[HONG KONG] Hong Kong's Securities regulator warned investors on Friday against trading stocks whose valuations bear little resemblance to their underlying business, in a week in which the financial hub has seen three spectacular stock meltdowns of companies fitting that pattern.
"Investors should always be cautious when markets are volatile and to investors, I say be aware of stocks that do trade a long way from fundamentals, in any market," Hong Kong Securities and Futures Commission (SFC) Chief Executive Ashley Alder told a news conference.
A Thomson Reuters analysis of data on Hong Kong-listed companies with market capitalisations of more than US$1 billion found that 35 of them had seen an explosion in their stock market value, despite having revenues of less than US$100 million.
A vast majority of those stocks had ownership concentrated among a few investors, mirroring the structure of Goldin Financial Holdings Ltd, which plunged 60 per cent on Thursday.
Just 20 investors owned 98 per cent of the company's shares when the SFC warned investors against the stock back in March.
Stocks with such a precipitous rise in value pose risks because they can collapse equally quickly. Such was the case with China-based Hanergy Thin Film Power Group Ltd , a US$40 billion company that lost half of its value in less than an hour on Wednesday.
The Reuters data analysis flagged 35 more stocks whose rapid gains in value apparently outpaced the company's earnings.
BEP International Holdings, which describes itself as an investment holding company and trader of appliances and computers, has surged an astounding 3,300 per cent since the start of this year to a market value of HK$18.5 billion (S$3.2 billion).
On Thursday, its shares struck an all-time high of HK$15.70 from just 30 cents at the end of 2014, even though the company's earnings per share was just 22 cents in the six months to September 2014.
Another booming investment holding company, Good Fellow Resources, has gone from HK$0.53 to a peak of HK$6.21, a more than ten-fold gain in less than six months.
The company reported a halving of net profit in its six monthly period to December 2014, which the company said was due, among other things, to investment valuation changes and share-based compensation expenses.
Both stocks have seen daily volumes pick up from 1-2 million shares a day to 10-20 million. No one at BEP or Good Fellow Resources was immediately available, and calls to the companies' Hong Kong offices, outside business hours, went unanswered. "A lot of investors in these bubble stocks know what they are doing, it's exciting and there's a low transaction cost compared with the jockey club," said David Webb, a corporate governance activist in Hong Kong.
Hong Kong is going through a period where such stocks are especially prevalent, Webb said, because of increased inflows of cash from mainland China.
The spectacular crash of Hanergy Thin Film was followed by a suspension that trapped retail and institutional investors alike.
Guggenheim Solar ETF, for instance, which had Hanergy as its single-biggest holding and had been buying into the stock recently, fell as much as 10.25 per cent on Wednesday.
Hong Kong's regulator warned that more turbulence may be in store. "The SFC's surveillance systems have picked up more 'noise'," Alder said.