Jun 09, 2017 07:44 PM

Man Wah, Dali Shares Bounce Back After Disputing Short-Seller Accusations

(Beijing) — Shares of two Hong Kong-listed Chinese companies that had been the latest targets of short-seller attacks bounced back after they denied allegations of financial misconduct — but overseas-traded Chinese stocks remain vulnerable to such attacks due to a lack of transparency.

Furniture maker Man Wah Holdings resumed trading Friday and its stock price rose 8.8%, after dropping 11% and having its trading halted Wednesday afternoon. The drop came immediately after Carson Block, founder of investment research firm Muddy Waters, said the company lied about its financial status by hiding debts and manipulating sales numbers.

Muddy Waters made headlines in late 2016 when it accused China Huishan Dairy Holdings Co. Ltd. of inflating profit margins. Huishan shares rebounded after it clarified the accusations, but it has been mired in another crisis since March amid embezzlement scandals that have caused its stock price to plummet by 85%.

In a nine-page statement Friday morning before the market opened, Man Wah responded to 32 allegations that Muddy Waters had made over the prior two days.

Among these allegations was that Man Wah’s annual 37% sales growth in the financial year ending March 31 was likely overstated, as many of its stores seemed to be doing poor business. Of its 96 stores registered at the State Administration for Industry and Commerce, Muddy Waters visited 57 and found 15 closed.

Man Wah called those allegations “groundless.”

Man Wah responded that “the number of the Group’s self-operated ‘CHEERS’ and ‘MOREWELL’ brand sofa stores was adjusted from 100 at the beginning of the fiscal year to 99 as at 31 March 2017.”

It also said that Muddy Waters didn’t specify when it searched the administrative records.

Man Wah said it has “instructed its legal advisers to make a formal complaint to the Securities and Futures Commission of Hong Kong against Muddy Waters Capital LLC.”

Soon after Muddy Waters’ Block leveled his charges at a speech at an investment conference, a similar spat occurred with food giant Dali Foods Group. At that same conference, Daniel David, chief investment officer of hedge fund F.G. Alpha Management, presented a short-selling report alleging that Dali was engaged in fraud.

The allegations caused Dali shares to plunge 6.5% on Wednesday. But the company seemed to reverse course by publishing two clarifications the next day, and its share price rose nearly 4% Thursday. Its shares continued to rise Friday, up 2.24%.

Dali said that the “allegations were made without due consideration of the underlying facts and based on selective and biased information, and are considered to be inappropriate and misleading.”

One of the allegations related to advertising costs, which David said the company deflated in its financial reports.

Dali’s advertising spending was higher than that of rival Want Want China Holdings Ltd. from 2012 to 2014, according to data from Market Research Co. Ltd. But the situation conflicted with what the two companies recorded in their financial reports, David said.

Dali argued that the CTR data are generally based on the standard publication rates quoted by various media outlets, but in reality, no enterprise is required to pay the full amount and usually enjoys a substantial discount.

David also pointed out that Dali seemed to report substantially lower labors costs than its publicly traded peers. The company responded that it is based in a small county in Fujian province with lower wages.

The Man Wah and Dali cases are not unusual, and such accusations have at times inadvertently influenced other companies as well.

A day before Block made the charges against Dali, he signaled the move through media without revealing the company’s name, which resulted in the stocks of several Chinese firms to plummet, including Wisdom Sports Group, whose stock fell 14%, and Tibet Water Resources Ltd. which dropped 7%. Both rebounded.

Block said the spillover market effect was unexpected, and that drops in uninvolved companies’ share prices could be related to unspotted flaws of those firms.

Martin Wheatley, former CEO of Hong Kong’s Securities and Futures Commission, said at the Wednesday conference that short-selling is not market manipulation, and a divergence in opinions is important for the market.

Contact reporter Coco Feng (

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