Activist Short Selling in H1-2020

Activist Short Selling in H1-2020
  • We recorded 91 major activist short reports in H1-2020. A truly unique period that left short-selling in a "logic versus liquidity" state, as characterised by Muddy Waters.* 
  • We look at the top performers of the last six months. The chart is topped by the obvious names, Wirecard and Luckin Coffee. We also look at Hindenburg Research’s and QCM’s top performers. 
  • We also highlight some of the common themes in the first half of this eventful year, to say the least, such as COVID-19 biotechs and Robinhood crowd trades.
  • Finally, we review short campaigns that originated in the previous six months and, that, we believe, are worthy of attention in the upcoming months.

In H1-2020, we have registered and tracked 91 new major short campaigns. This compares to 84 such campaigns in H1-2019. On average, targeted stocks are trading 9% higher following a short call/report, which marks a first unsuccessful streak for activist short sellers in a long while. This result somewhat resonates with "logic versus liquidity" comment by which Carson Block of Muddy Waters summarised the current state of short selling to Breakout Point.

Eight activist short sellers accounted for almost 54% of published short reports. Out of them, the most successful, in terms of negative shares performance, has been J Capital Research with four targets declining 28% on average. The most active has been Hindenburg Research with 15 major short calls. Somewhat fittingly, Nate Anderson, founder of Hindenburg Research, described to us state of short selling in 2020 as "more opportunities than ever".

The most targeted country/region has been US with 48 short reports. This is unsurprising and is a regular occurrence in our short selling records. We noted the biggest regional growth of a number of short selling reports in China, with 20 in H1-2020, versus 12 in H1-2019. In terms of share prices performance, developments of China-related activist short selling are perhaps best described as hit-or-miss. Only few targeted stocks remained fairly unchanged. Several Chinese stocks plunged (eg Luckin Coffee, China Metal Resources Utilization, Canaan, Hebron Technology), while several are trading much higher than prior to the report (eg GSX Techedu, iQIYI, GDS Holding, Tianneng Power International).

Top H1 Short Calls and what worked

Based on shares performance following release of the report 5 top performing H1 short calls are:

The first stock we need to highlight is Luckin Coffee (LK). The demise of Luckin Coffee happened few days into Q2 as the announcement of 2019 sales being fabricated occurred (ref. CNBC). More recently, it has been reported that, as per conclusions of an investigation into the accounting issues at LK, the company’s chairman knew or at least should have known, about the fabricated transactions.

The campaign against this chain of coffee shops in China was first launched at the end of January by famous Muddy Waters who republished an anonymous report. The second thesis, which corroborated many of the points, was released just a few days after that by a previously unknown short seller, Ash Illuminations. Lastly, it was J Capital Research that scrutinised all the data points in the bull thesis and supported the downside case. Here, we would like to re-emphasise enormous amount of work and scrutiny that apparently went into the original short report:  

Next successful target of the first six months we want to point out is Akazoo (SONG). This was a target of Quintessential Capital Management (QCM). The short-seller with one of the most impressive track records in the industry has targeted the company at Contrarian Investor Virtual Conference in April due to allegations of a pyramid scheme with the goal to enrich insiders at the expense of the shareholders. These were proven true rather quickly and the stock collapsed within a week of the report being public and is delisted from the exchange.
The results of internal investigation by a special committee of independent directors are also out and are devastating for the shareholders. We recommend reading this document in full to those interested in activist short selling. It contains statements such as: "Akazoo, in fact, has had only negligible actual revenue and subscribers for years". Even the internal investigations document's title says it all: 

Akazoo Special Committee Determines Former Akazoo Management Participated in Sophisticated Multi-Year Fraud

Another success was registered by Hindenburg Research who targeted China Metal Resources, a Hong Kong-listed business, due to allegations of dubious accounting, questionable corporate governance and possible manipulation of the stock price. 
A little less than a month after the report went out, the company announced its auditor, EY, needs to perform extra due diligence with China Metal’s annual report as seen below.

This has been a first excursion of Hindenburg Research in .HK universe. Hindenburg Research described related experiences to us:

"We had no name recognition in Hong Kong so we weren’t sure if anyone would even notice our research. That turned out not to be an issue."

The next stock we want to mention was Canaan (CAN), which was first targeted by Aurelius Value who wrote about the US-listed Chinese bitcoin mining business before the March downturn due to 'classic Chinese' allegations of dubious related-party transactions and questions around CAN's customers. The short-seller met with quick success, but as the market rebounded so did shares of CAN. 



In May, White Diamond Research came out and wrote about the business from the perspective of the recent bitcoin price and the ‘halving’ event, both negative for CAN. Now both short-sellers are seeing 60% returns from their campaigns. Users of Breakout Point can easily spot which stocks have been up despite being targeted by multiple short-sellers and evaluate on their own whether this makes sense.

The Robinhood crowds, COVID-19 stocks

The first half of 2020 also saw many campaigns targeting companies that have seen wild share price action due to the COVID19-related press releases (many times biotechs who have jumped into the race for the vaccine). Another theme could be described by companies that have been vocal about their new business developments perhaps with the motivation to capture interests of newly minted retail traders, usually operating through Robinhood. 

This attracted a number of activist short sellers. We denote related short calls 'inverse Robinhood strategies'. While some of these targets have been declining recently as the hype left them, many are still substantially up even after the short-seller raised serious allegations about the businesses. Most interesting examples can include Cytodyn (CYDY), biotech short of Culper Research which is up over 300% or Wins Finance Holdings, a recent target of Hindenburg which is up roughly 30%.

Emergence of so called 'retail bros' in H1, will, we except, translate into even higher importance of retail investors in H2. At Breakout Point this includes tracking and flagging of all relevant retails flows, such as, global retail investors activities, Robinhood's swarming, Dave Portnoy's views and developments at r/wallstreetbets.

What will happen to China Hustle 2.0? 

One group of short campaigns which have not seen much success in the H1 was the China Hustle 2.0 stocks.These are some of US-listed Chinese companies which are usually alleged to frauds or have serious red flags in corporate governance. While LK was obviously the outlier and could actually spur a lot of changes in the regulatory environment, most of the ‘cohort’ was struggling to provide positive performance for the short-sellers in the short run. 

Most interesting stock is certainly...

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* Note: Unless otherwise stated, presented data and analytics is as of available on 2020-07-04, UTC 12:00.

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