Market watchers hoped at the beginning of 2022 that a value reversal would support Hong Kong equities. That did not happen, and the market is so far down 12% this year. While this might have inflicted much pain for long-only investors, such market conditions are favorable to short sellers who bet on falling share prices. What have short sellers been targeting recently?
Internet and tech hardware companies, Chinese property developers, and Macau gaming stocks are some dominant themes on the list of more than 1,000 stocks. Tech covers businesses ranging from online healthcare and e-commerce platforms to laptop makers and smartphone modules provider.
Top of the List of Most Shorted Stocks
Ping An Healthcare And Technology (01833), or known as Ping An Good Doctor, is top of the list, with 12.6% of its shares being shorted. Despite plunging 25.8% year to date, the online doctor consultation platform owned by Ping An remained in the overvalued territory, as our analysts rate its stock two stars, or 17% overvalued. “We are not expecting robust growth or short-term catalysts. As the company transforms its business model, it remains unclear whether there will be long-term demand for its healthcare services,” says Kai Wang, senior equity analyst at Morningstar.
In addition, the company faces competition from giants, such as JD Health (06618) under JD.com (09618), Alibaba Health (00241) under Alibaba Group (09988), and Tencent Holdings (00700)’s WeDoctor. The short position accounts for 2.9% of Ali Health shares and 2.4% of JD Health shares.
“We view services like online consultations and various health management in the industry to have a lack of differentiation among its competitors, analogous to how patients can choose from multiple options with offline physicians or wellness products,” Wang adds.
Rechargeable battery maker Tianneng Power International (00819) and AAC Technologies (02018) followed Ping An Good Doctor, with 11% of their shares being shorted. Tianneng held up well, giving out a 3.3% positive return. AAC Technologies (02018) has been severely hurt by a prediction of an imminent smartphone demand downcycle and is down 51.2% so far this year. Explaining the four star-rating, equity analyst Phelix Lee states a few reasons that support his buy call: “We are looking at a margin recovery in acoustics and haptics products, in view of AAC’s ongoing cost reductions and a resilient iPhone demand. In the Android market, an upgrade in haptic motors for gaming phones should support AAC’s outlook and we expect more haptic motors packed in regular Android products.”
Some stocks that were not in the top 20 in January include Hope Education Group (8.9% of shares shorted), CIFI Holdings (8.5%), Yeahka Ltd (6.1%), Pop Mart International Group (6.1%), MicroPort Scientific Corp (5.8%), Cathay Pacific Airways (5.5%), and Hygeia Healthcare (5.2%).
Struggling Developers and Casinos Also Made the (Short) Cut
The debt-ridden property sector on the mainland made another playground for short sellers. Outside of the top 20, we find defaulted developers like Shimao Group (4.7% of shares shorted) and Sunac China (4.1%).
Most recently, Morningstar analysts shifted the Uncertainty rating of privately-owned Country Garden and Agile Group to Very High from High. “[The downgrade] reflects the potential uncertainty smaller scale of operations due to the impact of the weak property market,” says Cheng Wee Tan, senior equity analyst at Morningstar, who continues his preference for state-owned developers over privately-owned ones. Short positions of Country Garden and Agile Group represent 4.1% and 2.9% of total shares, respectively.
On the other hand, Macau casino operators remain sluggish due to lockdowns and an uncertain outlook on border reopening with the mainland. All six names have a short position, with the most shorted stocks being Wynn Macau (3.2% of shares shorted). SJM Holdings (2.8%) and Galaxy Entertainment (2.5%) followed.
Morningstar analysts believe that while China’s zero tolerance against Covid remains the policy direction, the visibility for the sector to recover is clouded. In a worst-case scenario of a further two-year delay in recovery, analysts would consider a further downgrade of the sector’s fair value estimates. At present, an undervaluation of Macau gaming stocks factors in a gradual relaxation of border restrictions by year-end.
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