In recent years it has been common for short sellers who are active in the Hong Kong stock market to target "high-performing stocks". However, most of these actions have been in vain, the targeted companies with solid fundamentals have withstood these tests and their stock prices performed well again in the secondary market, fighting back against the short sellers.Recently, the short-seller Blue Orca issued a short selling report of China Medical System, a domestic high-quality pharmaceutical company. In this report releasing in early February, Blue Orca accused China Medical System of inflating profits and its chairman's misusing of the listed company's profits for his personal gain.
China Medical System quickly issued a strong response responding to each of the key points in Blue Orca's allegations. The response also stressed that these allegations were groundless, seriously misleading with untruthful conclusions. Then Blue Orca released a second report which is similar to the first one on February 10. In response, China Medical System further denied all the allegations made in both reports, and claimed that all the allegations were false due to the ignorance of the company's business structure, applicable tax policies and regulations, and audit process and these allegations are based on incomplete information that was inconsistent with the facts.
Despite the round of confrontation, the share price of China Medical System has not been frustrated, presenting a stable trend and rebounding in the following days. It is worth mentioning that after the short sale, China Medical System bought back 9.648 million of its shares at the cost of HK$ 98.1641 million on February 11. This action not only shows the strong confidence that China Medical System has in its future development but also showcased the company's sincerity to its minority shareholders and determination of defending against short selling. The company's shares continue to be in popular demand since the short sale on February 6, with a cumulative increase of 9.8% as of February 14. The response in the capital market clearly demonstrates the failure of Blue Orca's long planned short sale.
2. China Medical System gives strong response to the allegations. Why the company is so confident?
As a Chinese idiom goes, "If you stand straight, do not fear a crooked shadow," when facing Blue Orca's attack, China Medical System not only strongly responded to various allegations in announcement, but also asserted its confidence through a large-scale buyback. The following is a discussion of key views of the confrontation and an analysis of why the Blue Orca's short selling is untenable.
First, Blue Orca questioned the performance of China Medical System, claiming that the net profit margin of the company's Chinese branches was significantly lower than the group, and further claiming that the profits from its Malaysian subsidiary were fictitious. In response, China Medical System pointed out that its Malaysian subsidiary, with independent rented offices and employees, undertakes the main international business functions of the company, including new product investment and introduction, manufacturer selection and evaluation, quality control and supply chain management, promotion strategy formulation, etc., and by the end of 2018, its accumulated intangible asset expenditure had reached RMB 2.85 billion.
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