Short Sellers Attack Lenovo, Evergrande 联想和恒大地产遭卖空狙击

By newsdoug on June 23, 2012

It’s summertime and that means the short selling sharks have come out in search of new prey, making fresh attacks on PC giant Lenovo (HKEx: 992) and real estate braggart Evergrande (HKEx: 3333) in a bid to capitalize on lingering investor doubts about Chinese companies’ accounting practices. Both companies saw their shares tumble late last week after negative reports came out, with Lenovo shares shedding 11 percent while Evergrande fell as much as 18 percent.

Both companies came out with statements denying anything was amiss; but clearly the fact that both stocks fell so sharply indicates international investors remain skittish about Chinese stocks, following a series of accounting scandals last year — many uncovered by aggressive short sellers. The fact that investors remain wary bodes poorly for a turnaround anytime soon in the offshore IPO market, where new listings in both Hong Kong and New York have slowed to a crawl this year due to the frosty climate.

Let’s take a look at these 2 individual cases to see what exactly happened that spooked investors so much.

In Lenovo’s case, I can only look at the company’s statement for clues, since I didn’t see the original report that sparked the sell-off. But according to the statement, a report from an unspecified source apparently said that Lenovo had made a substantial downward revision to its 2012 PC shipment forecast. Lenovo went on to say it has made no such revision, and expects to continue to grow faster than the broader PC market for the forseeable future.

Meantime, Evergrande came under attack from a small research house called Citron, which some readers may remember for its series of short seller attacks against security software maker Qihoo 360 (NYSE: QIHU) late last year and early this year. (previous post) Like it did in the Qihoo attack, Citron again questioned some of Evergrande’s numbers, prompting Evergrande to release its own long-winded statement denying there were any problems with its reports. (company statement)

Frankly speaking, this attack on Evergrande doesn’t really surprise me since the company frequently puts out boastful statements each month about how great its sales are, even as Beijing takes tough steps to cool China’s overheated real estate market. Against that kind of backdrop, it’s not surprising that a report casting even the slightest doubt about Evergrande’s data could easily ignite a sell-off by investors wondering why the company has so far managed to avoid any downside that most other real estate companies are feeling.

From a broader perspective, both of these attacks show that short sellers are still able to take advantage of weak investor sentiment towards China stocks, and we may see more such assaults — including a possible return of leading China short seller Muddy Waters — in the summer months ahead.

Bottom line: New short seller attacks against Lenovo and Qihoo show investor sentiment remains weak towards overseas-listed Chinese firms, with more attacks likely in throughout the summer.

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