Focus Media Holding Ltd, a digital advertising firm, has denied accusations by Muddy Waters that it overstated its assets, the latest U.S.-listed Chinese company to be targeted by the influential short-seller.
A report from Muddy Waters said Focus Media inflated the number of its LCD screens, sending its shares down by as much as two-thirds on Nasdaq on Monday and wiping $1.3 bln off its market value.
Short-sellers — who borrow stocks and then sell them in the hope they can later buy them back for less — have targeted Chinese companies listed in North America, alleging fraud and mismanagement, and wiping out billions of dollars of shareholder value.
In June, Muddy Waters accused Canada's Sino-Forest Corp of fraud. Investors, who included billionaire fund manager John Paulson, lost billions of dollars, and the company is now under investigation by authorities in Canada.
In a posting on China's Twitter-like microblog service, Focus Media's CEO Jason Jiang said short-sellers spreading rumours should be legally punished, and his firm will be vindicated by good fourth-quarter results.
Shanghai-based Focus Media operates advertising screens in offices, apartments, elevators and supermarkets across China that show a mix of video, interactive media and still photos.
Shares in the company closed at $15.43 on Monday, after earlier dropping to $8.79, their lowest since September 2009. More than 77 mln shares were traded, the most in a single day.
Shares in Fosun International, which owns 16.2% of Focus Media, fell as much as 6.5% in Hong Kong on Tuesday.
SCREENS
Muddy Waters said Focus Media "fraudulently" overstated how many LCD advertising display screens it had in its network by about 50%. It said the company reported in regulatory filings it has 178,382 screens, while its own media kit put these at fewer than 120,000.
The short-seller, which has issued a string of bearish notes from its research director, Carson Block, on Chinese companies listed in North America, put a "strong sell" recommendation on Focus Media shares.
Of the dozen analysts covering Focus Media, 8 rated the stock a "buy", 3 a "strong buy" and 1 a "hold", according to Thomson Reuters Starmine. The company has beaten analysts' earnings estimates for at least 8 straight quarters. Last year, it posted net profit of $178 million on revenue of $516 million.
Just last Friday, Goldman Sachs raised its 12-month share price target for Focus Media to $45 from $42.
Shares in Sina Corp, whose chief executive is on the Focus Media board, dropped 11.4% in the United States on Monday. Sina's attempts to buy Focus Media in 2009 failed to win Beijing regulators' approval.
Of the six overseas-listed Chinese companies Muddy Waters has written on before, only two are still trading: Oriental Paper Inc and Spreadtrum Communications.
OLD NEWS?
Muddy Waters also accused Focus Media — whose investors as of end-September included Fred Alger Management, Baillie Gifford and Capital World Investors — of "significantly and deliberately" overpaying for deals, noting is has written down $1.1 bln out of $1.6 bln in acquisitions since 2005.
"FMCN has written at least 21 acquisitions down to zero and then given them away for no consideration … as a result FMCN has an accumulated deficit of $437.4 mln," it noted.
It added that Focus Media's board was "incapable of providing real corporate governance" due to high compensation and an intricately linked web of businesses.
Another analyst said the 120,000 figure cited by Muddy Waters may have been taken from an outdated media kit. The analyst also said the report broke no new ground.
