AMTD Digital, 'mother of all shorts', highly risky for bears: Experts

By any conventional measure, AMTD Digital is one of the world's most overvalued stocks.

The barely profitable Hong Kong financial services firm trades at more than 400 times its latest fiscal-year profit, compared with about six times for Goldman Sachs Group.

Even after tumbling more than 90 per cent from its peak in early August, AMTD Digital's 2,221 per cent gain since listing in New York five weeks ago rivals GameStop's surge at the peak of meme-stock mania.

One analyst has called AMTD Digital - whose leader is appealing against a ban from Hong Kong's securities industry - "the mother of all shorts".

Yet, ask professional short sellers about the stock, and they are more likely to say it is an incredibly risky stock to bet against.

AMTD's tiny free float and low turnover makes borrowing shares prohibitively expensive for short sellers, while its extreme volatility could wipe out bearish positions in an instant.

"As a professional short seller, you want to stay a mile away from this," said Mr Soren Aandahl from Blue Orca Capital. "It's so enormously volatile that it's really dangerous."

AMTD Digital - little-known even within Hong Kong financial circles until its eye-popping gain - is still valued at more than US$30 billion (S$41 billion), making it bigger than about half of the companies on the S&P 500 Index.

With stocks like GameStop and Bed Bath & Beyond climbing once again, AMTD Digital offers a stark reminder that seemingly irrational gains can last far longer than seems warranted.

That is partly because shorting the stocks is so risky.

AMTD Digital has been raising eyebrows across Wall Street after a mysterious rally that exceeded 32,000 per cent at its peak.

At one point, the company was worth about US$400 billion on paper, more than the likes of Goldman Sachs and JPMorgan Chase & Co.

Other newcomers from Hong Kong or China have also posted similarly inexplicable gains, catching the attention of US regulators.

AMTD Digital has not returned multiple requests for comment.

It said in an Aug 2 statement that it is monitoring the market for any trading abnormalities and does not know of any "material circumstances, events, nor other matters" that could be affecting the stock price.

Market observers interviewed by Bloomberg have been baffled by the move. Tellimer became the first and sole brokerage to initiate coverage of the company, assigning it a "sell" rating on Monday.

While the gains in AMC and GameStop were fuelled by a coordinated effort among retail investors to squeeze short sellers, Tellimer analyst Nirgunan Tiruchelvam said AMTD "seems to be a very curious case".

AMTD Digital's short interest as a percentage of shares outstanding is less than 0.1 per cent, according to Markit data. One big deterrent for bears is the excessively high cost of borrowing the stock to sell it short.

Shorting a stock, or short selling, involves borrowing a stock whose price you think is going to fall from your brokerage and selling it on the open market.

The plan is to then buy the same stock back later, hopefully for a lower price you initially sold it for, and pocket the difference after repaying the initial loan.

As at Monday, investors needed to pay an annualised interest rate of 900 per cent, according to Blue Orca's Mr Aandahl. This compares to about 1 per cent for companies with large market capitalisation.

Only about 10 per cent of AMTD shares are available for trading, limiting the pool for investors and making the stock susceptible to wild swings.

BLOOMBERG