Citroën Research short seller Andrew took off on the Evergrande debt crisis

Citroën Research short seller Andrew took off on the Evergrande debt crisis

Andrew Left, Founder and CEO of Citron Research

Adam Jeffery | CNBC

Andrew Left, an American short seller who years ago was banned from doing business in Hong Kong for a damning report he wrote about Evergrande, said the promoter’s debt crisis Chinese real estate was “long lasting”.

But he told CNBC he didn’t think the Evergrande situation signaled a larger problem for China.

“The Evergrande situation had been happening for a long time and China had to get rid of its system. It’s not a Lehman moment and it’s not settled, ”the left told CNBC in an email.

He was referring to the 2008 collapse of Lehman Brothers – the world’s fourth-largest investment bank at the time, which filed the largest corporate bankruptcy in US history. This bankruptcy spread to other banks, leading to the global financial crisis.

Left, the founder of Citron Research, was banned from trading in Hong Kong markets after he released a 2012 report that predicted Evergrande would soon go bankrupt.

His five-year ban ends next month.

In an email interview with CNBC, Left said, “Everything I have discussed, from influence to corporate governance, has turned out to be true, and instead of considering my report, SFC … Asked me to defend myself. Forced to spend lakhs to

He was referring to the Hong Kong Securities and Futures Commission (SFC), which alleged that Left published a report on Evergrande containing “false and misleading” information, including an allegation at the time that the real estate developer was involved. in an accounting fraud.

Following the SFC’s allegations, the Hong Kong Market Misconduct Tribunal found the left to be guilty. The Tribunal is an independent body that deals with cases of abusive market practices, including insider trading and stock market manipulation.

I believe China has a plan to eliminate it. It might not be pretty, but it is long and they will save the system from the bottom up.

André Left

Founder of Citron Research

The leftist claim – that Evergrande was bankrupt and committed accounting fraud – seems never to have been proven. In 2015, the court rejected Evergrande’s request to produce records and documents.

Evergrande was not available for comment when contacted by CNBC. CNBC has contacted the Hong Kong Securities and Futures Commission, which declined to comment on the report.

The escalating crisis in Evergrande, the world’s most indebted with $ 300 billion in liabilities, hit global markets this week. The company is the second-largest Chinese developer in terms of sales and has a strong presence in the country, operating in sectors ranging from real estate to electric vehicles and healthcare services.

Evergrande has said he could default on his debt with a massive $ 83 million interest payment on Thursday. Analysts have also warned that this will happen by default. Investors are watching developments closely amid fears of a spread to other markets.

Left said that Evergrande’s current liquidity crisis had shown him to be right when he wrote his 52-page report in 2012. Short selling is an investment strategy that involves selling borrowed stocks in hope to buy them back at a lower price. And earn money with the difference.

“10 years ago, I wrote about how the company plays fast and unrestrained with debt and uses aggressive accounting to hide its true financial health. I continued to highlight how the company’s favorite projects were. The total costs billions of dollars in balance sheet financing, ”Left said.

“Now everything I wrote has come true and the Chinese people are suffering. It shows the importance of free speech and short selling in the markets, ”Left said.

Angry Chinese investors have staged protests in recent weeks demanding repayment of their money. Foreign investors, which include the world’s major asset managers, are waiting to see if Evergrande will be able to pay the two interest payments due Thursday and next week.

“China has plans”

The crisis will wipe out the company’s stock, Left predicted.

“Evergrande’s equity is worthless and the bonds are questionable,” he said. Evergrande shares have fallen more than 80% year-on-year and the yield on its bonds has risen. Bond yields and prices move in opposite directions: the higher the yield, the lower the bond price.

Even though the Chinese developer is in serious trouble, Left said the impact will be limited.

“Chinese banks will take a manageable blow and the people will be helped by the government,” he said. “I think this is not systematic and will not affect future investments in China or Hong Kong. I think the regulation of the tech industry is a lot scarier than that. “

“I believe China has a plan to open it. It might not be pretty but it is long and they will protect the system from the bottom up, ”he said.

Left denies decision by Hong Kong regulators

Left was banned from trading on the Hong Kong Stock Markets in 2016 after being found guilty of market misconduct in connection with the Evergrande Report by the city’s Market Misconduct Court.

The court also ordered him to repay 1.6 million Hong Kong dollars ($ 205,000) he had earned from short-selling the stock.

Here’s what Hong Kong regulators allege he did – and his denial on every point.

1. Bad market practices

Regulators accused the left of market misconduct in releasing the report. In the report, he said Evergrande was insolvent and defrauded investors. The court said the left’s claims are false and misleading.

Left said the report said Evergrande was or “soon will be” insolvent because the company’s cash flow “cannot handle” the volume of debt and off-balance sheet activity.

Referring to the current liquidity crisis, he said: “I have supported him with photos and testimonials from protests across the country. His request was ridiculous. I think we see it now.

“Now look at who is paying the price – the working poor and the people who trusted Evergrande with deposits,” he said.

2. Lack of knowledge of local accounting practices

Regulators said Left had little knowledge of local accounting standards and financial reporting and had not checked with experts or companies to verify the information he received.

Left says he was using GAAP, a common set of accounting principles and standards published by the US Financial Accounting Standards Board, to which companies listed in the US must adhere.

“The fact that I am using GAAP standards and not Hong Kong accounting [standards] does not eliminate the tone or message from the report on some data points, ”he said.

He told CNBC the courts would not allow him to question Evergrande’s CFO or the company if there are charges.

“I had a test where I was not allowed to question the company. It was more than one-sided, ”he said.

3. Negligence

The court accused the left of being negligent in publishing the report.

Left insisted he was not reckless. “What if I was, are they going to lay charges against every investment bank that has a target of $ 30 on a stock with huge bank fees, without seeing the evidence?” he asked via email. “It’s recklessness.”

On Thursday morning, Evergrande stock was at 2.58 Hong Kong dollars ($ 0.33), after falling more than 80% year-on-year.

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