Media

A new focus of attention

Stock plunges as short-seller Muddy Waters finds new target

Gets 140 million viewers a month

Stand in a lobby waiting for a lift in Hong Kong (and many other Chinese cities) and your eyes are likely to be drawn to a small TV screen. It will probably be showing short clips and movie trailers, accompanied by ads for slimming pills or a new credit card.

The company that runs the service is Focus Media, a Chinese firm listed on the Nasdaq exchange in the US. It has just become embroiled in a controversy over how many of these TV screens are in operation, after a short-seller made allegations on Monday that screen numbers have been overstated by 50%.

The impact was severe: Focus Media’s stock plummeted 39% in a single day.

The media were quick to pick up on the news, in large part because the author of the report has become something of a celebrity.

WiC has reported on the activities of Carson Block before (see issue 111) as the public face of short-selling fund Muddy Waters, which looks to profit by exposing fraudulent practices at Chinese firms.

Block is controversial, as are some of his reports. Hence the Wall Street Journal was careful to add that the allegations against Focus Media “couldn’t be independently verified”.

That’s a key point, with business media also poring over another document resulting from a Muddy Waters allegation.

This one ­– produced at a cost of $35 million – comes from timber firm Sino-Forest, which Block accused earlier this year of overstating the number of trees it claimed to own, calling the company a “Ponzi scheme”.

In the resulting investor panic, Sino-Forest stock fell 65%, founder Allen Chan resigned and the company was suspended from trading in Toronto.

The company then commissioned three of its directors, auditors PWC and three law firms to investigate the allegations. Their interim report was released last week – the final document comes out at the end of the year – and it found no fraud at the company. Sino-Forest really does own 833,000 hectares of timber, the findings appear to confirm.

Stock in its Hong Kong-listed subsidiary Greenheart then surged 93%, reports Bloomberg.

All clear for shareholders, then? The Financial Times thinks questions still remain, noting the admission that “significant amounts of material information” were not provided to the advisers working on the review. The Wall Street Journal concurred, highlighting too that the final version of the report will not include an independent valuation of the trees the forestry company “says it owns”.

One of Muddy Waters main contentions was that the timber was overvalued.

Indeed, if Sino-Forest was hoping to have undermined Block with its review, it will have been disappointed: Focus Media’s stock price collapse early this week shows that Muddy Waters can still move markets.

Nonetheless, Focus Media executives have come out fighting, with its CFO insisting on Tuesday that Muddy Waters had misinterpreted data, and that the advertising firm hadn’t made any “major” acquisitions for three years (Block had alleged it overpaid for acquisitions as an accounting trick).

The stock rose 9.4% as a result.

In China itself opinion is divided over whether Block and his ilk are crusaders to be applauded for exposing shoddy corporate governance or just opportunists profiting from what have become largely one-way bets. Those who hacked Muddy Water’s website this week likely think the latter.

But Block is definitely having an impact on the wider mood, with CBN reporting that 10% of Chinese stocks quoted on US exchanges have delisted this year. Some were employing dubious business practices but CBN says legitimate firms have also been caught in the crossfire. It cites the example of Pansoft, which provides software to China’s petroleum industry. Chairman Wang Hu has seen his stock plummet from an IPO price of $7 down to $2.30. He says a routine SEC review showed the company had no problem with either disclosure or governance, but that it has been dragged down by perceptions about US-listed China stocks. Wang says he now has sleepless nights worrying that the low scrip price will hit confidence in the company’s business model, as well as curtail its financing capacity.

In fact, a study co-authored by the China Mergers and Acquisitions Association and Forbes magazine found that only a few of the Chinese ‘concept’ stocks were genuinely problematic. Most simply didn’t understand all of the US rules.

Meanwhile Focus Media has announced that CEO Jason Jiang has purchased $11 million of stock as a demonstration of confidence.

On his Sina Weibo account, Jiang vented: “Why isn’t anyone suing these short-sellers who are just spreading malicious rumours everywhere? These people should be punished according to the law!”


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