Short-sellers attack Tianhe Chemicals, accuse firm of faking IPO documents

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SHANGHAI/HONG KONG (Sept 2): Short-seller research firm Anonymous Analytics accused Tianhe Chemicals Group Ltd on Monday of falsifying statements given to auditors for its Hong Kong initial public offering in June and massively inflating its revenues.

Shares in Tianhe dropped 5 percent on Tuesday morning before trading was suspended pending a company announcement.

This marks the first short-selling attack against a major Hong-Kong listed Chinese firm in years and it looks to be an ambitious one, although the report's authors were anonymous and its content could not be independently verified.

While offshore short-sellers have targeted smaller firms in Taiwan, Singapore and Hong Kong in recent months, Tianhe is extraordinary both for its massive market capitalisation, which last stood at $8 billion, and its stature as a recent IPO darling.

The Anonymous report alleged that Tianhe, which listed on the Hong Kong stock exchange in June for $654 million with the sponsorship of Bank of America Merrill Lynch, Morgan Stanley and UBS, generates only a fraction of the revenue that it claims.

Morgan Stanley declined to comment while officials at Bank of America Merrill Lynch and UBS did not respond to requests for comment.

A Tianhe investor relations official told Reuters the company is reviewing the report and preparing a statement.

If the Anonymous allegations are proven accurate, it would be a major embarrassment for China and for the institutions involved in clearing mainland firms to list in Hong Kong.

It could also create major losses for some high profile foreign investors. The company's second-largest investor is Morgan Stanley Private Equity Asia III fund, which owns 8.6 percent of Tianhe's shares, the fund's largest-ever single equity investment. The firm originally invested $300 million in Tianhe.

The tempo of short-selling attacks against Chinese firms has slowed dramatically since 2011, when shorters made a killing exposing accounting regularities at U.S.-listed Chinese firms.

But a crackdown on due diligence investigators by Beijing that saw many jailed, combined with new regulations making it harder to find information on Chinese firms and their executives, has dampened enthusiasm.


Tianhe looks to have become the target of massive shorting shortly after listing, a Reuters analysis shows. As soon as the Hong Kong Exchange put the company on its designated short-selling list in early August, around 60 percent of its daily turnover was short-transactions, compared to 10.5 percent for the Hong Kong market average.

Data from Markit shows nearly 80 percent of Tianhe shares that can be borrowed for shorting are currently out on loan.

The company has strongly outperformed the Hong Kong China Enterprises Index since it listed in June, rising nearly 25 percent compared to the 5 percent rise in the HSCE.

Short-sellers first take short positions in a company's stock, then publicise a negative report to drive the price down, at which point the short-seller takes in a profit.

The Anonymous Analytics report said that Tianhe provided falsified documents to its auditor, Deloitte, prior to its IPO that did not match previous filings.

"We believe this set to be a fake created ahead of the IPO because, among other reasons, it does not contain the necessary anti-counterfeit stamps, nor any form of verification code," the Anonymous Analytics report said.

Deloitte officials in Hong Kong did not respond to requests for comment.

"One would have thought that a fraud of the magnitude envisioned here could not have gotten by the regulators and investment bankers who do not want to see another one," said Paul Gillis, professor at the Guanghua School of Management at Peking University.

He added that Anonymous's examination of Tianhe's tax statements to imply false reporting was an original tactic and also potentially damaging to Tianhe.

"They're in a small town and the company doesn't even appear on the list of the top ten taxpayers in the county. If these facts are actually true, that's a real 'gotcha' there."

JPMorgan Chase & Co bailed out of IPO discussions with Tianhe Chemicals in January, a move sources said was driven by concerns about the bank's employment of Joyce Wei, the daughter of Tianhe Chemicals chairman, Qi Wei.

Anonymous Analytics describes itself as a "faction" of the hacker collective Anonymous.

Previously Anonymous Analytics published reports critical of other Chinese companies including Huabao International , Qihu 360 and Chaoda Modern Agriculture Holdings, with inconsistent results. Chaoda ultimately delisted, but investors shrugged off allegations against Qihu and Huabao.