UPDATE 1-Migao, other Chinese shares targeted by short-sellers

Mon Jun 20, 2011 5:56pm EDT

* Doubts still linger about Migao's potash supply contract

* Migao shares still down sharply despite buyback plan

* China's Silvercorp, GLG among others hit by Sino scandal

By Euan Rocha

TORONTO, June 16 (Reuters) - Investors have ratcheted-up their bets that Migao Corp (MGO.TO) shares will fall further despite a buyback, after a recent supply contract raised suspicions about the Chinese fertilizer company.

Shares of North American-listed Chinese companies have come under intense scrutiny after short-seller Muddy Waters earlier this month accused Sino-Forest (TRE.TO) of fraudulently exaggerating the size of its forestry assets.

Migao, whose Toronto-listed shares have fallen more than 30 percent this month, is among the hardest hit. The company's disclosure that it made a hefty upfront payment to secure a potash supply deal with an unknown Russian company has raised some investor concerns about its financial dealings.

The latest short-interest data from exchange operator TMX Group indicates that short positions in Migao have risen more than 40 percent in the two-week period ended June 15.

That correlates with data from Data Explorers that shows that more than 9 percent of Migao's outstanding shares were on loan as of June 15, up from less than 1.5 percent at the beginning of the month. The firm said the spike reflects short-selling activity - essentially bets that the shares will drop.

Data Explorers also said nearly 75 percent of Migao's shares available to be borrowed were already out on loan. The firm collects data from custodian banks that run lending programs on behalf of mutual and pension funds, who sometimes put their holdings into lending programs.

"It would be very hard to short more of this stock, because three-quarters of the available supply of shares are out on loan, so there's hardly any more shares that you can get your hands on to short," said Data Explorers spokesman Alex Brog.

Migao Chief Financial Officer Randall Smallbone contends that the increase in short-positions reflects negative market sentiment around Chinese companies in general more than any specific concerns about Migao.

THE $100 MILLION QUESTION

Migao said that it signed a potash supply deal earlier this year with a Russian company, but it declined to provide details about the supplier due to contractual restrictions. It said it had agreed to prepay the supplier $100 million, even though deliveries would not begin until 2013, triggering concern among some investors.

"Any ambiguity around any Chinese name raises questions and suspicions, whether right, or wrong -- that's the market we're in right now," said Barry Schwartz, portfolio manager with Baskin Financial. "The market has a herd mentality, when it comes to sectors and industries and when they hit on a theme, they either love it, or hate it."

In a bid to address investor concerns, Migao said recently it would buy back up to 5 percent of its shares, and its chief executive, who holds a third of the company, has pledged his entire stake against the possibility of a supplier default. [ID:nN0997357]

The Sino-Forest allegations, as well as accounting scandals that have embroiled U.S.-listed Chinese companies, have tainted other Chinese entities with listings in Canada. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Q&A about allegations against Sino: [ID:nN15276780] Analysis on U.S.-listed Chinese companies: [ID:nN10232390] Special report on Chinese stock scams: [ID:nN06271838] For data on short positions in Chinese Cos:[ID:nN15302736] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Shares of Chinese miner Silvercorp (SVM.TO) have fallen 23 percent this month, while those of GLG Life Tech (GLG.TO) -- a supplier of stevia extracts for zero-calorie sweeteners -- are down more than 25 percent.

Data Explorers said the number of Silvercorp and GLG shares on loan have also doubled over the last month. Currently about 9 percent of Silvercorp shares available for borrowing are out on loan, while about 22 percent of GLG's shares available for borrowing are out on loan.

The latest TMX data also indicates that the number of short positions in both companies more than tripled in the first two weeks of June.

"There's a lot of risk aversion right now to Chinese names and certainly you are probably going to see below average multiples, particularly on names that have some ambiguity surrounding parts of their business," said BMO Capital Markets analyst Joel Jackson.

SUPPLY CONTRACT

Migao shares staged a strong comeback last week, as the share buyback plan kicked in. But analysts and investors still want the company to be more forthcoming with answers.

"The stock is trading as if the market hasn't necessarily received enough information on this to feel comfort," said Jackson, who recently cut his price target on Migao to C$5.75 from C$7.

Migao's supply deal with privately owned Potash Export Co raised eyebrows, as there are only two potash producers in Russia, and both denied having any involvement in the deal, or any ties to Potash Export Co. [ID:nLDE72H1SO]

A third Russian fertilizer company, EuroChem, which plans to launch production at its potash mine in 2013, has also denied any relationship with Potash Export Co.

Despite the doubts that have hit its share price, Migao said it will honor a non-disclosure agreement prohibiting it from disclosing the share structure and resources of its supplier. For competitive reasons, it also refused to disclose the exact discount pricing that is built into the contract.

"Until the Potash Export Co ownership structure is revealed, Migao will likely continue to trade sideways," wrote CIBC analyst Jacob Bout in a recent note to clients. (Reporting by Euan Rocha; editing by Frank McGurty)

Source: http://feeds.reuters.com/~r/reuters/hotStocksNews/~3/PFZB8Fega3w/china-accounting-migao-idUSN1616406720110620

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