Citron Keeps Up Qihoo Assault 香橼继续攻击奇虎

By newsdoug on February 1, 2012

Short seller Citron continues Qihoo attack The year of the Dragon is off to a noisy start for controversial Internet security software firm Qihoo 360 (NYSE: QIHU), which is coming under yet another assault from a small western research house named Citron over the credibility of some of its user figures. Chinese media are reporting that Citron founder Andrew Left has taken his attack to China, where he did an interview with Shanghai’s influential China Business News telling the paper he will continue his campaign to debunk user numbers from Qihoo that he says are vastly inflated. (Chinese article) Citron began its assault back in November last year (previous post), saying at the time that Qihoo’s stock was probably worth about $5 per share rather than the $20 where it was trading. At the time Qihoo put out a strongly worded statement denying the allegations. But now the company’s controversial and usually combative founder Zhou Hongwei is keeping uncharacteristically quiet, saying he won’t engage in war of words over the issue which has clearly become quite sensitive. Qihoo’s shares initially fell to as low as $14 after Citron’s report first came out, but have bounced back since then and now trade at around $18. I’ll be quite frank and say I’m 1,000 percent confident that Citron has probably taken a big short position in Qihoo, and is starting to worry that it could lose big money on its bet, hence its reluctance to end its assault. At the same time, Zhou, who often uses ethically questionable business tactics, is actually taking a smart approach this time by staying quiet and letting his company’s performance speak for itself. All that said, I don’t think this story is over just yet, as I really do believe that Qihoo overstates its user numbers, though the magnitude of those overstatements is still unclear. By the time this story plays out, I’d look for Qihoo shares to trade a bit lower than where they are now, perhaps as low as $10, though I doubt they will hit the $5 mark unless a major scandal emerges. On a broader basis, what this prolonged war shows is that this kind of attack on US-listed Chinese companies, which became a common theme last year, will continue into the first half of 2012, as short sellers take advantage of the deep suspicions that still remain over Chinese accounting practices.

Bottom line: The protracted battle by a short seller against Qihoo 360 shows that such attacks will continue into 2012 and last at least through the first half of the year.

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