SouFun Spars With Short Seller
A recent spat over the past week between a feisty short seller and real estate services firm SouFun (NYSE: SFUN) is providing some good entertainment for China stock watchers, though investors may be less entertained. The ongoing tussle has seen the self admitted short seller, a company called Glaucus Research, issue 3 reports over the period, with SouFun replying in each instance that it’s done nothing wrong. All of this shows that US-listed Chinese companies remain attractive targets for short sellers some 2 years after a series of attacks that sent many companies’ shares tumbling and kicked off a prolonged winter for the entire sector.What’s slightly different now is that the short sellers are having more difficulty convincing investors these days, which appears to be the case with Glaucus and SouFun. The Chinese company’s shares have are largely unchanged since Glaucus launched its series of attacks about a week ago, and SouFun’s shares even jumped 5.4 percent on Monday after it issued a new statement responding to the short seller’s latest report. (company announcement)
Regardless of my opinion on the reports, I have to at least commend Glaucus for being quite creative with the title of its initial report, which is a play on SouFun’s name titled “It’s So Fun To Conceal Related Party Transactions”. (short seller report) The crux of this ongoing battle seems to center on a 3 properties that SouFun bought in China and the US, and whether the company’s founder Vincent Mo was using SouFun as his personal investment vehicle.
Glaucus is questioning SouFun’s motivations for buying the properties, including one in New York and another in south China’s Hainan province. In its latest report, the short seller also questioned SouFun’s use of a consulting company controlled by Mo, implying that such an arrangement constitutes a related-party transaction that should have been disclosed more clearly to investors.
The kind of issues discussed in the Glaucus report are typical of a broader behavior pattern that sometimes sees founders of Chinese companies using those firms like their own personal empires. One of the biggest cases of such abuse came 2 years ago when online game operator Giant Interactive (NYSE: GA) came under fire for investing in a venture in the completely unrelated insurance sector, which many viewed as a personal bet by the company’s founder. (previous post)
In the case with SouFun, I do think that Glaucus’ claims seem a bit shaky for a number of reasons. Most importantly, SouFun is a real estate services company, so it shouldn’t come as a huge surprise if the company wants to invest some of its extra cash in real estate. Many companies often have lots of idle cash sitting around and make similar investments to try and maximize the returns, since idle funds left sitting in a bank earn little or no interest these days.
Glaucus’ other claims of self-dealing between SouFun and Mo’s consulting company also seem a bit shaky. SouFun claims that Mo’s consulting company provided its services to SouFun for free and were disclosed in company stock filings, and I would tend to believe this is probably true since Mo obviously wants his company to succeed. But even if Mo’s consulting company did charge SouFun for some of its services, it does appear that any fees were probably tiny compared to the value of his SouFun stock holdings.
At the end of the day, this case with Glaucus shows that short sellers will need to build more solid and dramatic cases of bad business practices against Chinese firms if they really want to succeed in sparking a share sell-off. That should be good news for US listed Chinese firms, many of which have cleaned up their business practices over the last 2 years and can now focus on more important matters like earning profits rather than fighting off short seller attacks.
Bottom line: SouFun’s successful defense against a short seller attack shows that investors are growing skeptical of such tactics against US-listed Chinese firms.
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