Shares in Esprit, the Hang Seng's worst performer so far this year, fell as much as 14 per cent on Wednesday after a Hong Kong magazine said it had allegedly exaggerated the number of stores it had in China.
Next Magazine reported that 30 of the outlets listed by the company on its website in Shanghai and Shenzhen either did not appear to exist or could not be reached by phone. Esprit did not respond to a request by FT Tilt for comment.
The retailer has suffered as its Europe-focused brand went out of fashion and full-year profit for the year ending in June plunged 98 per cent. Shares, which have fallen 73 per cent so far this year, ended the day down 7.5 per cent to HK$10.18 in a firm market.
Esprit has said it plans to expand its store base in China -- where it said it has 300 directly-operated stores -- to double sales in four years, to help make up for weak European demand.
"This is definitely making a lot of people even more nervous. They are wondering: if this is the case in China, what is the story in Europe?" Vineet Sharma, a Hong Kong-based analyst at Barclays Capital, told FT Tilt, adding that he could not comment on the veracity of the claims.
Investors have been anxious about how much they can trust mainland companies ever since scandals about Chinese reverse-mergers and accusations of fraud at Sino-Forest and other overseas-listed Chinese companies emerged this year.
Although Esprit is a larger company, with most of its business in the West, the retailer appears to be out of favour with the market. The company, which is headquartered in Hong Kong, listed on the local exchange in 1993, and is a constituent of the benchmark Hang Seng index.
Sharma has an "underweight" rating on the stock, and said he was not convinced by its turnaround plans.
"Any turnaround will take at least 12 months to be seen in the financials, and given how much the stock has de-rated, if you miss the first 20-30 per cent of the rally, you could still get in later," he said.
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