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China's Pinduoduo gives silent class in short defence
[HONG KONG] Pinduoduo is schooling in the art of silent short defence. In its Tuesday quarterly earnings call, executives of the US$26 billion New York-listed Chinese e-commerce company said it had complied with the relevant local US rules, barely addressing accusations of book-fiddling levelled by Blue Orca Capital. Pinduoduo's stock is up one third since the attack one week ago. High profile investors help reinforce a quiet resistance.
The allegations by the activist research outfit focused on the mismatch between the revenue and net loss Pinduoduo subsidiaries reported to the Chinese State Administration of Industry and Commerce, and the far lower number it gave to the US Securities and Exchange Commission. In the past short-sellers following similar discrepancies found genuine accounting fraud, resulting in a swathe of de-listings by New York-listed Chinese companies.
But short attacks are conducted in markets, not courts. The evidence can matter less than the savvy of the attacker, who must convince investors to read the report, then dump shares. Target selection is equally important; ideally a well-known company with a lot of trading volume and a toppy valuation.
This attacker's track record isn't bad. Blue Orca's May report, criticising Hong Kong-listed luggage maker Samsonite, knocked that company's shares down 23 per cent in two brutal trading days and forced the resignation of chief executive officer Ramesh Tainwala for inflating his CV. A move on Chinese data-centre operator GDS Holdings in July was similarly successful.
Pinduoduo looked vulnerable to scrutiny. It's a loss-making company with an unusual business model, a high valuation and a questionable governance structure. But unlike Samsonite and GDS, it is backed by some of China's biggest strategic investors, including US$342 billion tech giant Tencent and Sequoia Capital. They would be embarrassed if Blue Orca were proven right. On Nov 14, the day the report was published, share prices rose 11 per cent and trading volume hit the highest level since its first trading day.
Thus the assault has backfired so far. The Chinese company's shares are now worth US$23 each, three times more than Blue Orca says they are worth. So long as prices rise, Pinduoduo has no reason to keep the negative story alive by talking about it. Silence can be deadly.
Chinese e-commerce company Pinduoduo (PDD) announced on Nov 20 that revenue increased to US$491 million in the three months to end September, up 697 per cent from the same period in the prior year. The New York-listed outfit's net loss also rose 396 per cent to US$160 million, which was less than analysts expected.
Blue Orca Capital on Nov 14 alleged Pinduoduo overstated revenue and under-reported its net loss to the US Securities and Exchange Commission (SEC), based on a comparison of corporate filings to Chinese and US regulators. The short-seller research firm also asserted that PDD had understated its employee expenses by hiring via a related third-party company, and that it had exaggerated so-called "Gross Merchandise Value".
During the earnings conference call Tian Xu, vice-president of finance, said "we have always held ourselves to the highest standards and that the numbers in our consolidated financial statements are in compliance with the rules and regulations of the SEC".
Shares in Pinduoduo have risen 35 per cent since the Blue Orca report was published.