Focus Media Holding, a US-listed Chinese company held by a number of retail funds, has seen its shares plummet after being targeted by a short-selling group.
The digital media and advertising company fell by as much as 66% last night after being given a “strong sell” rating by Muddy Waters, the group best known for sparking a drop in the share price of Chinese forestry firm Sino-Forest.
Focus Media, which is based in Shanghai, accounts for 2.12% of Ben Akrigg’s £113.27m F&C South-East Asian Equity fund and 3% of Gigi Chan’s £72.1m Threadneedle China Opportunities fund.
The firm runs a network of LCD television screens which display advertising in offices, shops and residential buildings. However, Muddy Waters claims the company has overstated the size of this network by up to half.
“[Focus Media] claims to operate 178,382 screens but the actual number in [Focus Media’s] media kit is less than 120,000,” the group’s report says. “We therefore question whether [Focus Media’s] core LCD business is viable.”
The group also claims that Focus Media has “significantly and deliberately” overpaid for acquisitions, comparing this to the recent scandal to engulf Japanese camera-maker Olympus.
Muddy Waters says that $1.1 billion of the company’s $1.6 billion in acquisitions were eventually written down as impaired assets. It also claims Focus Media’s board is “incapable of exercising good corporate governance”.
These issues are “symptomatic of a highly troubled enterprise that is run solely for the benefit of insiders”, the report concludes.
The Focus Media report is the latest example of ‘whistleblowing’ by short-sellers of Chinese companies. Earlier this year Muddy Waters accused Sino-Forest of overstating its assets and revenues, while Anonymous Analytics alleged that the management of food producer Chaoda Modern Agriculture has channelled hundreds of millions of dollars out of the business.
Fitch Ratings also released a statement on the issue, warning that the negative effects of market volatility and uncertainty following such reports is likely to outweigh any resulting benefits of improved corporate governance and transparency.
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