Did Anti-Corruption Campaign Lead To Plunge In Hanergy Shares?
A Chinese-based solar company with a history of unusual trading activity that hard garnered a $39 billion valuation crashed in value Wednesday, erasing $19 billion in value. The crash comes shortly after Hanergy Thin Film Solar Group Ltd. Chairman Li Hejun boosted the size of his short exposure in the company he leads on the same day he adding long exposure. Speculation is the price plunge might be related to an anti-corruption probe in China, a topic that was discussed in a recent hedge fund investment letter.
Odd Hanergy long / short behavior precedes stock price plunge
Bloomberg reports that Li added 26.4 million shares at an average of HK$7.28 each on May 18, citing to two separate filings to Hong Kong Exchange. This long exposure comes as he increased his short exposure to 7.71 percent to 5.81 percent of the share’s float on the same day.
Li has not provided explanation regarding his short position, a Business Insider report notes, pointing out that Hanergy’s biggest client is its parent company, Hanergy Holding Group. The holding company was reported to have used its ownership in the solar company to take out a bank loan that it has failed to repay.
Such related party relationships have been sharply questioned by activist Hedge Funds in the past leading to rapid prices crashes, but no activist activity is documented to have been behind Wednesday’s 47 percent drop in the stock price. As previously revealed on ValueWalk, New York-based Lakewood Capital announced they had shorted the stock in their April 23 letter to investors, calling the company “perhaps the most astonishing stock in the entire market today.”Hanergy had odd financial reporting and trading patterns
Hanergy Thin Film is the largest supplier of thin-film solar equipment and products in China and had previous difficulity generating proper earnings guidance, as reported in ValueWalk. The Hong Kong-listed stock has seen its share price increase more than 1000% in the last two years, with a surprising amount of those gains coming in ten minute increments.
After a two-year bull run, Hanergy Thin Film had a higher market cap than Facebook Inc (NASDAQ:FB) last March and founder Li Hejun, who at that time had a 73% stake, became the richest man in China as a result, taking the mantle form Alibaba founder Jack Ma.
Lakewood shorts Hanergy stock on anti-corruption concerns: “we believe this is a manipulated stock with manipulated financials”
In its April 23 letter to investors reviewed by ValueWalk, Lakewood Capital outlined its concerns in clear fashion as it shorted shares in the stock. “We have considerable experience analyzing some pretty peculiar situations, but even the untrained eye can detect something isn’t quite right here.”
The Lakewood report noted Hanergy recently reported revenues of $1.2 billion, an increase of nearly 200 percent — a strong sales rise not generally corroborated by other solar manufacturers over a similar period. “If these figures are real, the shares are pricey at 30x revenues,” Lakewood said, as it noted the potential for other red flags. “Up until last year, nearly all of Hanergy’s sales had been to its parent. In 2014, the parent company accounted for just 60% of Hanergy’s revenues, but much of the remaining revenues were related to a sale of solar power stations to a Chinese investment vehicle called Hongsheng, which was curiously only incorporated 13 days before the deal was announced.”
Related party transactions among relatives are typically a sign of potential riches for a short seller, and Lakewood didn’t miss the trade signal. “One of the three shareholders of Hongsheng lists the wife of a former Hanergy board member as its legal representative. Also, the company’s robust revenue growth has barely translated into any actual cash flow as receivables have ballooned.”
The thesis “could go on,” Lakewood’s Anthony T. Bozza noted in the letter. But rather than get into the boring details, he said: “Simply, we believe this is a manipulated stock with manipulated financials. There is a significant anti-corruption drive in China right now, and given the company’s sizeable market capitalization and importance to the Hong Kong market, it should be only a matter of time until this distorted situation comes to an end.”
That moment in time appears to be last Wednesday. Lakewood Capital did not return requests for comment.
At press time the Guggenheim Solar exchange-traded fund announced it would exit its investment in the stock, following the rules-based guidelines that drive asset allocation.