China Everbright

China Everbright - Sentiment on the China Water stocks probably affected by the recent short-sell report on HK-listed Sound Global (967 HK) by short seller Emerson Analytics few days back.

Major allegations raised by the Short-Seller on Sound Global are as follow:
1) Bogus revenue - Emerson was unable to find enough projects for undisclosed technology business to account for at least 40% of Sound Global's revenue between 2011 and 2013.

2) Anshan mystery: Sound Global completed the acquisition of Anshan plants in 2012 and claimed that Anshan was the biggest revenue source in 2013. Emerson however believes that the group had already accounted for Anshan’s revenue in 2012, which then leaves a hole on which project contributed to 2013’s revenue.

3) Confused accounting: Emerson alleged that Sound Global booked profit before construction contracts were even signed, citing examples from two Jingzhou projects.

4) Interest income: The low interest income reported by the group suggests that Sound Global’s actual cash balances are just merely at 1/3 of the amounts disclosed.

Overall, the short-seller estimates Sound Global fair value to be at HK$2.40 per share against its current market price at HK$7.58.

Rumours are also swirling that there is fraud and that the Chairman has been called in for an investigation. Meanwhile, market watchers are eagerly awaiting the group’s response to the allegations.

Do note that the indiscriminate sell-down of the water stocks may be unwarranted, as the report was company-specific, and as with many short-sell reports, should always be taken with a pinch of salt.

Overall, Maybank-KE continues to favour China’s water sector, with China Everbright (Buy: TP $1.26) as the top sector pick. The house also have Buy ratings on SIIC Environment (TP $0.20) and United Envirotech (TP $1.93). As such, any further pullback in share price could offer investors a good opportunity to accumulate the stocks.