Caixin
Sep 23, 2020 04:08 AM
BUSINESS & TECH

Short Seller Accuses Huazhu of Inflating Profits by $295 Million

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What’s new: Activist short seller Bonitas Research accused Nasdaq-listed Chinese hotel chain Huazhu Group of underreporting the number of hotels it owns and their related operating costs to inflate reported profits.

Bonitas said Monday in a report that it calculates that Huazhu’s fake profits manifested as 2 billion yuan ($295 million) on its 2019 financial reports. Based on its field investigation, Bonitas asserted that Huazhu generated significantly less profit than it reported to the U.S. Securities and Exchange Commission and the Hong Kong stock exchange in its secondary offering, the short seller said.

Huazhu, one of China’s biggest hotel operators, said the Bonitas report was groundless and contained many false and misleading conclusions. Short sellers like Bonitas look for evidence that certain companies’ stocks may be overvalued, take positions to profit if the shares fall and publish their findings.

Whether the short seller’s report involved false accusations would depend on how professional institutions involved in Huazhu’s Hong Kong offering responded to the financial reports, said Zhaog Huanyan, a senior economist at Huamei Consulting Group, a hotel industry adviser. Usually a prospectus has been reviewed by professional institutions, he said.

The background: Huazhu’s shares debuted Tuesday in Hong Kong after it completed a HK$5.9 billion secondary offering.

Huazhu operates several hotel chain brands, including HanTing, Hi Inn, Elan Hotel and Crystal Orange. Earlier this year, Huazhu acquired German luxury hotel operator Steigenberger Hotels AG for about €700 million ($827.7 million). As of June 30, Huazhu reported operating 6,187 hotels with 599,235 rooms in 16 countries.

According to Huazhu’s prospectus for the secondary offering, it posted a net profit of 1.77 billion yuan ($261 million) in 2019, more than triple from the previous year.

Quick Takes are condensed versions of China-related stories for fast news you can use. To read the full story in Chinese, click here.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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