By Colin Kruger
It was 9.14am on Thursday October 17 when a tweet signalled that a multibillion-dollar strike was about to hit the Australian Securities Exchange.
Beijing-based short seller J Capital Research, the brainchild of former Labor candidate for the federal Sydney seat of Wentworth Tim Murray, said it was ready to publish its findings on a $US7 billion ($10 billion) company that "we think is massively exaggerating profits and revenue".
Nearly two hours later at 11:37am the report dropped, and it named the company: Australian tech darling WiseTech.
The game had begun.
J Capital was alleging WiseTech, which makes software for the trillion-dollar global logistics industry, has overstated its profits by $116 million since listing on the ASX in 2016. This week J Capital made further claims against WiseTech, including that its acquisition strategy is failing.
In just 33 minutes after the initial report was released, WiseTech stock shed more than $1.3 billion of value. WiseTech, reeling from the allegations, requested a trading halt as it scrambled to prepare its response.
It was a demonstration of the modern dark art of short selling at its finest.
The short story
Short selling, which is as old as markets themselves, is a trading strategy designed to profit from falling prices of securities. It involves borrowing stock and selling it on the open market with the aim of buying it back at a lower price.
There was a time when fund managers were reluctant to talk about their short positions. That time has long since passed.
The new world of short selling involves aggressive claims made in full public view. Increasingly, those making the claims are based overseas and thus insulated from any legal and regulatory threats. The message and impact has also been supercharged with the immediacy and reach of social media.
The target often has little or no warning, and it sets the scene for a play that is akin to a smash and grab raid.
Yet for this approach to succeed, a short seller still needs to find the right target. And in many ways, WiseTech was particularly vulnerable.
An allegation of overstated earnings is serious for any company, but especially so for one trading on an astonishing multiple of 100 times forecast earnings.
I was not upset, I was not angry at any time during this. I was just going 'what’s next?'
WiseTech CEO Richard White
“If they are also lying about their profit then it’s game over,” J Capital co-founder Anne Stevenson-Yang - who authored the report - says.
Painful lesson
The episode has been particularly painful for WiseTech founder and chief executive Richard White.
By the time the company was forced into another trading halt this week after the second J Capital report and share price plunge, his personal wealth had taken a hit on paper of more than $1 billion.
“I was not upset, I was not angry at any time during this. I was just going 'what’s next?',” White tells the Sydney Morning Herald and The Age.
In an interview with the ABC this week, White struggled to answer questions on the company and WiseTech's chief financial officer had to clarify some of his statements.
When asked if KPMG had audited the company’s subsidies, Mr White responded, “yes, I believe they have. No, sorry. I believe the issue is..”. He then asked the ABC’s Elysse Morgan to repeat the question.
Speaking to the Herald and Age, White rules out legal action against J Capital.
"I don’t think getting yourself tied up in very complicated legal actions with overseas entities is at all smart, it’s distracting and messy," he says.
As WiseTech scrambled to address the allegations which had popped up out of nowhere, investors were faced with the question: did the company understand what was going on?
The eventual response was a detailed denial of the allegations and a riposte to its new nemesis which resulted in a share price rally.
White insists he is focused on running his business but he is among those calling for more action from regulators against this new blood sport.
For its part, the corporate regulator seems unfazed. It said this week if there is no breach of the Corporations Act, it is really up to the target company to use the tools at its disposal to respond.
"A company is able to respond to detailed allegations with detailed answers via the ASX and in that way the market and market observers can form their own view,” says a spokesman from the Australian Securities and Investments Commission (ASIC).
It's being intentionally released during a trading session, generally during lunch time, often on a Thursday or Friday when there’s not many people in front of their screens.
Ben Clark, TMS Capital
Short selling may be controversial and lucrative as J Capital demonstrates, but to its fans it is also a necessary check against a giddy and uncritical market.
Even some WiseTech fans agree.
"We don't have a problem with short sellers and their role in the market," says Ben Clark, fund manager at TMS Capital, which has held WiseTech shares since 2016. "We think it provides more liquidity to the market which is a good thing."
But it is the new tactics being used by short sellers, designed to ensure maximum share price impact, that people are upset about.
"It’s the way that it’s being released that is the biggest issue," Clark says of the tactics generally employed by the new breed of short sellers.
"It's being intentionally released during a trading session, generally during lunchtime, often on a Thursday or Friday when there’s not many people in front of their screens.”
It's difficult enough for institutional investors to assess the danger of these shock announcements and make a decision. But for mum and dad investors with their own personal wealth on the line, determining whether to run for the door when someone yells fire, or trust the company management and bunker down, can be a nightmare.
Acquisition spree raises doubts
This week White had to address the perennial scepticism about WiseTech's acquisition strategy.
J Capital claimed the $400 million worth of acquisitions the company had undertaken since listing on the ASX in 2016 were not paying off and the company was "raising money to buy revenue".
