Wrong call

A-share in wonderland

The film Alice Through The Looking Glass bombed in the US, but did surprisingly well in China where it topped the box office at the beginning of June. Likewise, many US-listed Chinese companies, whose share price have flopped overseas, are looking to do better by relisting in the A-share market.

Many of these homecoming firms have been plagued by negative analysis trumpeted by research houses such as Muddy Waters. But like Alice they may find themselves entering a topsy-turvy world back home where companies complain about positive broker research rather than bad. For that is exactly what phosphorous products producer Hubei Xingfa Chemicals Group has just done.

On June 20, GF Securities published a research report concluding that Xingfa was a “neglected master of electronic chemicals” whose valuation had bottomed out. The securities house argued that if the industry outlook improves, Xingfa will be well positioned.

That sounds like the sort of bullish report that most listed companies would welcome. The same day the stock closed limit-up but investors were shocked when Xingfa then issued an emergency notice to refute GF’s upbeat outlook almost point by point.

Company officials warned that its main product might still suffer from overcapacity in the market as well as falling prices. They added that Xingfa’s production levels were normal and management knew of no material information to explain the recent share price spike. More pointedly, they also stressed that they had not met any analysts of GF to discuss the company’s business.

What should investors make of it? In Through The Looking Glass Alice tells the queen there is no use trying to believe in impossible things. The queen tells her that is nonsense, as she has “sometimes believed as many as six impossible things before breakfast”.

In Chinese social media Xingfa’s clarification has been forwarded widely as another example of bizarre behaviour in the A-share market. “GF Securities wanna kiss Xingfa’s ass but they were still being hit in the face,” one internet user commented. Others netizens suggested GF might have failed to do a proper company visit. “The securities house has issued a research report without doing any proper research,” said one investor.

Meanwhile, Sina Finance noted that a group of Xingfa’s directors have been actively buying shares in the company (GF says this demonstrates management’s faith in the firm), and they may want to avoid unnecessary attention from the stock market watchdog, which has tended to take a more zealous approach recently.

Meanwhile retail investors have continued to pile into the shares. While the stock price is still down 20% year-to-date, it has climbed almost 16% since its recent low on June 13.

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