Banking & Finance

Sour notes

Citron causes Evergrande to plunge. Media asks who is behind the firm?

Deluged with questions: property tycoon Xu Jiayin

On May 17 property tycoon Xu Jiayin likely felt flushed with success, as the news flashed around the footballing world that he’d lured Italy’s Marcello Lippi to manage his team, Guangzhou Evergrande. His ambition of building a top club had taken a giant step forward with the hiring of one of Europe’s top coaches.

Just over a month later and less welcome headlines were bringing Xu down from that high. This followed the publication of a report by short-seller Citron Research attacking his firm, Evergrande Real Estate, as “insolvent” thanks to a “rapidly deteriorating financial condition” and an “unsustainable” business model.

There were wounding words for Xu’s soccer team and his other “pet projects” too, which Citron slammed as “comically off­‐strategy and frighteningly expensive for Evergrande’s shareholders”.

The full 57-page report – which queries Evergrande’s financial reporting – led to a huge sell-off in the company’s stock. On June 21 the Hong Kong-listed firm had over $1 billion wiped from its market capitalisation.

Xu and his executives quickly fought back, issuing a point-by- point rebuttal via an investor conference call. Nine international investment banks also refuted Citron’s findings. Xu confirmed the company had Rmb13 billion of cash and denied that his firm – of which he owns 63% – is at all troubled. Calling Citron’s report “outrageous”, Caijing Magazine reports that Xu added: “The accusations against the company’s cash [position] are too ridiculous. How could a listed company fake its cash position on the company’s books when there are accounting firms conducting audits?”

In the ensuing weeks, Evergrande’s stock has recovered much of its losses, with Sina, a news portal, noting that it had “weathered the short-selling storm”.

However, given the scale of the publicity unleashed by the report, many are now asking who is behind Citron Research.

The answer is an American called Andrew Left and 21CN Business Herald tracked him down in Los Angeles. Left, the newspaper reports, is a 40 year-old father of four who is the sole employee of Citron. How, it asks, could an “ant” like Left have taken on an “elephant” like Evergrande, which generates over Rmb80 billion in sales?

The answer is that short-sellers are gaining a fearsome reputation for attacking Chinese firms. As WiC earlier reported accusations of fraudulent accounting from Muddy Waters caused Sino-Forest’s stock to plunge last year (see issue 111). Earlier this year Sino-Forest filed for court protection against its creditors, with the Ontario Securities Commission accusing the Canadian-listed firm of “lying to investors”, reports Winnipeg Free Press.

Citron has issued over 150 reports but in the last six years it has focused on China. Of the 20 Chinese stocks it has attacked, 15 saw their stock prices fall by more than 66% and seven were eventually delisted. In the most famous case, Citron’s research on Harbin Electric saw the power firm leave the stock market at the end of last year. Shortly before that Citron made noises when it exposed a financial scandal at US-listed Longtop Financial Technologies, whose auditor later resigned.

“Every report I issue is published in an honest and reliable manner,” Left told 21CN. “So in the past 10 years I have never lost a prosecution, triggered by a ‘short-selling’ report.” (Evergrande is reported to be considering legal action again Citron. Left says he has won the five previous cases brought against him in the Californian courts and hopes the Chinese property firm will try to prosecute him in the US.)

Left originally named his firm ‘Lemon’, a colloquial reference to dud stocks, but decided that this was too direct and chose the French word instead. He says he makes his living from selling short the stocks that he researches, using a team of a dozen or so part-timers in China to help him sift local language documents.

He rebuts the view that, as an American, he is an outsider who does not understand how business is done in China. “Because I do not live in China, nor have fixed partners in China, some people question my understanding of Chinese companies,” he complains.

Left spent three months researching Evergrande before publishing his inflammatory findings. But surely, suggests 21CN, the company’s refutations have negated his accusations? Not so, says Left, who also claims to have done a “good deed” for the property firm by forcing it to “become more transparent”.

Xu will be hoping this is Citron’s final good deed on his behalf (see WiC99 for a profile of the Evergrande boss). Nor is he alone in fighting the plucky US investor. Also battling claims from Left is Qihoo 360, an internet and anti-virus software firm. In December it also issued a series of public rebuttals, claiming Citron’s research contained “numerous errors of fact and misleading speculations”. But the Nasdaq-quoted stock is up 7.2% year-to-date, so in this case the short-seller does not appear to have dented market confidence in Qihoo (Citron put a price target of $5 on the stock; it currently trades at $16.27).

Left claims not to be singling out China for attack, saying he has “no prejudice against Chinese enterprises”. But he does describe investing in Chinese firms as very risky. He also says the information he provides is not only beneficial to investors but also a positive for the market as a whole in rooting out firms guilty of “inappropriate behaviour”.

So far Left has targeted private sector companies, a strategy that capitalises on market perceptions that they sometimes lack “transparency and integrity”.

But he tells 21CN he’d never try to short Chinese state-owned firms or banks. As the government gives these companies its full support, Left says he’s concluded that shorting them would be futile.


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