HK stock wipeouts highlight governance gaps

For a fleeting moment last month, a cramped office on the 13th floor of Hong Kong’s Golden Centre was home to the world’s best-performing major stock.

The tower, stacked on top of a train station on the edge of the city’s main business district, is the registered office of ArtGo, a lossmaking producer of marble.

The company was riding a giant rally in its shares on optimism that they would soon be included in a series of influential benchmarks for investors. But its run ended on November 21 when the Hong Kong-listed stock plunged 98 per cent, wiping out almost $6bn of shareholder wealth.

On the same day, shares in Kasen International nosedived 90 per cent after the shares of the furniture maker-turned-property developer were targeted by a short-seller.

In the same month, mineral water supplier Tibet Water leaked two-thirds of its market capitalisation. China First Capital, which makes shock absorbers and runs schools, fell 78 per cent in another meltdown.

The episodes have raised questions over whether authorities watching over Asia’s third-largest stock market are doing enough to protect investors from wipeouts.

Line chart of Share price of ArtGo Holdings in HK$ showing Marble maker ArtGo gets smashed

“Some of these stocks are bubbles and some are frauds,” said Gillem Tulloch, founder of Hong Kong-based GMT Research. “There seems to be hundreds of them in the murky depths of the small-cap market.” 

The booms and busts follow a pattern, analysts say. Companies may appear to have a large free float on the exchange, but, in reality, the stock is controlled by a small band of shareholders.

In the case of ArtGo, an executive director who resigned a month before the stock’s collapse, owned about one-sixth of the shares, according to Bloomberg data.

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The former director sold his entire stake, public filings showed, after MSCI, the indices company, said it had reversed an earlier decision to include ArtGo in its China benchmarks.

Inclusion would have resulted in significant inflows from foreign passive investors. The Financial Times was unable to reach the former director, Leung Ka Kit, for comment. ArtGo did not respond to a request for comment. 

Arnaud Vagner, whose critical reports contributed to the downfall last year of Singapore-listed commodities trader Noble Group, said that shares in some Hong Kong companies are locked up by a major shareholder and their friends or associates acting in concert.

Mr Vagner, who publishes reports under the name Iceberg Research, said that this squeezes the proportion of shares that genuinely trade, and which insiders can then bid up. Hong Kong’s legion of retail investors are often the last to buy in and are “left holding the baby” when the shares eventually crash, Mr Tulloch added. 

Bar chart of Single-day losses by Hong Kong stocks in November ($bn) showing The harder they fall

Another common phenomenon in Hong Kong — pledging shares as collateral for loans — has increased the chances of sharp moves in prices. If a pledged stock falls below a certain level, that can result in a “margin call” where the borrower has to pay back the loan or forfeit stock. 

This was the case with ArtGo, which told the Hong Kong exchange that hundreds of millions of its shares had been offloaded on to the market by brokers, in a forced share sale. China First Capital said millions of shares owned by its chairman had been sold by brokers under margin finance arrangements. It did not respond to a request for comment.

“For what, who knows?” said Mr Tulloch, on why investors pledge shares. “It could be because they want to go and buy themselves a house in California.”

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Tibet Water told the exchange in November that it was suing a Hong Kong broker following its share-price collapse, claiming the broker had “unlawfully misappropriated” 200m of its shares. Tibet Water did not respond to a request for comment. 

Kasen International, the target of short-sellers, offered a detailed denial of allegations made against it by Blue Orca Research, including that the company sold its most valuable business to the family of the chairman for a knockdown price. It did not respond to a request for comment.

The spate of stock collapses has prompted calls for stronger oversight.

Jamie Allen, secretary-general at the Asian Corporate Governance Association, said the Securities and Futures Commission — Hong Kong’s markets regulator — had “upped [its] game in recent years” through more active enforcement and steeper fines. But, he added, “the number of companies with problems doesn’t seem to be diminishing”.

A SFC spokesperson said it did not comment on individual cases, but that it will keep the matter of margin financing under review. “As always, we are closely monitoring the market and we will not hesitate to take decisive actions against misconduct, where appropriate, within the existing statutory framework to safeguard the interest of the investing public,” the spokesperson added.

Mr Allen noted that Hong Kong also lacks an investor identification system. Shares are bought through, and held by, brokers in a single omnibus account, which makes it harder for the SFC to track suspicious trades, he said. 

Iceberg Research’s Mr Vagner said delisting companies without a meaningful free float would be one way of stamping out manipulation. “When there’s no punishment, there’s no crime,” he said.

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