Posted by KOH Ngiap Hao, Year 4 undergrad at the School of Accountancy, Singapore Management University
An anonymous researcher releases a report questioning the accounts of a publicly traded company. Investors catch wind of it and sell. The targeted firm denies the allegations, but by then the share-price damage is already done.
That’s what’s playing out in Asia this week, with reports on Singapore-listed Noble Group and Sound Global in Hong Kong erasing about $US900 million of market value in a single day. For Andrew Clarke, director of trading at Hong Kong brokerage Mirabaud Asia, there’s something unsettling about that pattern when the sources of market-moving claims can’t be held accountable for what they say.
“It seems too easy” for anonymous researchers to place bets that will benefit from the impact of their reports, Clarke said from Hong Kong. “That’s not a sell note. That’s a brick being thrown at a plate-glass window. The intent is to destroy.”
Scrutiny of anonymous research has intensified this month after the reports on Noble, a commodities trader, and Sound Global, a Chinese water-treatment firm, alleged accounting irregularities that both companies denied. The Monetary Authority of Singapore, or MAS, said it’s reviewing the report on Noble, produced by a group calling itself Iceberg Research, and will take action if securities laws were breached.
Noble, which said on Monday it “completely rejects the allegations,” lost as much as 15 per cent over two days in Singapore trading after the Iceberg report. The stock rose 1.9 per cent on Wednesday after the company said directors and management are “comfortable” that its balance sheet “fairly presents its book value.”
Iceberg doesn’t have any short position, or wager on a decline, in Noble securities and doesn’t work in tandem with funds, it said in the report. Iceberg’s website contains no analyst names, phone numbers or links to research notes, apart from the 17-page report on Noble.
The “Contact Us” page has a form for readers to submit comments and a link to follow a Twitter feed. When contacted on the website by Bloomberg News, Iceberg said it “cannot give phone calls” for an “anonymity reason.”
Ask questions later
Traders will sell first and ask questions later when research of this kind is released, said Nicholas Teo, an analyst at CMC Markets in Singapore who’s been dealing shares since 1989.
“You don’t have the time to read through long reports, you just react,” said Teo, who was sent Iceberg’s Noble report by market contacts on Monday. “In a certain way, companies like Iceberg have a function in the marketplace. The question is whether there is something sinister behind what they’ve done.”
While short-selling makes the market more efficient, manipulating prices with false rumours is an offence that can lead to fines or a prison sentence, according to Singapore Exchange, the city-state’s bourse operator. The exchange declined to comment on anonymous research, referring the request to MAS, which licenses analysts in Singapore and is reviewing Iceberg’s report.
“No research should be anonymous,” said Jimmy Ho, president of the Society of Remisiers, Singapore’s biggest association of equity traders. “MAS should make sure analysts do not use their research for their own agenda.”
Sound Global sank 29 per cent in Hong Kong on Monday as shares resumed trading for the first time since February 4 after a report by Emerson Analytics alleged the company exaggerated revenue. The stock fell 5.3 per cent that day, before the company asked for a suspension.
No individual analysts at Emerson Analytics were identified in the Sound Global report, which says the firm and its associates may have short positions. The group’s website provides no phone numbers or contact information, with the exception of a Gmail e-mail address.
Sound Global published a response to Emerson Analytics on February 13, saying the report is “seriously misleading, groundless and full of hyperboles and logic flaws.” The company also said it may start a share-buyback program and Chairman Wen Yibo may increase his stake through market purchases.
Sound Global shares rose 7.8 per cent on Tuesday and added a further 1.2 per cent Wednesday. Hong Kong’s securities regulator declined to comment on whether it’s looking into short seller reports. The city’s exchange operator said companies should make an announcement to the market if rumors are impacting their shares.
When asked by Bloomberg News in an e-mail why its analysts are anonymous, Emerson Analytics replied through a Gmail address that “China is a dangerous market” and “everything that we want the outside world to know about us is already in the report.”
Carson Block, the founder of Muddy Waters LLC, said in 2012 he stopped trying to bet against Chinese stocks after workers at a storage company he owns in Shanghai were harassed and unidentified “gangsters” came looking for him.
Block put a spotlight on the reporting practices of Chinese companies with a 2011 report on alleged overstated timberland holdings at Sino-Forest Corp. After an eight-month investigation, an independent committee of Sino-Forest directors said the company may not be able to disprove some of Muddy Waters’ allegations as the information may not exist or be retrievable.
True, accurate and valid?
Ben Surtees, a London-based fund management director at Jupiter Asset Management who held shares of Noble in his Jupiter Asian Fund as of November, said the Iceberg report hasn’t changed his opinion of the company.
Still, he says independent research reports can be beneficial for investors if they “weed out” companies that are bending accounting rules or engaging in fraudulent activity.
“I’m not concerned about the origins of the report, it’s whether the report is true, accurate and valid ultimately,” said Surtees, whose firm oversees about $US50 billion. “Time will tell.”
Noble and Sound Global weren’t the only companies hit by short sellers on Monday. Ozner Water International Holding sank 20 per cent in Hong Kong before trading was suspended following a “strong sell” rating from Glaucus Research. Unlike Iceberg and Emerson Analytics, Glaucus shares its analysts’ identities.
The research firm disclosed that it has a short position in Ozner and stands to profit if the stock declines. Glaucus spends hundreds of hours analysing publicly available information to build investment ideas, Soren Aandahl, the director of research, said in an e-mailed response to questions on February 6.
Ozner, a Shanghai-based maker of water purifiers, responded by saying in a statement to the stock exchange on Monday that the report “contains errors of fact, misleading statements and unfounded speculations against the company.”
For David Welch, the head of equity sales trading at Reorient Group in Hong Kong, anyone producing negative research should ultimately be willing to reveal who they are and held accountable for their analysis.
“I understand they want to provide independent research and that’s fine, they have the right to do that,” said Welch. “But if they have a view on something, and are putting something up in the public domain, they should be willing to defend it in the public domain.”