Forefront by TSMP: How US$36 billion was just wiped out from the market capitalisation of three of the hottest stocks on the HKEx.

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Forefront by TSMP

29 May 2015

How US$36 billion was just wiped out from the market capitalisation of three of the hottest stocks on the HKEx.

Welcome to the inaugural instalment of TSMP’s regular newsletter, “Forefront: By TSMP”.

This week, we explore the recent share price rout of the Hong Kong Stock Exchange’s three rising stars – Hanergy Thin Film Power Group, Goldin Financial Holdings Ltd and Goldin Properties Holdings Ltd. The trio of companies saw a combined wipeout of US$36 billion from its market capitalisation.

By Stefanie Yuen Thio

Cover photo credit: Unsplash.com

Hong Kong’s Share Price Rout

Last week, Goldin Financial Holdings Ltd and Goldin Properties Holdings Ltd, both listed on the Hong Kong stock exchange and both controlled by billionaire Pan Sutong, plunged more than 60% in trading. Prices of the two stocks had surged by more than 300% in 2015, contributing the biggest gains on the Hang Seng.

The bloodbath followed hot on the heels of a similar rout of Hanergy Thin Film Power Group, also listed in Hong Kong, which saw US$19 million of its market capitalization wiped out before trading was suspended. Hanergy’s stock price had seen a 6-fold increase in the past year, making its controlling shareholder, Li Hejun, China’s richest man and giving the company a larger market capitalization, at one point, than Japan’s Sony Corp.

None of these listed companies were able to offer any explanation for the steep rises and falls in their share prices. The two Goldin companies are owned by a common shareholder but do not appear to have any relation to Hanergy, save that Hanergy had appointed Goldin Financial as its independent adviser for a transaction earlier this year.

The shadow of Singapore’s Blumont/Lion Gold/Asiasons share plunge of Oct’13

Singapore investors will be reminded of a similar phenomenon in October 2013 when three penny stock counters, Blumont Group Limited, Lion Gold Corp Limited and Asiasons Capital Ltd (which has since been renamed Attilan Group Limited), collectively lost S$8.7 billion in market capitalization, after spectacular price increases in the preceding months. In the case of Blumont, its market capitalization had increased 6-fold to hit S$6.3 billion, rivalling that of SingTel’s. This was on the back of a full-year revenue of a paltry S$4.4 million. The Singapore regulators took swift action to address the issue. The trio of companies was queried by the Singapore Exchange on the reason for the drastic price movements but no satisfactory explanation has been given. Since then, the Commercial Affairs Department of Singapore has started investigations into the matter, with no conclusions having been announced. The three companies today have a combined market capitalization of S$77.8 million. Their stock trading prices are literally counted in pennies.

So, what’s happening?

The Hong Kong price volatility is reminiscent of the Singapore situation in that these are penny stocks whose rapid prices rises are matched by similarly meteoric falls. No satisfactory reasons have been advanced for the price trajectories in either direction.

But that’s where the superficial similarity ends.

Hong Kong commentators have pointed to thin liquidity and the small percentage of shares in these companies held in public hands, as a possible basis for the volatile price movements. Hanergy and Goldin Properties have public floats of 19.45% and 35.57% respectively. While Goldin Financial has an ostensible public float of 29.66%, of this, 28.29% is concentrated in the hands of 19 shareholders, so its effective public float is only 1.42%. With such an insignificant portion of its issued shares in public hands, it is little wonder that its share price can see such wild swings. In fact, Hong Kong’s Securities and Futures Commission (SFC) had warned in the past that Goldin Financial shares “could fluctuate substantially” given the high concentration of ownership. The SFC has issued nine other warnings about investor concentration this year. One of the recipients, Jicheng Umbrella, is up 1,500 per cent this year (its value was cut in half once along the way). Yan Tat Holdings (electronic components) has had a 500 per cent intraday move.

The three Singapore companies, on the other hand, have a larger proportion of their shares in public hands.

In addition, Hong Kong (unlike other developed exchanges like New York, Tokyo and Singapore) does not have a circuit breaker mechanism. The circuit breaker mechanism, which was introduced in Singapore in February 2014, would automatically institute a 5-minute cooling off period when trading prices in a stock deviate by 10% or more from the reference price.

Whether such a circuit breaker mechanism would have curbed last week’s rollercoaster share price ride is uncertain. The tumble in share prices was only halted when trading halts kicked in. The HKSE is now looking into the viability of adopting circuit breaker mechanisms. The regulators have also started investigating the companies.

What’s Next?

Hong Kong’s traded shares have seen greater volatility in recent months, since the launch of Shanghai-Hong Kong Stock Connect, which establishes mutual access to the two stock exchanges by investors, subject to daily quota limits. There has been a big influx of retail customers and momentum investors, many from the mainland, since the launch of the platform. Shanghai’s bourse is known to be volatile and the access to more capital will certainly have had a knock-on impact on the Hong Kong stock exchange.

These phenomena may also be the result of unbridled speculation and the gamblers’ mentality that pervades certain sectors of the markets. While direct connectivity to foreign exchanges may give access to greater liquidity, the porousness of capital markets may also open the door to more volatility and speculative investment.

There has been speculation about whether a Singapore-China Stock Connect will be offered to investors in these two markets. The recent events in Hong Kong will surely be weighing on the minds of the decision makers.

Buyer Beware.