White Knights Dispense Short Shrift in Asia; Short Sellers in Asia Need to Be on the Lookout for Big Shareholders

Updated September 6, 2013, 6:05 p.m. ET

White Knights Dispense Short Shrift in Asia

Short Sellers in Asia Need to Be on the Lookout for Big Shareholders

ABHEEK BHATTACHARYA

Small short seller slays big Asian firm. This David-and-Goliath tale has played out many times, but a third character has shown up recently: the white knight. A string of short sellers have targeted companies with Asian operations recently. Most famously, Muddy Waters alleged in 2011 that Toronto-listed Sino-Forest overstated its timber assets in China. Sino-Forest later filed for bankruptcy protection. But the latest dust-up shows how a third-party investor can hurt the shorts. On Aug. 26, California-based Glaucus Research accused Singapore-listed vegetable producer China Minzhong Food K2N.SG -0.45% of fabricating its sales. The stock lost nearly half its value before trading was frozen later that day. Then on Sep. 2, Minzhong’s largest shareholder came to its aid. PT Indofood Sukses MakmurINDF.JK -0.83% a noodle maker run by Indonesia’s fourth-richest family, said it plans to make an offer for the shares it doesn’t own, which could effectively take the company private. It will even offer a 10% premium to where the stock traded before the Glaucus report. Minzhong’s shares have since rebounded to the offer price. That may squeeze some shorts, though it is unclear whether Glaucus exited its position in time. Indofood says this is a “strategic acquisition” that will “be mutually beneficial to both Indofood and China Minzhong.” Pre- Glaucus, Indofood owned about 29% of the company.Something similar played out last year when Muddy Waters targeted Olam InternationalO32.SG 0.00% a commodities supplier listed in Singapore. Olam defended itself through a $1.2 billion rights issue—and crucially gained Singapore state fund Temasek Holdings as a subscriber. Temasek, which already owned about 16% of Olam, also vocally backed the company, saying it was happy to “have another opportunity to invest” in it. This boosted the stock back then. Temasek is now Olam’s largest shareholder.

Big third-party investors offer a key vote of confidence, not to mention firepower to overwhelm short positions.

Their motivations could be commercial, if the investor gets the shares at lower valuations, but reputation may also play a big role. Muddy Waters’s founder Carson Block says boards and outside investors in Asia work hard to protect “face.”

Asia’s typical shareholding structure presents special risks for short sellers. Smaller free floats can raise the cost of borrowing stock and make it easier for white knights to scoop up stakes or even take companies private. The average free float in Hong Kong and Singapore is 43% and 34%, respectively, against the U.S. average of 87%, according to FactSet data. Even among U.S. listings, Chinese and Hong Kong companies float just 43% of their stock on average.

Short sellers focused on taking down their targets should watch out for the backup waiting off to the side.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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