Short seller Bonitas Research accused Hong Kong-listed Bosideng (HKEx: 3998) of public market fraud, which resulted in the firm’s shares plunging 24.8% on Monday morning—the largest one-day drop on record—before a trading halt.
The China-headquartered firm is a down clothing maker with more than 7,500 retail outlets selling its own products.
Bonitas said in a statement that Bosideng has overstated revenues and profits and had undisclosed related party transactions as well as overpayments for acquisitions from undisclosed insiders at “astronomically high prices”.
According to the short seller, it has uncovered ways through which Bosideng’s chairman Gao Dekang and his conspirators stole from the firm’s minority shareholders.
Bosideng has overstated its net profits by 174% to fabricate CNY 807 million of net profits since 2015, Bonitas said.
Bonitas said Bosideng artificially overpaid CNY 2 billion for multiple acquisitions from undisclosed insiders, and disposed CNY 56 million of real assets at bargain prices to Gao.
The short seller also accused the firm of paying “significant historical dividends” to Bosideng insiders who own more than 65% of Bosideng’s shares outstanding.
“An analysis of Bosideng’s Chinese subsidiaries’ credit reports revealed large balances of undisclosed receivables and undislcosed payables that appear to be a result of significant inter-company sham transactions (and possibly with Gao’s private entities) used to fabricate transaction volumes that manifested as fabricated profits on Bosideng’s reported financial statements,” Bonitas noted in a statement.
Despite Bosideng’s claim that its primary acquisitions were purchased from independent third parties, Equity Transfer Agreements from SAIC Filings show that each of Bosideng’s three primary acqusitions were purchased from one of Gao’s conspirators, “Mr. Chow”, according to Bonitas’s statement.
“The modus operandi appears to be that Mr. Chow would buy a little- to no-cost apparel brand and then sell it to Bosideng within one to three years at a consideration up to 40 times higher than what Mr. Chow initially paid for the asset,” Bonitas added.
With his strategy, the short seller claimed that Gao and his conspirators have already siphoned RMB 2 billion in cash and stock out of Bosideng by flipping little to no value apparel brand assets to Bosideng at artificially inflated prices.
Bonitas said it had gone short on Bosideng's stock, which it considers to be "worthless."