Hanergy’s Stock Collapse Is A Frustrating Win For Handcuffed Short Sellers


Antoine GaraForbes Staff

INVESTING 5/20/2015 @ 2:26PM 3,216 views

Hanergy’s Stock Collapse Is A Frustrating Win For Handcuffed Short Sellers

John Fichthorn of hedge fund Dialectic Capital woke up on Wednesday morning to find one his most promising short trades, a bet against high-flying Chinese solar  panel manufacturer Hanergy Thin Film Power Group was finally paying off after the stock plunged 47% in early Hong Kong trading and was suspended.A victory for sure, but Fichthorn is not in a mood to celebrate: He’s been placing an order to short six million Hanergy shares every single morning since May 12 to no avail.

Dialectic Capital looked to Hanergy as an obvious short trade as the company rose 500% over the past 12-months, minting founder Li Hejun with a fortune in excess of $30 billion and making him one of China’s richest men, even as the company’s business prospects remain unclear. Alarmingly, Hanergy doesn’t show up on solar panel shipment league tables, but prior to Wednesday it had a $40-billion plus market cap that was bigger than the entire solar panel manufacturing industry. The company even is a 12% holding in the Guggenheim Solar ETF.

Fichthorn told Forbes he built a short in Hanergy amounting to 1% of Dialectic Capital’s total assets this year. However, adding to the trade through the course of May has been impossible.

Every morning for the past handful of trading days Ficthorn’s placed the same order with his Hong-Kong based brokers:

– Short six million shares of Hanergy.

Every day he’s received the same response:

– Wait in line.

The problem, according to Fichthorn, is that he needs to wait for tens of millions of existing Hanergy shareholders to have their sell orders executed in Hong Kong markets before he can have his short order trigger. According to a recent communication with a Hong Kong-based broker, orders to sell 31 million Hanergy shares were  queued ahead of him.

But that shouldn’t have been a problem. Hanergy has been the top traded stock in the China A-share market and on the Shanghai-Hong Kong Stock Connect for months. It also traded upwards of 140 million shares a day in recent Hong Kong trading sessions.

“It has been impossible to short Hanergy,” Fichthorn told Forbes in a Wednesday afternoon telephone interview. “Whoever has been trading the stock has been doing it in such a way to prevent it from being shorted or sold,” he added.

Suspiciously, Fichthorn points out that Hanergy has traded in an extremely narrow, one-cent band through the course of trading in May, an extremely low level of intra-day volatility given Hanergy’s market cap. In U.S. markets, it would be the equivalent of Apple or ExxonMobil trading without any daily variance.

Its not just Hanergy that’s frustrated the shorts.

The more than doubling of the Shanghai Composite over the past 12-months has provided Fichthorn with limited opportunity because he’s been unable to execute shorts against many surging Chinese stocks. The veteran short seller did well betting against Chinese reverse mergers such as Rino International, A-Power and China MediaVision Express that saw their shares lose virtually all of their value amid concerns over fraud in 2011 and 2012, but this is a different market.

“What is bizarre is that in all the years of shorting Hong Kong stocks, I’ve never had this problem before,” says Fichthorn of his inability to short stocks.

Hedge fund Lakewood Capital said in a first quarter update posted by ValueWalk it was able to open a small short position in Hanergy shares in March when the company was included in a large stock index, freeing up some borrow. “We believe this is a manipulated stock with manipulated financials,” Lakewood said in the investor update. A call to the fund Wednesday went un-returned.

Perhaps, Hanergy’s woes will begin to unravel gravity defying stock markets in China.

Hanergy’s plunge is being attributed to founder Hejun’s no-show at the company’s annual shareholder meeting on Wednesday; competitor Yingli Solar also plunged 37% this week amid disclosures that the company may be  unable to pay its bills. But, Fichthorn believes Hanergy’s 47% decline, which wiped $14 billion from founder Hejun’s fortune, could be the result of technical pressures.

Hanergy insiders have been using their stock as collateral for non-recourse loans, according to Fichthorn’s research, and he believes it’s possible that banks have repossessed the stock being pledged and now are in a rush to sell. Meanwhile, he wonders whether questions about the validity of Hanergy’s business will spill into the wider market.

Short sellers have been puzzled by the daily limit-up trading of Beijing Baofeng Technology since its mid-March initial public offering. That stock has risen to a market cap in excess of $6 billion despite limited business prospects, an inexplicable rise similar to the relentless gains of Hanergy over the past year.

Fichthorn believes there is an element of fraud that’s pushing some Chinese stocks relentlessly upwards. Meanwhile, a FT investigation shows suspicious trading activity in Hanergy and other stocks.

Although many short-sellers like Fichthorn envisage an eventual popping of stocks like Hanergy and Beijing Baofeng, there’s little ability for them to bet against them. If this is a bubble that does crash, many will be watching from the sidelines.


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