Trading in Hong Kong-listed Man Wah Holdings was suspended on June 7 after its shares slumped by as much as 15.4%, following a presentation by Muddy Waters’ Carson Block against the furniture maker.
Block claimed Man Wah had failed to disclose all of its debt and that there were inconsistencies in its taxes that are “a strong indicator of fraud.”
Man Wah has instructed its legal advisers to file a formal complaint against Muddy Waters with Hong Kong's Securities and Futures Commission, and said it stands by its Annual Report 2017. The stock recovered more than 13% when trading resumed on June 9.
Will You Be Next?
In 2011, Block made headlines following his campaign against Chinese forestry company Sino-Forest Corp., which filed for bankruptcy in 2012. Late last year, he announced he had short sold China Huishan Dairy Holdings Co., which operates the most dairy farms in China, saying the company was worth “close to zero.” In March, its shares fell 85% in a day and they have been halted since.
Short sellers like Muddy Waters borrow shares to sell them with the hopes of buying them back at a cheaper price later on, aiming to profit from a price decline. Detractors say short sellers can sometimes unfairly push share prices lower simply by announcing a new target, whether such moves are warranted or not.
But supporters say the practice can force companies to make sure their business model is sound, their accounting is impeccable and their governance sensitive to stakeholder expectations. The targets of shortsellers like Muddy Waters have typically been enterprises with sloppy accounting and indications of fraud.
Man Wah's Defense
In a filing with the Hong Kong stock exchange, Man Wah said Block's presentation "contains allegations which are groundless and contains various misrepresentations, malicous and false allegations and obvious factual errors."
"The Group has no undisclosed debt," Man Wah said.
Muddy Waters' allegations center on loans to a Man Wah subsidiary in China that the short seller says appear on a credit report issued by the People's Bank of China, the central bank. The loan total is larger than the consolidated debt reported by the group.
Man Wah explained that the cut-off date for the subsidiary's loans was December 2016, while the consolidated debt report was as of March 2017. It also said that the subsidiary had entered into a forward exchange contract and set-off agreements with the creditor bank.
"The net effect of such agreements is that the loans and deposits had been set-off," said Man Wah.
The company also rebutted Block's claims of inconsistencies in taxes, transfer pricing computations, sales growth, export sales and dividends.