When a U S activist fund accused 3½-year-old Chinese retailer Pinduoduo PDD 5.17 per cent in November of inflating its sales, shares in the Nasdaq-listed company jumped.
One reason: a growing horde of Chinese investors who are contributing to large price moves and unusual trading patterns in some US stocks. Many are young, tech-savvy individuals who stay up late to trade using mobile apps, and who prefer the unfettered nature of US markets to more restrictive conditions in mainland China.
Among them is Yu Junjie, a 28-year-old living in Hangzhou. He first heard of Pinduoduo a few weeks before the online retailer’s $1.6 billion initial public offering last summer. “It took me only half an hour of research to decide that it’s a good company,” said Yu,
who used to work in the tech industry and is now studying coding full time.
He wasn’t deterred by an announcement on November 14 from Texas-based Blue Orca Capital, which said it was betting against Pinduoduo shares and released a report detailing discrepancies it found in the company’s regulatory disclosures. Yu bought more Pinduoduo shares that
day; the stock ended nearly 12 per cent higher.
The shares have since climbed 56 per cent, giving Pinduoduo a market capitalisation of $34.5 billion. The money-losing company, which sells toilet paper, clothing and other merchandise online, is currently worth more than Twitter and Spotify Technology SA .
Some analysts have likened the trading volatility of some US-listed Chinese stocks to activity in China’s domestic stock market, which is largely retail-investor driven. Andrew Karolyi, a finance professor at Cornell University, said many Chinese companies also tend to have small “floats” upon listing in New York, meaning a relatively small portion of their shares are available for public trading. That makes them more susceptible to large price swings, he said.
While there isn’t public data on what US stocks Chinese investors are trading, “Chinese investors tend to favour Chinese companies,” said Leaf Li, founder and chairman of Futu Holdings Ltd, a fast-growing online brokerage that helps Chinese investors trade US and other overseas stocks. Futu completed a US IPO last week and went public on Nasdaq. Li said more Chinese investors are also trading US tech stocks such as Tesla and Apple, and said many of Futu’s
customers work in China’s tech sector.
Another popular Chinese brokerage, Tiger Brokers, has also filed plans to list on Nasdaq and said it helped arrange $49.5 billion in US stock trades by Chinese investors in 2017.
Cen Saiyin, vice president of Cornerstone Capital, a Guangzhou-based investment firm, said more Chinese institutional investors are also trading US stocks, in part because China’s most successful tech companies are listed there.
Cornerstone said in a recent report that it once helped Cheetah Mobile, a New York-listed Chinese mobile-app maker, fend off an attack from a US short seller in October 2017. Prescience Point Capital Management, a Baton Rouge, La-based investment firm, had accused Beijing-based Cheetah of misrepresenting its reported financial performance.
Cheetah’s shares fell as much as 10 per cent shortly after Prescience Point released a report on the company, which denied the allegations. Cornerstone said that once it discovered the attack, it “quickly built up positions in Cheetah,” helping the shares end up more than 12 per cent that day.
Cornerstone said in the report it was trying to help “safeguard the stability” of US-listed Chinese companies. The firm declined to disclose how many shares it bought. A representative said Cornerstone isn’t affiliated with Cheetah and no longer holds the shares.
Cheetah currently has a market capitalization of $1.1 billion. Its shares climbed in late 2017, but have lost about half their value over the past year. “The shareholder
activities and stock-price movements are beyond our control,” a company spokesman said.
Shares of Pinduoduo have been on a roller-coaster ride since listing, often defying conventional wisdom. They rose as much as 40 per cent one day during their first trading week and fell more than 10 per cent on several days. In January, shares rose after the company disclosed that hackers broke into its systems and stole millions of dollars in coupons.
They also went up after a 180-day post-IPO lockup period expired, enabling more large shareholders to sell their shares. Index giant MSCI added Pinduoduo to its China index last month.
The Shanghai-based company, which has yet to turn a profit, was founded in September 2015 by Colin Huang, a former Google engineer. Its backers include social-media giant Tencent Holdings Ltd, private-equity firm Hillhouse Capital Group and venture investor Sequoia Capital China.
The company said it had more than 400 million active users as of end- 2018, a customer tally that took larger rival JD.com Inc. more than a decade to attain. Pinduoduo’s reported sales in the first nine months of last year swelled to 7.5 billion yuan ($1.1 billion) from 561.2 million yuan a year ago, though its net loss topped its revenues for the period.
In mid-November, after months of researching the company, Soren Aandahl, founder and chief investment officer of Blue Orca Capital, went on Bloomberg Television to announce his short bet against the company and released a 42-page report detailing its analysis and opinion.
Pinduoduo has made “fundamental misrepresentations” about its staff, cost structure, transaction volumes and overall performance, Aandahl said that day. The Shanghai-based company denied the allegations and said its reported numbers were audited by Ernst & Young and in compliance with US rules.
Wang Haitian, a 30-year-old former journalist who now trades stocks full time, saw the short seller’s report as a buying signal. “Our judgment of Chinese internet companies is more grounded than foreign investors,” he said.
Adam Feng, a 38-year-old IT specialist at an internet company in Shenzhen, also bought Pinduoduo shares and brushed off the allegations. “Most Chinese companies dress up their financials to some extent,” he said, adding that he believes the company has huge growth potential.
Regulatory filings in February showed that dozens of institutional investors exited or reduced their Pinduoduo investments during the fourth quarter, but many others bought shares.
Aandahl of Blue Orca said he stands by his analysis of the company. “Smart investors can disagree, that’s what makes the market. We are pretty philosophical about it.”