WiseTech counters that acquisitions play a crucial role in its grand plan to become the de facto operating platform for the trillion-dollar logistics industry.
Its cloud-based solution aims to ensure data gets entered once and shared everywhere on the system between different logistics providers rather than re-entered manually at every new link in the logistics chain.
"We’ve got a very long-term strategy," White says. "We are very high growth and very successful and will do everything we can to continue that trend."
It’s not like with Blue Sky where you pretty much end up with the conclusion that there is no business there,
Morningstar analyst Gareth James
White this week repeated the company's explanation that the acquisitions are the only way to gain the capability to handle local languages, customs and regulatory expertise it needs to fulfill its global ambitions - and justify the equally ambitious valuation.
Some institutional investors are still backing White and his growth story.
"My view would be that Richard White has delivered on everything he's said," says TMS's Clark.
Arguments 'unconvincing'
It is easy to question the motives and methods of the shorts.
Even Morningstar analyst Gareth James, who thinks WiseTech is dramatically overvalued, has found J Capital arguments "unconvincing" . This includes the serious allegation of accounting fraud.
Despite the evidence presented, the larger financial picture presented in the WiseTech accounts tells a different story, according to James. He says the cash flow and revenue growth do not support J Capital's story of financial statement manipulation and customers deserting them.
“I don’t think it fundamentally undermines the fact that WiseTech is a genuine software company which is genuinely building software and trying to expand globally," he says.
While the report highlighted “potential flaws in execution it’s not like with Blue Sky where you pretty much end up with the conclusion that there is no business there,” he says of another high-profile short-selling target.
WiseTech hit a record valuation of $12.2 billion last month. James values the company at less than $2.6 billion - a gap of nearly $10 billion.
"We have always found it difficult to get sufficient confidence to put such extreme growth forecasts into our estimates," James says of the hockey stick growth priced into the WiseTech share price by the market.
WiseTech chief executive and controlling shareholder Richard White ruled out legal action against short seller J Capital.Credit: Peter Braig
There is good reason why the shock reports are being taken so seriously by the market. A string of recent high-profile short campaigns have hit their targets.
In 2017, US short seller Glaucus Research targeted Formula One driver Daniel Ricciardo-backed sandalwood grower Quintis with a brutal report on the eve of the Melbourne Grand Prix comparing it to a Ponzi scheme. The company imploded.
A year later Glaucus targeted fund manager Blue Sky with a report arguing it was massively overvalued and alleging it had overstated the amount of assets under management (AUM) that are capable of earning fees, by more than half.
Adam Gilchrist and Daniel Ricciardo were brand ambassadors for Quintis.
Blue Sky collapsed this year after breaching a loan agreement.
Glaucus alumni have targeted agricultural outfit Rural Funds Management, others have aimed at construction giant CIMIC Group, beverage group Treasury Wine Estates and travel company Corporate Travel Management.
The jury is out on those companies, which are all still trading. But it has now reached the point where shares fall in a knee-jerk reaction every time a target is lined up and disclosed to the market.
The question is whether it is warranted.
Rural Funds has yet to fully recover from its attack by two separate entities but its valuation is still well ahead of the prognosis that it might be worthless.
J Capital's record in Australia is also worth keeping in mind.
The China expertise of J Capital's founders led them to scrutinise billionaire Andrew Forrest's Fortescue Metals Group during a crucial time for the company in 2014 when the resources boom was losing steam.
J Capital claimed 6 million tonnes of Fortescue's iron ore was sitting at Chinese ports due to the market glut.
Fortescue angrily denied the claims and lodged a complaint with ASIC and sent legal letters to J Capital.
It appears to explain why J Capital's Murray - now based back home in Sydney - has declined to speak about its WiseTech report and left the talking to its Beijing office and New York-based Anne Stevenson-Yang.
There was also a research report in 2017 on Harvey Norman describing the Aussie big box retailer as "Australia's Circuit City".
Circuit City was an iconic US electronics retailer that went bust in 2008 after failing to move with the times.
"An industry shock like a property downturn or challenge by an internet competitor like Amazon could crush margins and send franchisees and Harvey Norman stores out of business," said the report authored by Murray.
While there were many questions about the Australian business run by billionaire retailer Gerry Harvey, the company has indeed survived and the share price is above the levels it traded at the time of the report.
It might provide some solace for CEOs like White as they watch their companies get pummelled.
White worries about the signal the J Capital attack sends to the next generation of tech entrepreneurs.
“I really worry about the loss of the next generation of aspirational technology entrepreneurs who may be considering listing and trading on the ASX. They may well be repulsed by this type of attack on Australian companies," he says.
These entrepreneurs might consider it a small price to pay for the rewards on offer. Despite the tumult, White's shares are still worth about $4 billion.