Vanishing IPO gains cause concern in HK

HONG KONG • Hong Kong's Growth Enterprise Market (Gem) has seen a string of the world's best stock debuts this year. It has also been home to some of the biggest plunges, wiping out gains and raising questions about how the exchange operates.

Vegetable supplier Goal Forward, whose shares soared 1,500 per cent on their October debut, is trading 20 per cent below offer price. Board game designer Cmon gained 1,330 per cent on its first trading day on Dec 2, then fell for six straight sessions to below its offer price.

It is a pattern that plays out regularly on the city's exchange for small companies.

Concentrated holdings, preferred investors during IPOs and low trading volumes all contribute to the roller-coaster performances, which have caught the attention of the city's chief regulator. 

Mr Ashley Alder, head of the Securities and Futures Commission, last month said he wanted his agency to look at the issues on Gem.

Mr Ringo Choi, Asia-Pacific IPO leader at Ernst & Young Global, said: "You can see now nobody would chase or buy stocks on Gem if they aren't crazy enough. Speculators obviously win big time."

Eighteen of the 20 top global IPO debuts this year are from Gem listings, all of which posted a first-day gain of at least 500 per cent,  data compiled by Bloomberg shows. The 44 firms that debuted this year closed up an average of 541 per cent on their first trading day.

The surges rarely last. KW Nelson Interior Architect Group rose 2,005 per cent on its first day of trading on Dec 8, this year's best first day worldwide. The stock fell 14 per cent last week. That debut surpassed November's IPO of night- club operator Luk Hing Entertainment Group, which leapt 1,900 per cent in its first session before falling by more than two-thirds the next day. Expert Systems, a provider of tech infrastructure, jumped 1,100 per cent on its April debut but is now 17 per cent below offer price.

The initial moves "created the misleading illusion for Hong Kong investors that whatever's going up must be good - or that whatever goes up, must go up even further", said Mr Mike Leung, an investment manager at local brokerage Wocom Securities. "A lot of investors don't understand the market that well."

While Mr Alder has voiced his concerns, HKEX chairman Chow Chung Kong said a decision on whether to hold a Gem consultation would be made early next year, according to media reports.

Many in the market say the issue is the closely-held nature of Gem firms, and the fact that IPO placements see shares handed to a small group of hand-picked investors. "They need to review the way placements are done, so the first-day value of a company is reflected more accurately," said Mr Bernard Pouliot, chairman of Hong Kong securities firm Quam.

The fourth quarter this year has been Gem's busiest in 15 years in terms of number of debuts. More than HK$2.6 billion (S$486 million) was raised. Companies are rushing to list before any review of the exchange takes place, Ernst & Young's Mr Choi said.

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A version of this article appeared in the print edition of The Straits Times on December 21, 2016, with the headline 'Vanishing IPO gains cause concern in HK'. Print Edition | Subscribe