Hong Kong halts stock's 543% debut in volatile equity market

A panel displays the benchmark Hang Seng Index after the launch of Shenzhen Connect at the Hong Kong Exchanges in Hong Kong, China on Dec 5, 2016.
A panel displays the benchmark Hang Seng Index after the launch of Shenzhen Connect at the Hong Kong Exchanges in Hong Kong, China on Dec 5, 2016. PHOTO: REUTERS

HONG KONG (BLOOMBERG) - Hong Kong traders are used to seeing strange things on the city's small-cap exchange, home to some of the world's biggest price swings. But the initial public offering of GME Group Holdings on Wednesday (Feb 22) had even hardened market watchers scratching their heads.

Shares of the tunnel excavating subcontractor rose 543 per cent before they were suspended from 1pm local time by the Securities and Futures Commission. The stock was trading for the first time on the city's Growth Enterprise Market.

The move raised eyebrows in the former British colony, which is known for its laissez-faire markets and light-touch approach to regulation. It comes after a year in which IPOs on GEM soared by thousands of percentage points for reasons seemingly unrelated to company performance. Just last month, the SFC and the operator of the city's exchanges issued a joint statement reminding participants to follow market rules.

"This is very surprising," said Ricky Chim, who represents the financial services constituency in the city's election committee, in reference to the suspension occurring on the stock's first trading day. "It has never happened according to my recollection."

Hong Kong Exchanges & Clearing and the SFC said in the January joint statement that many GEM stocks have highly concentrated shareholdings and a small shareholder base. Half of the 10 best first-day gainers in 2015 saw their share prices plunge by more than 90 per cent from their peak within a month, they said.

The joint statement laid out conditions for GEM listings, including the need to operate in a "fair and orderly manner," and threatened action against companies and brokers that fail to have "appropriate policies and procedures" in place. Several GEM placements, including clothing firm My Heart Bodibra Group, shelved their listings after the statement.

Wednesday's IPO was the just the third on GEM since the joint statement, and by far the largest mover. The other debuts were by Dadi Education Holdings, which fell 2.9 per cent on its first day, and CBK Holdings, which rose 18 per cent, according to data compiled by Bloomberg.

GME Group's stock jumped from HK$0.54 to HK$3.47 by the time of the halt, the data show. More than 20 million shares changed hands in the morning session.

That activity and price rise suggested to the regulator "that there may not be an open market in the trading of the shares," GME said in a statement released after the suspension.

"The board is not aware of any reason that has caused the price movement of the shares or any information which must be announced to avoid a false market in the company's securities or any inside information that needs to be disclosed," GME said.

Spokesmen for the SFC and HKEX declined to comment on individual cases. Phone calls to the deal's sponsor, Altus Capital, and lead manager, Pacific Foundation Securities, were not returned.

"The SFC would I think look at the prospectus again to see if the disclosures can conceivably sustain a share price of five times the issue price," Anthony Neoh, a former SFC chairman, said by e-mail on Thursday (Feb 23).

The regulator will likely speak to the IPO sponsors and interview significant buyers of GME stock and look into their background and source of funds, Neoh added.

Run-ups such as GME's highlight quirks in Hong Kong's market for small-caps, where wild swings are a regular occurrence, many firms have a tiny portion of their shares available to trade and mainland Chinese firms buy companies to engineer reverse takeovers.

Last year's top performing IPO globally was Luen Wong Group Holdings, another GEM listed civil engineering firm, which rose 8,515 per cent from its April debut through Dec 31. Shortly after its listing, the SFC issued a warning about the stock because 96 per cent of its outstanding shares were in the hands of the controlling shareholders and 19 other investors. Low trading volumes, with 790,000 shares changing hands each day, mean it's vulnerable to extreme moves.

HKEX is planning to overhaul GEM and begin a public consultation on the exchange this year. Chief Executive Officer Charles Li said at a media event last month that such a review could be linked to a proposal to introduce a third exchange that may target professional investors and include new listings standards, including dual-class shares. He didn't give specific timing for the plans.

Francis Lun, CEO of Geo Securities, said it was the first time he knew of a stock being suspended on its first day.

"A question is how can the authorities list if they have questions," he said. "They should stop it before it gets listed."