Flat Glass Group (HKG: 6865) shares are the most shorted in Hong Kong currently. That there’s a large short position in a stock doesn’t prove anything other than that there are large bets that it will decline in value. That, in itself, is just that information - but pondering why there are such large bets is something that might be worth doing. Why do so many sophisticated investors think that the share price is going to decline?
Yes, of course, it’s open to any of us to short a stock. It’s not normally recommended for retail investors like us simply because the risk reward ratio, without hedging, can be so bad. So, it tends to be the professional investors and hedge funds that do go short. So, what is it that they’ve seen to make them think of a decline?
The answer is probably in the line of business at Flat Glass: “Flat Glass Group CO., LTD. is a China-based company principally involved in the research, development, manufacturing and sales of glass products. The Company's main products include photovoltaic glass, float glass, engineering glass and home glass. In addition, the Company is also engaged in the mining and sales of glass quartz mine and engineering procurement construction (EPC) photovoltaic power plant construction businesses. The Company distributes its products within domestic market and to foreign markets.”
Well, what do we also know about China at present?
Flat Glass Group share price from Google Finance
Well, we know from China Evergrande and Country Garden that the Chinese property market is in severe problems. New building is grinding to a halt as property companies desperately try to offload already built stock and thereby pay down their debt loads. The secret of the connection there is in the word “flat”. When applied to glass this means the sort of glass that gets used in windows - this can be very profitable, as Pilkington Glass showed over the generations. But it’s also something that waxes and wanes with the level of new building. Yes, of course there’s also that replacement market but the big shipments, in volume, go to new builds.
Which probably is the explanation. As S&P Global Market Intelligence is pointing out, the short position in Flat Glass Group is up at 20.12% of the share issuance - at least that’s the amount on loan which is much the same thing. Why? Because the major market is that construction business and that’s grinding to a halt in China. Our expectation is that the speculators are awaiting the next results which will make that plain.
