Muddy Waters Targets Japan Firm as Shorts Hit Tokyo, Hong Kong

(Bloomberg) -- Carson Block revealed his first ever Japanese target on a day that short sellers and researchers descended on Tokyo and Hong Kong and sent shares sliding.

Muddy Waters Capital LLC, the prominent short seller founded by Block, is betting against Nidec Corp., the precision motor-maker run by the billionaire Shigenobu Nagamori, it said in a report published Tuesday. Separately, Well Investments Research pushed Tokyo-based pneumatic-equipment maker SMC Corp.’s shares lower with a bearish thesis questioning its accounting, while Anonymous Analytics issued a “strong sell” rating on Credit China Fintech Holdings Ltd. in Hong Kong, sending its stock down.

Activist short sellers have long been active in Hong Kong, but they’ve only arrived in Tokyo over the past year, as an overhaul of corporate governance rules convinces bears their voices will be heard in a market seen as having previously escaped deeper scrutiny. Still, some investors in the Japanese capital were far from convinced by the arguments made, and after initially tumbling Nidec recouped most of its losses.

“We’re not taking any particular action because of these reports,” said Takahiro Kusakari, chief investment officer of Sawakami Asset Management Inc., one of Japan’s largest independent mutual funds. His firm has stakes in both Nidec and SMC.

Kyoto, Japan-based Nidec consistently misses sales and profit targets and uses “highly aggressive accounting” to boost reported profitability, Muddy Waters wrote in a 53-page report, saying its shares would lose more than half their value.

“In our view this company is not well-governed,” Block said in a phone interview from San Francisco. “It uses acquisitions to try to cover up a lack of organic growth in its business.”

Nidec said in a statement that it holds a totally different view, and that its accounting and financial reports are transparent. Nidec closed 0.1 percent lower in Tokyo after falling as much as 5.9 percent.

While Muddy Waters is taking on one of Japan’s most iconic entrepreneurs in its first foray into the world’s third-largest economy, local short-side research firm Well Investments went for a less familiar name in Tokyo-based SMC. Well Investments, which previously had big successes with Jig-Saw Inc. and Cyberdyne Inc., queried SMC’s accounting and its earnings outlook.

SMC has a completely different view, the company said in a statement. It’s conducting accounting appropriately and its financial statements have been properly audited, SMC said. After tumbling as much as 11 percent, shares trimmed their decline to 3.5 percent.

Meanwhile, in Hong Kong, shares of financing-service provider Credit China slumped 5.3 percent after Anonymous Analytics questioned its valuation and some of its deals. The stock was halted just before noon. Anonymous said it doesn’t hold direct or indirect positions in any of the securities mentioned in its report. China Credit officials weren’t immediately available to comment.

Short Debate

Short sellers borrow shares and sell them, hoping to profit by buying them back later at a lower price. Supporters say the research makes markets more efficient and keeps misbehaving corporate managers in check, while opponents argue the methods often resemble market manipulation.

Some of the biggest names in activist short selling focused on Japanese companies for the first time this summer. Glaucus Research Group issued a bearish thesis on commodities trader Itochu Corp., while Citron Research said robot-exoskeleton maker Cyberdyne Inc. was poised to plunge. Both firms strongly denied the allegations made by the short sellers.

“We certainly want to make the case to Japan that there’s a place for short-side activists as well as long-side activists,” Block said.

--With assistance from Takako Taniguchi and Nao Sano To contact the reporters on this story: Tom Redmond in Tokyo at tredmond3@bloomberg.net, Takashi Amano in Tokyo at tamano6@bloomberg.net, Lisa Pham in Hong Kong at lpham14@bloomberg.net. To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Yusuke Miyazawa at ymiyazawa3@bloomberg.net, Jeff Sutherland