Noble's concession gives clout to maverick researchers

[SINGAPORE] Noble Group's vow to be more open after a blogger attacked its accounting is a testament to the growing clout of independent researchers, who have shaken up Asian corporate practices in a way investors and brokerage analysts never could.

Researchers and short-sellers, who bet on stock prices falling, highlight potentially controversial governance and rely on securities traders and media to spread the word for maximum impact. The approach makes up for the lack of an activist investor culture in Asia, where firms' primary shareholders are often so big that smaller voices go unheard.

Activist investors such as Oasis Management and Third Point have failed to convince Asian firms of a need for what they see as positive change - at Nintendo and Sony respectively - while analysts at stock brokers pore over finances but rarely challenge management assertions. "Almost all of the investment research or opinions disseminated to the market fail to properly scrutinize listed companies. In fact, they are usually nothing more than a dressed up regurgitation of management drivel," Soren Aandahl, director of research at short-seller Glaucus Research, told Reuters.

Sell-side analysts - who recommend stocks to clients - often face a conflict of interest given the banks many work for seek advisory fees from the firms they analyse, Aandahl said.

Activist short-sellers such as Glaucus and company-watchers like Iceberg Research have stepped in to assume the role of corporate antagonists. Short-sellers sell borrowed shares, buy them back at lower prices and pocket the difference. To push a company's share price down, they bring to light, for instance, what they perceive as misleading accounting.

But their reports do not always have an impact on shares and they sometimes face accusations of making sensationalist claims.

In Hong Kong, short-seller Citron Research is facing legal action from the securities regulator who alleges a report about Evergrande Real Estate Group was misleading. Citron chief Andrew Left is disputing the allegations.

In Singapore, the central bank is reviewing the blog about Noble written by Iceberg to ensure it does not breach securities law.

Last month, little-known Iceberg blogged about accounting at Noble, saying the Singapore-listed commodity trader manipulated the value of assets by billions of dollars. Noble rejected the claim and linked Iceberg to an employee it fired in 2013.

Its share price nevertheless fell, knocking more than US$1 billion off its market value over the following days, leaving management saying it needed to provide more information about its accounting policies.

Some analysts in November did question Noble on some points made by Iceberg, such as whether its investment in coal miner Yancoal Australia Ltd was over-valued. In a post-earnings conference call with analysts, Noble said the value was dependent on several factors and was continuously under review.

But the public nature of Iceberg's attack added to its impact, particularly as it was made just before Noble reported earnings when it was prohibited by stock exchange rules from providing detailed disclosure.

Noble lowered the value of its Yancoal investment soon after another Iceberg report. Noble said the two issues were unrelated.

Commodity traders like Noble make attractive targets for activist short-sellers looking for possible accounting anomalies, since such companies tend to rely on complex methods to value their assets.

In 2012, US short-seller Muddy Waters similarly challenged the accounting at Singapore's Olam. Olam rejected all allegations but reduced its capital spending and debt as a result of the challenge. "Businesses that engage in complex transactions and whose business models are subject to rapid change can be opaque to the investment community," said Paul Smith, chief executive of the analyst association, the CFA Institute. "Insiders may even find it hard to keep track of what is going on; let alone outsiders like research analysts."

REUTERS