(Yicai Global) Sept. 22 -- Just before its stock debuted in Hong Kong this morning, Huazhu Group rejected a short seller's allegations that the Chinese hotel operator exaggerated its profit last year by CNY2 billion (USD294.5 million). The shares gained 4.7 percent.

In a statement posted on the Hong Kong Exchange and Clearing's website before the market opened, Huazhu said the short-seller report published yesterday by US-based Bonitas Research was devoid of any factual basis.

Bonitas Research claimed the Shanghai-based company, China's second-largest hotel group, overstated its annual profit for 2019 and lied about the ownership of its hotel investment portfolio.

Bonitas Research said on-site investigations in Beijing and Shanghai confirmed that Huazhu secretly supported the operating costs of 'off-the-books hotels,' franchisee hostelries owned by undisclosed Huazhu employees and other undisclosed parties. It said operating licenses revealed Huazhu secretly controlled 1,952 hotels, while the firm claimed it operated only 688. Huazhu exploited undisclosed related party transactions to hide operating expenses and inflate profits, the report said.

"The report is without merit," Huazhu said. It "contains numerous errors, unsubstantiated statements, and misleading conclusions regarding the company's business and operations."

In the wake of the report's release, Huazhu's US-listed shares [NASDAQ: HTHT] sank 3.7 percent yesterday to USD40.48 each.

But on its first day of trading in Hong Kong, the company's new shares [HKG: 1179] shrugged off the allegations to open 2.7 percent higher than the initial offering price of HKD297 (15 US cents) and posted intraday gains of more than 5 percent. The stock ended at HKD311, up 4.7 percent. The benchmark Hang Seng Index fell 1 percent.

Huazhu's net income jumped 37 percent to CNY11.2 billion last year from CNY8.2 billion in 2017, while net profit soared 50 percent to CNY1.8 billion in 2019 from CNY1.2 billion in 2017, according to its prospectus. The firm is expected to close about 350 to 450 hotels in China this year due to headwinds from Covid-19.

It had net income of almost CNY2 billion in the second quarter of this year, a 32 percent decline from a year earlier, the firm's most recent earnings report showed. Its second-quarter net loss narrowed 74 percent to CNY548 million (USD80.7 million) from the first quarter's CNY2.1 billion. Huazhu made a CNY613 million profit in the second quarter of 2019.

Editor: Ben Armour