English article "China Short Sellers: Exposing Fraud or Practicing Fraud?" against Citron, saying that Citron's report was "deceiving investors" to make profits. I wonder if Citron was fighting counterfeit or spreading rumors? The back-and-forth confrontation between the two escalated half a month later. Citron officially sent a lawyer's letter on September 12, 2012, asking Kai-Fu Lee and the 62 Chinese entrepreneurs jointly signed on the website "Citron Fraud" to apologize and withdraw all false accusations.
During 2012, Citron Research also shorted Evergrande Real Estate, which was also the most difficult time for Evergrande. Citron's short selling also caused a sharp drop in Evergrande's stock price.
Interestingly, regarding this Luckin Coffee incident, after Muddy Waters released its short report on February 1, 2020, Citron posted a comment on Twitter, which did not support the view of Muddy Waters research.
Cimonial Research questioned the research of Muddy Waters
. Luckin War
Considering the online article about Luckin incident, I will briefly talk about it here. If you don’t understand it, you can take a look:
On February 1, 2020, Muddy Waters Research posted a post on Twitter, saying that it received a report from anonymous persons. Muddy Waters believes that the content of the report is credible and has shorted Luckin Coffee.
In this report, investigators claimed that a total of 92 full-time employees and 1,418 part-time employees were hired, and surveillance of 981 Luckin Coffee stores lasted 11,260 hours, and collected 25,843 receipts.
According to the survey, the research report lists the ironclad evidence of Luckin Coffee's five financial frauds and six red flags. It also analyzes the defects in Luckin's business model. The core content is that Luckin Coffee has serious financial fraud, and the actual revenue data should be far lower than the data in the financial statements.
After the report was released, Luckin's stock price fell by more than 20%, but Luckin later denied it, so its stock price rose again.
But on April 2, 2020, Luckin announced that it had admitted that there was financial fraud, and it was as high as RMB 2.2 billion. On that day, Luckin's stock price plummeted by 85% at the highest and finally closed down 75%.
Luckin Company's share price on April 2
Referring to the fate of each company before, Luckin's results are obvious. The colleagues who have not drunk their coffee have really not had much time.
