Author: Mark Holder
Models: Opportunistic Arbitrage, Opportunistic Arbitrage Long Only
Disclosure: Long PUDA in both models
Puda Coal (PUDA) is a coal mine consolidator and met coal washer in China that has been hit by fraud allegations from a noted short seller. At question is whether the Chairman of PUDA illegally transferred shares from a subsidiary 90% owned by PUDA to himself, then sold 49% of the shares to CITIC (China govt fund) and further pledged the other 51% for a massive loan that could threaten to bankrupt the company. With all of the recent news regarding fraud amongst Chinese reverse merger companies, the stock plummeted 50% within a week .
The company issued a press release prior to the stock opening on April 11th that the allegations might have some validity and announced they were launching an investigation. The stock was halted on the 11th and has yet to reopen. Also the margin requirements were raised to 100%. Although the Opportunistic Arbitrage model heavily relies on margin, the model hasn’t been impacted with this increased requirement ,since the other stocks in the model have enough available margin.
For now we have to wait until the investigation is finalized and the stock resumes trading, which could take days or even months. As investors, all we know is that the allegations might have some merit, but whether the dire conclusions of the shorts are accurate remain in question.
What we know is that the Chairman owned roughly 50% of PUDA at the time of these transfers and his alledged sell to CITITC could’ve impacted his ownership in PUDA rather then other shareholders. Regardless, any such transactions were not properly reported. The Chairman also has numerous other assets including a partnership with PUDA that could be used to make shareholders whole.
The risk in these Chinese stocks was widely known, therefore this model kept relatively low investments in this sector to minimize risk regardless of the due diligence and the value in the sector. One important development is that in the process of the short attack they have validated the operations, meaning that the company could have more value once the ownership transfer issue is cleared up. Of course, on the flip side shareholders could be significantly impacted if the short theory comes to fruition.
