The U.S. Senate passed the Holding Foreign Companies Accountable Act, an amendment to the Sarbanes-Oxley Act of 2002, which would require foreign companies trading on U.S. exchanges to submit to audit oversight by the Public Company Accounting Oversight Board (PCAOB) and “submit documentation … that it is not owned or controlled by a governmental entity in the foreign jurisdiction”. While not directly mentioning Chinese companies trading on U.S. exchanges in the bill, Senator John Kennedy of Louisiana who introduced the bill stated that “All I want … is for China to play by the rules.” U.S. traded Chinese based companies are exempt from the domestically accredited financial oversight required for U.S. and international stocks.
S3 follows 556 Chinese based domestically traded equities and ADRs on our Blacklight SaaS and Black App platforms with an aggregated market cap of $5.5 trillion and short interest of $22.7 billion. Short sellers in these stocks were up +$382 million today, +1.69%, on the news.
The most shorted Chinese based companies trading on U.S. Exchanges are:
Shorts in domestically traded Chinese stocks were down -$483 million in net-of-financing mark-to-market losses as of 5-19-20. Luckin Coffee Inc ADR (LK) was the most profitable short of the year after its accounting\revenue scandal wiped out most of its $12 billion market cap and the Nasdaq has initiated de-listing procedures. LK shorts are up +$1.08 billion in mark-to-market profits for the year. On the other side of the ledger, shorts in online E-commerce\Direct Sales companies Pinduduo Inc ADR (PDD) and JD.com Inc ADR (JD) are the worst performers for the year.
In today’s trading, shorts in domestically traded Chinese stocks were up +$382 million, +1.69%, in mark-to-market profits. Today’s move cut their year-to-date losses dramatically and they are down only -$101 million in year-to-date mark-to-market losses, down -0.47%. Today’s biggest short-side winners were GSX Techedu Inc (GSX), Pinduoduo Inc (PDD) and LK Coffee Inc (LK) on its first day of trading after its suspension was lifted. The biggest short-side losers today were Autohome Inc (ATHM), Alibaba Group (BABA) and Tencent Holdings (TCEHY).
We should expect increased short selling in Chinese stocks which trade on U.S. exchanges, especially those with significant Chinese government ownership and Chinese based accounting firms that are less likely to agree to PCAOB oversight.
Looking at short selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities. Our Blacklight SaaS platform and Black APP provides an up to date view of short selling and short covering on an equity, sector, index or country-wide basis allowing investors\traders to better manage their existing long and short positions as well as generate new trade ideas.
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Managing Director Predictive Analytics, S3 Partners, LLC
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