Trading in shares of Tianhe Chemicals (天合化工), a Chinese company that raised about US$654 million in a Hong Kong listing in June, was suspended on Tuesday morning after a report on a Web site 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 mid-morning 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 on 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 Hong Kong Stock Exchange on Tuesday evening, Tianhe, which makes lubricant additives, said that 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 had planned to raise as much as US$1 billion but lowered the target for its initial public offering (IPO) in June to HK$5.07 billion (US$654 million), pricing its shares at HK$1.8 each. The stock has since risen sharply and despite the decline on Tuesday, was trading at HK$2.3, 28 percent above the IPO price. Tianhe’s market value stood at about HK$59 billion.
In recent years, it has not been uncommon for short-sellers and their affiliates to publish highly critical reports of Chinese companies, accusing them of fraud or dubious accounting.
Shares in the targeted companies often fall in immediate response to such reports, meaning a short position — or a bet that the stock price would fall — can yield significant profits, even before the company has a chance to respond to the accusations, which might or might not turn out to have substance.
In its report on Tuesday, the contents of which could not be immediately independently verified, Anonymous Analytics said that original filings made by Tianhe’s main Chinese operating subsidiaries to China’s State Administration for Industry and Commerce (SAIC) showed revenue and profit that were 85 percent less compared with what the company declared in its filings to investors in its Hong Kong IPO.
“The SAIC 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.
The report also contended that Tianhe’s Chinese units kept two sets of books, both of which were filed to the SAIC but only one of which was shown to the company’s Hong Kong auditor Deloitte Touche Tohmatsu.
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