One of the most striking things about the 85% plunge in Huishan Dairy Holdings Co’s stock on Friday was how little it surprised market observers in Hong Kong.
The mysterious crash, the indefinite trading halt, the hours without a company statement explaining the move – it was all too familiar for traders who’ve had to navigate at least three similar episodes in the past two years.
While the city is upfront about its buyer-beware approach to regulation, the frequent sight of multi-billion dollar stocks collapsing in minutes has deterred investors and raised questions about Hong Kong’s role as one of Asia’s premier trading hubs. It’s one reason why the city’s benchmark Hang Seng Index commands by far the lowest valuation among counterparts in the world’s 10 largest markets.
“There are regulatory discounts to the price-earnings multiple,” said Niklas Hageback, a Hong Kong-based money manager who helps oversee about $180mn at Valkyria Kapital. “Valuation is lagging and this has become a market-wide problem.”
The Hang Seng index trades for about 13 times reported earnings, versus 22 for the MSCI World Index, according to data compiled by Bloomberg.
Hang Fat Ginseng Holdings Co, Hanergy Thin Film Power Group and Tech Pro Technology Development have all suffered crashes similar to Huishan’s in the past two years. Tech Pro, a provider of LED lighting products, fell 86% in 17 minutes in July, while Hang Fat Ginseng plunged 91% in an hour in January 2016. Eight months before that, solar panel manufacturer Hanergy dropped 47%, wiping out $19bn of market value in 24 minutes.
Huishan’s slump took less than 90 minutes. About 779mn shares in the company changed hands, the most during the morning session on Hong Kong’s exchange, which doesn’t have daily limits on share-price swings. By the time the stock was halted at midday in Hong Kong, it had lost $4.1bn of market value.
The Shenyang, China-based company issued a statement about two hours after the rout began, saying it suspended trading after a “significant decrease” in the shares. Huishan said it would comment further after completing an inquiry. Chairman Yang Kai said speculation that the company’s largest shareholder misappropriated 3bn yuan ($435mn) to invest in mainland real estate was untrue, Netease reported, citing a phone interview with Yang.
Lorraine Chan, a spokeswoman for Hong Kong Exchanges & Clearing, said the bourse operator doesn’t comment on individual companies. Ernest Kong, a spokesman at the Securities and Futures Commission, declined to comment.
The fallout spread on Monday to a Chinese bank that – like Huishan Dairy – counts Champ Harvest, a company controlled by Yang, as its largest shareholder. Jilin Jiutai Rural Commercial Bank Corp slumped as much 11% in Hong Kong, the most since the lender listed in January. Jiutai Bank is Huishan Dairy’s second-biggest creditor with 1.83bn yuan of loans, Caixin reported on Saturday.
Carson Block, the founder of Muddy Waters who published a bearish report on Huishan in December, speculated in an interview on Friday that share sales by Yang might be behind the drop. But he added that “there’s a lot going on behind the curtain that we never get to see.”
If there was a surprise about Huishan’s slump, it’s that it didn’t happen sooner. The company was a well-known target of short sellers, including Block. Yet until Friday, the stock had been one of the most stable in Hong Kong, fluctuating in a narrow range between HK$2.69 and HK$3.23 since the start of October 2015. It didn’t swing more than 5.1% on a closing basis during a single trading day in that period.
Huishan’s suspension on Friday highlighted another concern among investors in Hong Kong: the city’s record of unusually long trading halts. Hanergy shares have been frozen since May 20, 2015, and at least 38 Hong Kong-listed companies have been suspended for more than a year, according to HKEX data. In the US, trading halts must end within 10 days.
While Block said institutional money managers like himself can close out their positions in the off-exchange “gray market” after suspensions, he said individual investors are usually stuck.
“If you look at the number of suspended stocks, it’s unprecedented for a bigger, mature market like Hong Kong,” Hageback said. “These suspensions can last for years. It shows that the listing process is not diligent enough.”
Huishan’s plunge wasn’t the only extreme move on Hong Kong’s main exchange last week. Shares of beauty-enhancing selfie app developer Meitu surged 28% yesterday, before tumbling as much as 33% in the final 90 minutes.
The moves were fuelled by heavy trading among Chinese investors through Hong Kong’s exchange links with Shanghai and Shenzhen, according to Mirabaud Asia. Meitu’s chairman told reporters in Hong Kong on Friday that the company has heard regulators are probing the share swings, but added that Meitu hasn’t been contacted. Hong Kong’s SFC hasn’t commented on the issue.
Traders work at the Hong Kong Stock Exchange. One of the most striking things about the 85% plunge in Huishan Dairy Holdings Co’s stock on Friday was how little it surprised market observers in Hong Kong.
