The California-based shortseller is at it again. Prince Frog International Holdings (1259.HKG), a Hong Kong-listed firm that makes child care products, lost more than US$200 million, or about 26%, in market value on Wednesday after Glaucus Research Group released a report that said company sales were less than 25% of what it reports. Trading was halted for the Fujian-headquartered firm. This is the second time Glaucus has shortsold a Chinese company in two months. Singapore-listed China Minzhong Food (K2N.SGX) lost half its market value in August following similar allegations from the research firm. Shortsellers have targeted Prince Frog before. A Chinese firm in June claimed that Prince Frog’s IPO proceeds didn’t go to building a new plant but analysts railed against those accusations. This time around, however, the company has a bit more explaining to do. On Thursday it was scrambling to produce a statement on sales figures and tax records. Perhaps the most serious allegation comes from a problem in its tax filings with the Chinese government. The company pops up on a local government top-taxpayer list last year, but not between 2008 and 2011. Prince Frog’s CFO said “management will consider to show previous tax awards,” according to the records of a conference call with an investment bank obtained by China Economic Review. “A lot of investors are still confused with this tax stuff so they are waiting for the announcement,” said one analyst who asked to remain anonymous because they did not have permission to speak to the press. After its IPO in 2011, the company conducted significant corporate restructuring which could account for the funny-looking tax records. Investors will wait for an explanation. If the company stumbles, Glaucus has yet again picked out a true prince charming among Chinese firms listed outside of the mainland.
Come together, under Wumart
Chinese grocer Wumart Stores (1025.HKG) is slowly pulling together a highly fragmented sector. On Tuesday, the company said it would buy 36 of CP Lotus’s (0121.HKG) stores in Shanghai and Beijing for US$372 million in cash and shares. It will also swap shares with the company: Wumart will pick up a 10% stake in CP Lotus while CP Lotus grabs a 14% stake in Wumart. Competition in mainland supermarket chains is fierce. Wumart, which has 145 markets and nearly 400 minimarts, isn’t just competing with industry titans such as China Resources Enterprise (0291.HKG), which just added 131 shops to its 4,100 marts via a joint venture with the UK’s Tesco (TSCO.LON). It’s also vying with the myriad of tiny, independent shops that rule the small retail world on the mainland. That said, Wumart’s purchase is a sound one. It has already successfully integrated CP Lotus shops in Tianjin in the past, Frank Xu at Guotai Junan International noted in a report on Wednesday. “Wumart has the chance to increase its market share progressively,” the report said. CP Lotus has held onto its shops in Hunan and Guangdong provinces. Those could be this growing grocer’s next target. Investors should watch Wumart as it expands its presence to a street corner near you.
China markets are bored by the US debt deal
In an eleventh-hour deal in Washington, the world’s No. 1 economy extended its ability to take on debt and avoided imminent and destructive default of monumental proportions – and few were surprised, especially in the greater China markets. This isn’t the first time Republicans and Democrats have duked it out on Capitol Hill while putting at risk the value of the more than US$1.3 trillion in US treasuries held by Beijing. The Chinese government has complained about the turmoil. Some Asian markets also came under pressure as the US government shutdown raged on for more than half a month. Many sprang back to life on Thursday though. Japan’s Nikkei was up 1.2%. Benchmarks in Indonesia and the Philippines hit 0.8% and 0.7% respectively. The Straits Times Index in Singapore climbed by 0.8%. As if thoroughly unamused with the escapades, the Heng Sang Index in Hong Kong climbed a mere 0.4% and the Shanghai Composite Index rose 0.3%. This is because Hong Kong and the mainland had such mild reactions to the so-called crisis to begin with. “Everyone thought that they would get it done at the last moment just like last time,” Kong Yong Ng, head of research at RHB OSK Securities in Hong Kong, said on Thursday. “So there wasn’t much fear that it wouldn’t get done. It was more a question of how long it would take to do it.” The controls on the mainland equities market also remove it from the clutches of international investors. The US debt discussion has been pushed back until February 7. For some, this may mean another crisis is looming around the corner. But investors in greater China should remember to keep cool and wait for the next last-minute clincher that is anything but.
IPO watch
State-owned Poly Group’s culture and auction arm is reportedly eying a US$100 million IPO in Hong Kong. This comes amid a thaw in interest for Chinese companies in that market. Several midsized Chinese banks are also planning to float, although dates haven’t been set. That’s good news after Hong Kong lost Alibaba’s potential listing last month.