Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Short-sellers smell blood as Japan Inc wounded by accounting scandals

Stock Markets Aug 18, 2016 07:14PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. A man walks past Toshiba Corp logo displayed on one of its television sets in Tokyo, Japan

By Umesh Desai and Michelle Price

HONG KONG (Reuters) - Short-sellers who made their names and fortunes wiping billions off Chinese and Southeast Asian companies are setting their sights on Japan after a series of accounting scandals amplified concerns about weak corporate governance there.

Until recently, corporate managers in Japan have enjoyed relatively limited scrutiny of their governance standards and accounting rigor, and a cosy tradition of cross-holdings between companies has relegated the status of minority shareholders and the importance of adequate disclosure.

But as the government of Prime Minister Shinzo Abe has tried to clean up corporate culture and activist investors have begun to kick the tires of Japan Inc, short sellers are finding fertile ground for profit.

On Tuesday, prominent U.S.-based short-seller Citron Research launched an attack on Japanese robotics company Cyberdyne <7779.T>, claiming it was "the most ridiculously priced stock in the world" and had misled retail investors over its technology assets.

Cyberdyne, which closed down 7 percent on Tuesday, dismissed the report as an attempt to push its stock price down.

It is not known whether Citron holds a short position in Cyberdyne.

It is the second attack on a Japanese company in less than a month and the sixth since December 2015, when Well Investments Research challenged trading firm Marubeni (T:8002), the first such campaign in Japan tracked by Activist Shorts Research.

According to Activist Shorts, the six Japan campaigns, half of them directed at Cyberdyne, have generated average losses of 23 percent, which means profit for short-sellers, who sell borrowed stocks and buy them back more cheaply.

It said that is among the top half of the 46 activist short-sellers to have launched campaigns in the past year and is more than double the year-to-date return of Asia's main benchmark (MIAPJ0000PUS).

The phenomenon of short-sell attacks took hold between 2009 and 2011, with investment and research firms such as Muddy Waters Research and Alfred Little attracting international attention for their campaigns against overseas-listed Chinese companies including Sino-Forest and Silvercorp (TO:SVM).

HIGHER STANDARDS

Short-sellers and analysts said they expected more attacks on Japanese companies as regulators in China and Hong Kong fight back against short-sellers, and Abe's campaign flushes out deficiencies.

“As Japanese markets embrace the values of Abenomics, investors of all types, shareholders, short-sellers will insist that listed companies hold themselves to higher standards of transparency, accountability and corporate governance," said Soren Aandahl, director of research at Glaucus Research.

"That in turn makes short investment opinions more impactful," he added.

Glaucus itself sent shares in trading firm Itochu Corp (T:8001) tumbling 10 percent last month by claiming it had inflated profits through creative accounting, the biggest attack on a Japanese company by market value so far. Itochu denied the claims.

Aandahl declined to say if Glaucus was preparing more Japan campaigns but confirmed it was conducting research on other Japanese companies.

Revelations last year that Toshiba (T:6502), the laptops-to-nuclear conglomerate, had overstated profits by $1.3 billion over several years sparked a public debate over Japan's inward-looking corporate culture, in which boards have typically held investors at arms' length.

The Toshiba investigation identified a corporate culture in which the management could not be challenged and didn't always heed its external auditors.

The scandal led the Japan Financial Services Agency to step up scrutiny of auditors, while the Japan Institute of Certified Public Accountants has conducted several quality-control inspections of its members.

In June 2015 the government also implemented a new corporate governance code in a bid to stimulate foreign investment.

"Right now, there's an interesting mix of factors at play in Japan. The Toshiba scandal could be seen as a blow to investor confidence, but that and Abe's moves also created the opportunity for short-sellers to spark a conversation on overvalued companies," said Claire Stovall, research analyst at Activist Shorts.

"In a country where Well Investments has described an acceptance of poor disclosure, partly built on corporate relationships and a laissez-faire trust in management, investors and regulators will likely be sensitive to negative research."

OPPORTUNITIES

Analysts and short-sellers said they saw ripe shorting opportunities among Japan's commodities trading companies, which could be prone to aggressive accounting tactics following the global commodities slowdown.

GMT Research, which analyses company accounts for hedge funds, said earlier this year that the book values of Japanese trading companies were overstated by as much as two thirds in some cases.

"Companies reclassify their investments and affiliates all the time. In this case, it is probably the pervasiveness and the magnitude that warrant closer scrutiny on the practice," said trader and short-selling specialist Laurent Bernut.

Short-sellers burnished their credentials from 2010 onwards by exploiting concerns over poor corporate governance and accounting practices at more than 100 Chinese companies, in some cases exposing outright frauds at the likes of Sino-Forest and China Metals Recycling.

But a crackdown by authorities in Hong Kong, the main market for offshore Chinese stocks, has made such attacks riskier, while investors are increasingly pricing in doubts over Chinese companies, making such attacks less lucrative.

Citron Research's head Andrew Left is currently awaiting a Hong Kong tribunal ruling over allegations by the Securities and Futures Commission he manipulated the market when he targeted Chinese property developer Evergrande (HK:3333) in 2012.

Left, whose influence has grown following his campaign against U.S.-listed Valeant, did not respond to a request for comment but has said he does not plan to target more Hong Kong companies, while market conditions in Japan were attractive.

Short-sellers smell blood as Japan Inc wounded by accounting scandals
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email