1 Strategy June 19, 2018 Wong Chi Man—Head of Research (852) 3698-6317 cmwong@chinastock.com.hk Mark Lau—Research Analyst (852) 3698-6393 marklau@chinastock.com.hk Short Selling Analysis for June 8 We resume our weekly short-selling analysis, as the data release schedule has returned to normal. Last Friday, the HKSFC released the aggregate short positions data for June 8. We analyzed which companies may be vulnerable to short-selling activity, based on the follow-ing three criteria: (i) the net change in short positions between June 1 and 8; (ii) short posi-tions as a percentage of free float; and (iii) the absolute amount of short positions. We must emphasize this is only an objective quantitative analysis based on official data; the analysis does NOT imply that we feel uncomfortable with the corporate governance or fundamentals of some companies. According to the results of our analysis, we believe Crystal International (2232.HK), China Huarong (2799.HK) and Xinyi Solar (0968.HK) require close monitoring, based on the latest short positions outstanding. On the other hand, we note that short positions in Jiangxi Copper (0358.HK) have dropped significantly. Short positions in Crystal International, China Huarong and Xinyi Solar increased significantly. As Figure 1 shows, short positions in Crystal International, China Huarong and Xinyi Solar rose 85.9%, 48.4% and 25.4%, respectively, during the week ended June 8. The outstanding short positions were equivalent to 3.3%, 5% and 10.9% of their free float. For Crystal International, we believe the sharp increase in short positions was due to some analyst downgrades in the past few weeks, driven by concern about the gross margin. Out-standing short positions of China Huarong stabilized in recent weeks after the appointment of the new chairman, but we don’t rule out the possibility that some investors have concerns about the 1H18 results, which may be the reason for the large jump in short positions during the week ended June 8. The surge in short positions in Xinyi Solar should be related to the latest unfavourable feed-in tariff policy for the solar farm industry, in our view. Significant decline in short positions in Jiangxi Copper. Outstanding short positions in Jiangxi Copper dropped 17.8% during the week ended June 8 (Figure 2). We believe the decline in outstanding short positions was mainly because of a moderate rebound in the copper price, as some investors treat the stock as a proxy for the copper price. Recap: Source of data. The HKSFC releases the aggregate short positions in all eligible stocks every Friday, with a delay of one week. The HKEx releases the data on short-selling activity on a daily basis (without a one-week delay), but investors do not know whether the short positions are covered or not later. Therefore, the usefulness of the HKSFC data is that it provides the outstanding short positions in each stock, and investors can trace the net change on a weekly basis. However, there are still some limitations, as this data set cannot cover short-selling activity using OTC derivative products. Three angles to analyzing the data. (i) The net change in short positions between June 1and June 8; (ii) short positions as a percentage of free float; and (iii) the absolute amount of the short positions. 2 Sources: HKSFC, Bloomberg, CGIS Research Figure 1: Top 50 short selling stocks (ranked by net change between June 1 and June 8, descending order) TickerCompany name Aggregatedreportableshort positionson Jun 08(shares) Aggregatedreportable shortpositions on Jun08 (HK$)% of freefloatChange in shortpositionscompared withJun 01Price onJun 08(HK$)Price onJun 15(HK$)PricechangeduringtheperiodMarket cap(HK$m)2018EPER (x)2019EPER (x) PBR (x) 2018EDividendyield (%) Aggregatedreportableshortpositions onJun 08/ 3-monthaveragedailyturnover2128CHINA LESSO662,000 3,826,360 0.1%Increase from nill5.785.49-5.0%17,032 5.624.951.034.080.103633ZHONGYU GAS850,000 5,635,500 0.1%Increase from nill6.636.57-0.9%16,589 n.a.n.a.5.23n.a.0.177300FI CSOP HSI11,776,600 60,649,490 n.a.Increase from nill5.155.251.9%2,150 n.a.n.a.n.a.n.a.0.511789AK MEDICAL1,284,000 7,511,400 0.5%275.4%5.855.77-1.4%5,986 33.7127.767.331.270.162001NEW HIGHER EDU2,217,708 16,056,206 0.3%152.5%7.247.9810.2%11,420 27.7721.405.421.040.213306JNBY732,000 14,713,200 0.4%91.6%20.120.20.5%10,479 19.1215.656.543.490.592355BAOYE GROUP128,160 708,725 0.1%88.0%5.535.38-2.7%3,154 n.a.n.a.0.35n.a.0.212232CRYSTAL INTL17,201,144 134,168,923 3.3%85.9%7.87.58-2.8%21,624 15.5812.712.543.005.09