Investors no longer in search of the Chinese consumer

It is high time we cast our eyes eastwards to draw attention to the perplexing case of high short selling in Asian clothing manufacturers and to also flag up some recent news on the expansion of short selling in certain Asian markets. We will also touch on those Asian companies who have done recent deals with western business. Companies mentioned include: Li Ning (HKG: 2331), Peak Sport Products (HKG: 1968), China Lilang (HKG: 1234), Bumi Resources (JAL: BUMI) and Pou Chen (TPE: 994).

Despite the Data Explorers LongShort Ratio for Asia (excluding Japan) being just off an annual high, with 11.7 times more longs in the market than shorts, there remain some interesting sectors where short sellers are active. For some time Consumer Durables and Apparel has been the most borrowed sector in Asia ex Japan. Now that we stop and think about, this is interesting given the perceived wisdom that it is wise to invest in companies that sell to the Chinese consumer to profit from the rapidly expanding and massive middle class there. Li Ning was once a famous gymnast but went on to found a successful company that sells sportswear in China and now the US.

Investors detected trouble on the horizon for Li Ning as long ago as September last year, doubling the short selling to 8%. It has since reached over 10% with little short covering despite the shares falling 40% with a major drop in mid December. It is not just the short sellers who are negative. The long only funds who lend sold 35m shares on the news that orders had dropped and it was this that would have prompted the major fall in price in December. This caught these investors by surprise since Li Ning was a popular company to own amongst international investors. With a “days to cover” of 23 days, this firm features prominently in a screen on this sector for a potential short squeeze risk.

Peak Sport Products is another Hong Kong listed maker of sports apparel aimed at the Chinese market that is in this list as the demand to borrow is a large proportion of the available supply and volume has been light recently. The shares have been falling but not quite as dramatically as with Li Ning. However, short selling is at a 52 week high at 3.4% of the total shares outstanding.

The final name to reinforce this theme is China Lilang. Aside from having a very memorable ticker, they sell all types of branded menswear including sporty stuff. Short sellers swooped in the summer last year but retreated as the price rose. Shares on loan have just hit a six month high, so some investors think there is trouble ahead and that the share price may have run out of steam.

What is behind this trend? Putting any individual balance sheet problems aside, my Chinese colleague (Yi Wu - whose videos you can watch in Mandarin on our website) notes, having spent the holiday period back in China, that competition is the driving factor. He points out that five years ago companies such as Li Ning had a clear runway but today there many new companies offering very similar stuff.

Away from Hong Kong, there are some attractive resources companies listed in places like Indonesia and with the popularity of coal showing no signs of abating, it is no surprise to see that funds who lend are buying more and more of Bumi Resources ahead of its merger with the UK’s Vallar. Such funds added 100m shares to their holdings since November and the price has doubled.

Taiwan’s Pou Chen is one of two companies to have teamed up to buy AIG’s local life insurance branch for $2.16bn. There is a degree of short selling in Pou Chen to the tune of a third of supply, picking up in July.

Finally there are two pieces of good news regarding the Asian securities lending markets. Thailand has doubled the short selling approved list to their top 100 companies while loans can now be left out for up to a year from 6 months in Korea. The one piece of less good news is that Australia’s regulator has changed the rules on short selling disclosure and firms can no longer report their net short exposure but the whole short position, regardless of any long position they hold in the same security.