Earlier this week, a group of top Chinese tech execs banded together to defend US-listed Chinese stocks from being bashed by short sellers. But their primary target was one man, Andrew Left, the financial blogger and analyst behind Citron Research. To tell his side of the story, Andrew agreed to chat with us about his work, and the recent controversies that led to some cross-Pacific mud-slinging.
Speaking via Skype, the Citron founder defended his record on China tech stocks, conceded to an error, and suggested he’d be looking into legal action against the likes of Kai-Fu Lee, the former head of Google China, and Zhou Hong-yi, the CEO of Qihoo (NYSE:QIHU), who collectively set up the CitronFraud website which personally branded Andrew a man with “a record of fraud.”
Andrew begins by defending his work on CitronResearch, claiming that “of the 10 Chinese stocks” he has reported on, “Only one is really trading today: Qihoo. Two are way down, the rest are charged with fraud.” An example is his post on Longtop Financial in April of 2011, a month before the Chinese financial software company was charged with fraud and subsequently delisted. Prior to that, Longtop had been sailing along nicely with clean audits from Deloitte “for six consecutive years.” But others he lists are still trading even after sustained attacks by Andrew and some other short sellers, such as Deer Consumer (NASDAQ:DEER) which is currently at an all-time low of $2.26.
Why go after the guy with a good record? I have a body of work in China, but… are you kidding me? My record speaks for itself. […] It’s proven that my track record is right. Only Qihoo hasn’t played out.
If Kai-Fu Lee really wants to help, he’ll say: We will not do business with any company misrepresenting to western investors.
But a key part of the attempt at undermining Citron is by pointing out the conflict of interest in short sellers – that they’re profiting from their moves against stocks. Is this true of Andrew in his year-long tirade against Qihoo, and his recent praise of Sohu (NASDAQ:SOHU)? “Of course I invest my own money,” Andrew concedes, but stresses that doesn’t alter the facts he puts forward, or the research that he does.
And what of that research into Chinese stocks? Though all US-listed stocks must submit financials in English, most of their services are in Chinese and can be tough to navigate and understand. The Beijing-based analyst Bill Bishop has been keen to learn who helps Andrew with his Chinese homework. Andrew sort of explains:
I get 50 emails a day from Chinese people who want to work for me.
But then Andrew declines to name a particular source, individual, or company that might be working with him. Aside from all that, he says that a lot of this info is in broad daylight. “It’s all in the filings,” he laughs.
Which brings us in our chat to Qihoo, an undoubtedly controversial web company that started out in anti-virus products and other bits of software, and is now a major AOL-like site with portals, gaming, and a new search engine. It was from Qihoo’s filings that Andrew took issue with its advertising revenues stats – but especially with Qihoo’s claims to have the highest ARPU of any Chinese gaming service. Qihoo’s claimed figure of 400 is five- to ten-times higher than most in the industry – above even the local market leader, Tencent (HKG:0700).
On this call-out, Andrew feels vindicated, despite Qihoo’s stock remaining strong. His public challenge to Kai-Fu Lee to explain Qihoo’s ARPU claim was declined. He says:
Kai-Fu Lee’s 16 million Weibo followers and himself can’t come up with the answer.
Qihoo has changed a lot since Citron first turned on it, so does Andrew think the new search engine launch last month changes Qihoo’s outlook? After all, it’s now China’s second-biggest search engine, even beating out Google in mainland China. He says Qihoo “needs to change its corporate culture” to succeed long-term, something we heard recently from a source who’s an ex-employee who paints a rather Wild West picture of working life at Qihoo. Andrew adds:
How to win in search? A better algorithm – and that’s it. Then Qihoo needs to monetize search in a believable way. Do you know that [China’s top search engine] Baidu spends $250 million on R&D? If you wanna compete, spend on R&D.
But on the issue of Sogou, the search engine run by Chinese web portal Sohu, Kai-Fu Lee did have some ripostes and answers. It was Andrew’s post praising Sohu as undervalued that actually triggered the backlash against short sellers – and it seems to have centered on an inaccuracy in Andrew’s summary of what Sogou does. Kai-Fu Lee pounced on it, annotating corrections onto the offending passage (pictured right), prompting the former Google China boss to slam the way Citron and “these short sellers take advantage of the information asymmetry between China and the US.”
On the conflation of Sogou search and the Sogou input method editor app (for writing Chinese), Andrew holds up his hands:
I did combine the two. You can call it an error – an over-simplification for an American audience. But that doesn’t mean the whole story is not valid.
As for his being long on Sohu, Andrew says it’s based on an analysis by JP Morgan; he can’t say for sure if he’ll continue on the theme of Sohu in his next post.
More Attacks, Legal Action, or Peace In Our Time?
Will all this mud-slinging continue? The collective of Chinese business execs has already set up CitronFraud.com and it looks set to pick apart every new report that Andrew puts out there. Heck, I’ve been been doing that occasionally since last November when we felt that the core claims against Qihoo by Citron were not credible – mainly because Qihoo’s “web 1.0 model” (as Andrew called it) could actually work and prove profitable in China where millions of new people come online for the first time each day. And those folks, sort of like your grandmother, need a guide to the net. They might want Qihoo’s web browser forced down their throat, and be led to a page full of dull links. It worked for AOL for long enough. And so I’m still not convinced that Qihoo is on a par with Longtop or the now-delisted China Media Express. Andrew says he hears that: “I deserve to get called out.” But there are, he points out, some limits.
Andrew says he’s “consulting with lawyers about Kai-Fu Lee and Zhou Hongyi” – specifically about the collective’s personal claims against him. He explains:
I’m consulting with lawyers about this whole fiasco – about being accused of fraud. The lawsuit would be filed in the US, and the CitronFraud site is registered in the US. […] If the charade continues – me blogging, him blogging – then I’m through answering in a public forum and I’ll turn to lawyers. I’m not gonna let people spread lies.
But that’s not set in stone. Striking a more conciliatory tone, Andrew says that he and Kai-Fu Lee, now the founder and CEO of startup incubator Innovation Works, do have a bond:
I’m a stock market person – not anti-China, not anti-Qihoo. I want to buy good companies and short bad companies. Also it’s not Andrew versus Kai-Fu Lee. We both want to make money.
The whole complex issue is muddied, he reckons, by Chinese web companies having to take sides and forcing uneasy alliances during this controversy. He expands on that:
I don’t think Kai-Fu Lee did Qihoo a favor – making a controversial company even more so.
It also exposed the awkward fact that Qihoo’s Zhou Hongyi ploughed some money into Lee’s Innovation Works. Andrew calls it a “major” backing, but the actual figure is a reported $3 million out of the fund’s $180 million total, which will be invested in numerous local startups.
Andrew says he feels he still has a place in the China tech scene, exposing potential fraud and dodgy practices, and notes that one of China’s top investors, Neil Shen of Sequoia Capital, is not one of the collective supporting the site that’s policing Andrew’s reports. Of that website, he says:
CitronFraud.com – on what? I’ll be proven right.
Hit the comments with your thoughts on this ongoing battle between short sellers and Chinese tech stocks.