* Stock drops 13 per cent in 2013, short selling mounts
* 9 of every 10 shares available to borrow on loan -Markit
* China coal exposure, 'opaque' business model worry some
* Pricey valuation vs financial peers lures short sellers
By Nishant Kumar and Lawrence White
HONG KONG, April 17 Investors have soured on
prospects for China's only listed bad debt management firm, as
Beijing's newfound willingness to allow struggling firms to
default on loans signals a harsher environment for China Cinda
Cinda's shares soared on their debut last December as
investors flocked to a rare chance to buy exposure to China's
bad debt market, then effectively guaranteed by the government.
Firms like Cinda, 25 percent-owned by China's Ministry of
Finance, make money by buying up underperforming loans and
slowly turning them around for profits.
Now as China Huarong Asset Management Co Ltd, the biggest of
the four bad debt firms, prepares to list, investors fear the
business model is at risk and many are selling Cinda stock short
in a calculated gamble that it will drop. If China simply lets
more loans and trust products go under, rather than allow the
likes of Cinda to take them on, what once seemed a good bet will
lose its lustre.
"Before, people did not think the government will allow some
trust products go bankrupt. Basically, they assumed the
(state-backed) banks guarantee their payments," said Cong Li,
managing partner at Hong Kong-based hedge fund Zenas Capital
Cinda's stock is still 17 percent ahead of its initial
public offering price, largely because of the rapturous Hong
Kong market welcome in its early days.
Since the turn of year, though, Cinda's shares have fallen
13 percent, a bigger drop than the 10.5 percent decline in the
Hang Seng China financials index, as confidence in its
prospects have drained. Investors and analysts also express
concern about the opacity of Cinda's earnings model - it reports
earnings only every six months - and its exposure to China's
weakening coal mining sector.
That has made Cinda a target of short sellers, investors who
sell stock they have borrowed hoping to profit from buying it
back cheaper later.
Global hedge funds have scrambled to bet on a decline in
Cinda shares after it became eligible for short-selling under
Hong Kong stock exchange rules on Feb. 14. The exchange
regularly offers newly listed stocks for shorting once they
fulfil certain criteria.
As much as 92.8 percent of the Cinda shares that could be
borrowed under Hong Kong rules were out on loan on April 14, the
latest day for which data was available, up from 71 percent
about a month earlier, according to Markit, indicating interest
from short sellers.
That has led to the cost of borrowing the stock spiking to 9
percent of its share price per annum, compared with the less
than 3 percent that investors typically pay to borrow Asian
stocks, people familiar with stock lending and borrowing said.
"It went straight from zero to hero," said a Hong Kong-based
head of equity finance at a bank that has lent Cinda shares to
hedge funds, referring to Cinda's popularity among
NEGATIVE CHINA PLAY
Cinda was established in 1999 to absorb toxic assets held by
China Construction Bank and is one of four such
entities Beijing set up. It had 283.55 billion yuan ($46
billion) worth of assets as of June 30.
Cinda's IPO attracted a group of core backers, known as
'cornerstone investors', who put in a combined $1.1 billion into
the deal. These investors, including Oaktree Capital Management
Ltd, the world's largest distressed-debt investor, and Och-Ziff
Capital Management Group LLC, agreed to a six-month lock-up,
which expires on June 12.
Part of the build-up in short positions is on expectations
that some cornerstone investors may decide to cut their
holdings, putting pressure on the stock.
Cinda's pricey valuation, at 2.15 times book value, is
another lure. By comparison, Industrial and Commercial Bank of
China and China Construction Bank Corp trade
at book value, according to Thomson Reuters data.
Analysts also fret about Cinda's exposure to China's coal
sector, with coal prices falling 20 percent in the first two
months of 2014 due to overcapacity and tighter anti-pollution
regulations. Nearly a quarter of Cinda's non-cash assets were in
the coal sector through debt-for equity swaps in mid-2013,
according to Daiwa Capital Markets.
Another concern for some: Unlike most major Chinese
financial firms that are listed in both Hong Kong and Shanghai
and report earnings every quarter, Cinda is listed only in Hong
Kong and reports every half-year.
"It's the opaqueness of the business with low frequency of
financial performance disclosure ... that piles up the short
trades," said Dorris Chen, an analyst at Standard Chartered in
($1 = 7.7531 Hong Kong Dollars)
($1 = 6.2220 Chinese Yuan)
(Reporting by Nishant Kumar and Lawrence White; Additional
reporting by Umesh Desai and Shanghai Newsroom; Editing by
Kenneth Maxwell and Denny Thomas)