Hong Kong's Most Painful Short Keeps on Breaking Record Highs

(Bloomberg) -- Investors shorting Kingdee International Software Group Co. are feeling the pain as they watch the shares soar to a record.

The stock jumped 13 percent on Monday in Hong Kong, capping its biggest two-day gain since July 2015. Bulls are betting on its cloud strategy, and further gains could prompt MSCI Inc. to include it in its benchmark indexes, said Alex Wong, Hong Kong-based director of asset management at Ample Capital Ltd., which oversees $170 million.

As the stock has soared, bearish bets have risen as well. Short interest as a percentage of shares outstanding climbed to a four-year high of 8.6 percent last month from 5 percent at the end of last year, according to IHS Markit Ltd. data. While bearish wagers have fallen since the peak, Kingdee still remains one of the most shorted stocks in Hong Kong.

“Shorting this kind of stock is not a good strategy," said Wong. The cloud strategy is “a global concept now. The short interest could propel a very sharp, brief rise."

Kingdee shares have more than doubled this year, making them this year’s biggest gainer in a Citigroup Inc. basket of Hong Kong’s most shorted stocks. The stock surged 40 percent last month as better-than-expected 2017 results prompted analysts to boost their target prices. Kingdee will launch a new cloud product in the second or third quarter this year, and is likely to monetize it in 2019, Jefferies Hong Kong Ltd. wrote in a report last month.

Short-seller favorites can often rally with a vengeance in Hong Kong. Bearish speculators gave up on Geely Automobile Holdings Ltd. after the stock jumped 266 percent last year, while China Evergrande Group’s shares rose more than 450 percent.

To contact the reporters on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net, Sofia Horta e Costa in Hong Kong at shortaecosta@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Philip Glamann, Ron Harui

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