Last Night Bloomberg Asia interviewed GeoInvesting’s Dan David about Tech Pro Technology (HK3823). He explained how GeoInvesting came about the story and parlayed the conversation to the current state of affairs in the Chinese markets. In essence, he tells Bloomberg’s Betty Liu and Yvonne Man that the lack of transparency lends to the need to be critical of companies listed on Asian exchanges.
Recall that trading in shares of Tech Pro was halted On July 28, 2016. The stock declined 91% after short seller Glaucus Research published a report claiming that the company’s accounting information didn’t match information the company had registered with the Chinese State Administration (SAIC). Bloomberg Asia wrapped up Glaucus’s report and quoted Geo’s Dan David in an article, explaining the stock drop as well as the company’s defense. Dan David presented GeoInvesting’s short thesis on HK3823 at the Sohn Hong Kong conference in June of this year. You can view those slides here. Below, is his interview with Bloomberg Asia.
BB – Okay so is it vindication for you when you see a stock like [Tech Pro] plummet?
David – Well, it was inevitable, the stock was always going to plummet. The financials were in that kind of poor condition. It was a money-losing business sustained by dilutive financing year after year, investing in non-core businesses that made no sense; an LED lighting business, doesn’t really make sense buying a French football team that also loses money. Past that the market manipulation, the stock manipulation that had been talked about seemed to bear out when the trading happened last week. Glaucus put a very nice report, they’ve done great research.
BB – Yes, they’ve corroborated what you’ve said.
David – They’ve done great research in Hong Kong, I agree with what they’ve said. And in this case it was a little bit different. The Hong Kong Exchange did not halt the stock. And by not halting the stock and letting market participants disagree and have their day…
BB -Why do you think they did that?
David – I think that they [China’s exchanges] are making a concerted effort to not halt stock as a knee-jerk reaction, and to not halt stock for months and years on end. When you do that, you give the long shareholders or possibly people making material misrepresentations or fraud the opportunity to collect interest on the borrowed shares. So, they’re making money on a losing bet. And the people who exposed the fraud are losing money.
BB – Ok, but the company of course has denied these allegations, has denied your report and your research, but you know, again, what’s playing out seems like the investor opinion is on your side. How did you come upon this company?
David – Well, the company’s denied our research then corroborated every bit of it in what they have said. We said they claimed to have 900 employees, we found 300; they said, guess what, we have 300 but we now outsource – not something they’ve disclosed in the past. So, there’s really nothing they’ve refuted that we’ve said. How we came across this is reading about it and seeing the market manipulation in the last hour of trading. If you looked at Tech Pro over the last year and you invested, you made 43% return, which is a great investment for a money-losing business. But if you look at the last hour of trading and you invested in the last hour of trading, closed out that trade before the end of market hours, reinvested that way for the following year, you made 791%. So, we found that to be incredible, just like you find it incredible. And now, you see when the market does not halt this stock, not only did Tech Pro crash, but four other unrelated stocks crashed that day. The only thing they had in common is they seemed to have the same broker custodian.
BB – Are you bullish on China at all, or is it just certain stock that you’re shorting?
David – I’m bullish on our relationship with China – I want it to be better, I want it to be more transparent, and I want to be a confident long investor. I want that opportunity. Our team is one of the best due diligence teams out there.
BB – Right, but you said it would have been a mistake for the MSCI to include Shang Hai and Shenzhen?
David – For all the reasons I’m discussing now, I don’t think there’s enough transparency in the Shenzhen and the Shang Hai. I don’t think when you cannot criticize companies on those markets; you don’t have a fair value. You got a price to earnings value of around 50 there; I think the S&P is around 20. And a lot of that has to do with the lack of ability to criticize and market participants to hash out their disagreements for a fair value stock. So in essence you’re just going to take money from Mrs. Smith in Michigan and give it to Mrs. Guo in Beijing and when the market pulls back in Hong Kong or Beijing, everybody’s going to feel the pain. It’s smart on China’s part, it’s not smart on the rest of the world’s part.