UPDATE 3-China's Tianhe Chemicals hits back at allegations over pre-float statements

Tue Sep 2, 2014 11:06am EDT

* "Hacktivist" short-seller research firm alleges massive fraud

* Tianhe says Anonymous report has errors, misleading statements

* Tianhe stock targeted in advance by short-sellers

* Stock down 5 percent on Tuesday before trading suspended (Adds Tianhe response to accusations)

By Pete Sweeney and Lawrence White

SHANGHAI/HONG KONG, Sept 2 (Reuters) - China's Tianhe Chemicals Group has hit back at allegations that it falsified statements to auditors and investors ahead of its Hong Kong listing in June and forced trading in its shares to be suspended on Tuesday.

The allegations were made in a report by Anonymous Analytics, a stock researcher that describes itself as a "faction" of the hacker group Anonymous, which Tianhe says contained factual errors and "malicious accusations".

"The report contains errors of fact, misleading statements and malicious accusations against the company and its directors," Tianhe said in a statement posted on the website of the Hong Kong stock exchange on Tuesday evening.

The company added that a more complete response to the report is being prepared for publication "as soon as practicable".

Shares in Tianhe dropped 5 percent on Tuesday morning before trading was suspended at the company's request.

Tianhe's statement said its directors are aware that there has been active short-selling on the company's shares recently.

Short-selling involves the sale of borrowed shares in the belief that the price will fall, allowing the stock to be bought later at a lower price to close the position with a profit. Firms specialising in shorting will often publish a negative report on a stock that can accelerate its decline.

The Anonymous Analytics report, which did not include authors' names, is the first short-selling report targeting a leading Hong Kong-listed Chinese company in recent years - and it looks an ambitious one, given Tianhe's large size and investor base.

While offshore short-sellers have targeted smaller companies in Taiwan, Singapore and Hong Kong in recent months, Tianhe is extraordinary both for its massive market capitalisation, which last stood at $8 billion, and its stature as a recent IPO darling.

The Anonymous report alleged that Tianhe, which listed on for $654 million with the sponsorship of Bank of America Merrill Lynch, Morgan Stanley and UBS, generates only a fraction of the revenue that it claims.

Morgan Stanley, Bank of America Merrill Lynch and UBS all declined to comment.

Reuters was unable to confirm any of the allegations independently, but if they are proven accurate, it would be embarrassing for China and the institutions involved in clearing mainland businesses to list in Hong Kong.

It could also create heavy losses for some foreign investment firms. The company's second-largest investor is Morgan Stanley Private Equity Asia III fund, which owns 8.6 percent of Tianhe's shares, the fund's largest single equity investment. The firm originally invested $300 million in Tianhe.

If the allegations are proven false, however, it would lend weight to Beijing's complaints that foreign short-sellers try to to exploit investor fears and slander Chinese firms for profit.

TARGET OF OPPORTUNITY

Tianhe looks to have become the target of massive shorting soon after listing, a Reuters analysis shows. As soon as the Hong Kong exchange put the company on its designated short-selling list in early August, about 60 percent of its daily turnover was short-transactions, compared with the 10.5 percent average for the Hong Kong market.

Data from Markit shows that nearly 80 percent of Tianhe shares that can be borrowed for shorting are currently on loan.

The company has strongly outperformed the Hong Kong China Enterprises Index (HSCE) since it listed, rising nearly 25 percent against a 5 percent rise in the HSCE.

The Anonymous Analytics report said that Tianhe provided falsified documents to its auditor, Deloitte, before its IPO that did not match previous filings.

Deloitte officials in Hong Kong did not respond immediately to requests for comment.

"One would have thought that a fraud of the magnitude envisioned here could not have gotten by the regulators and investment bankers who do not want to see another one," said Paul Gillis, professor at the Guanghua School of Management at Peking University.

Anonymous's report included examination of Tianhe's tax statements to imply false reporting, which Gillis said could be damaging to Tianhe.

"They're in a small town and the company doesn't even appear on the list of the top 10 taxpayers in the county. If these facts are actually true, that's a real 'gotcha' there," Gillis said.

JPMorgan Chase & Co bailed out of IPO discussions with Tianhe in January, a move sources said was driven by concerns about the bank's employment of Joyce Wei, the daughter of Tianhe Chemicals Chairman Qi Wei.

Anonymous Analytics has published reports critical of other Chinese companies in the past, including Huabao International , Qihu 360 and Chaoda Modern Agriculture Holdings, though investors shrugged off allegations made against Qihu and Huabao. (Additional reporting by Saikat Chatterjee in HONG KONG and Vikram Subhedar in LONDON; Editing by Matt Driskill and David Goodman)

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