Sun Energy Plunge: HK 'Demon Stock' Manipulation.
Recently, a Hong Kong stock, known as a 10-bagger "demon stock," Sun Energy Group, plummeted by 98% within a single day, drawing the attention of investors. Despite the overall downturn in the Hong Kong stock market, since last year, there have been suspected "demon stocks" that have soared more than tenfold in a short period. These companies generally share common characteristics: they are newly listed stocks or secondary offerings with small market capitalization and highly concentrated equity ownership.
Investigations by Securities Times reporters have revealed that behind such stocks, there are often professional trading teams manipulating the market. They continuously release positive news and concentrate on driving up stock prices for a period, leading retail investors to believe there is a "sweet spot" and rush to enter the market. Especially to be included in various Hong Kong market indices and the Southbound Trading (Stock Connect), the stock prices are driven up in a sprint to "enter the Connect," and after entering, major shareholders quickly sell off their holdings and cash out. Some Hong Kong stock investment institutions suggest that in addition to strictly controlling the quality of new listings in Hong Kong from the source, for Southbound capital, understanding the manipulators' tactics can also help avoid being caught in their schemes and enhance investors' ability to avoid pitfalls.
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Professional Trading Teams at the Helm
Taking the recent plunge of Sun Energy Group as an example, the company, a global manufacturer of ultra-high-power graphite electrodes, was listed on the Hong Kong Stock Exchange on January 17, 2023. In August of this year, it was included in the Hang Seng Composite Index and the MSCI Hong Kong Small Cap Index. Influenced by the aforementioned positive factors, Sun Energy Group's stock price reached a historical high of 23.1 Hong Kong dollars on August 30, surging more than 10.7 times from the April low of 1.97 Hong Kong dollars, with a total market value exceeding 23 billion Hong Kong dollars. However, on September 3, Sun Energy Group's stock price suddenly "collapsed," plummeting by more than 98%, and its total market value evaporated by over 20 billion Hong Kong dollars.
According to statistics from the Securities Times Data Center, in the past two years, companies such as Marco Digital Technology, Jingji Financial International, and Haichang Ocean Park have successively experienced stock price collapses within a year of being included in the Southbound Trading.
As early as August this year, the Hong Kong Securities and Futures Commission had warned that the equity of Sun Energy Group was highly concentrated, with Otautahi Capital Inc. holding the majority of Sun Energy Group's interests. Moreover, there were 25 other shareholders who also held interests in Sun Energy Group (it is not yet known whether they are acting in concert), collectively accounting for 85.32% of Sun Energy Group's interests at the time.
With the surge in Sun Energy Group's stock price, Otautahi Capital also made multiple reductions in its holdings. Data from Tonghuashun iFind shows that from April 30 to June 20, Otautahi Capital reduced its holdings in the company three times, cumulatively reducing 156.5 million shares, and cashing out approximately 601 million Hong Kong dollars. Otautahi Capital's shareholding ratio dropped from 73.17% to 57.67%.
"The company is clearly manipulating the market to be included in the index. After the plunge, the trading volume increased, and it can be seen that within two trading days after the plunge, the stock price rebounded, which may also be a good time for the manipulators to sell off their holdings," revealed a local broker familiar with Hong Kong's market trading rules. "This time, after being named by the Hong Kong Securities and Futures Commission, the stock plunged before being included in the Southbound Trading, which can be considered a failed manipulation. However, it does not mean that the manipulators will not continue to repeatedly manipulate the market in the future."
Securities Times reporters have investigated and learned that there are some so-called "trading teams" in the Hong Kong stock market that specialize in trading volume and driving up stock prices, with the aim of entering the index and then being included in the scope of the Southbound Trading. The sources of funds behind this are diverse: including local Hong Kong family funds, mainland funds, and other foreign funds from the Middle East, Southeast Asia, South America, etc. With the continuous downturn of the Hong Kong stock market in recent years, the liquidity of many Hong Kong stocks is poor, and some new or secondary offerings have the need to enter the Southbound Trading, thus giving rise to a series of routine manipulation tactics.
Enhancing Risk AwarenessBeware of Becoming the "Bag Holder"
The current Hong Kong stock market is suffering from a lack of liquidity, and the incremental capital from the south, vividly referred to as "northern water" by the Hong Kong capital market, is showing a continuous inflow trend. Wind data shows that as of August 30th, the southern capital has seen a cumulative net inflow of 41.876 billion Hong Kong dollars in August, with a cumulative net inflow of 461.258 billion Hong Kong dollars for the year.
In addition to A+H companies, for Hong Kong-listed companies to be included in the Hong Kong Stock Connect list, they must first become constituents of the Hang Seng Composite Index.
A senior investment manager from a Shenzhen firm specializing in Hong Kong stock trading told reporters that small and medium-sized companies in the Hong Kong market also aim to enter the Hang Seng Composite Index and the MSCI Hong Kong Small Cap Index to attract passive allocation of institutional funds. These indices are generally adjusted regularly every six months, and this period also becomes the time window for the aforementioned trading teams to operate, as they will deploy in advance, such as market value requirements and trading requirements.
In the Hong Kong stock market, before major shareholders of a company make significant sales, they will deposit the shares they hold into the securities broker's account, known as "warehousing"; or transfer stocks stored elsewhere to the broker that will be used for the sale, known as "transferring warehouses." The most famous transfer warehouse behavior, for example, is that of Nasper, the major shareholder of Tencent, which had warehouse transfers and storage before reducing its holdings, and Warren Buffett, before reducing his holdings in BYD, also deposited his BYD shares into his Citibank Hong Kong account.
Companies of all sizes can predict share reductions through this operation. A Hong Kong securities broker revealed that through trading seats, it can be seen that the two peak periods for warehouse transfers and storage of the Rising Energy Group were at the end of last year and from June this year to date, suggesting that these two periods are when the behind-the-scenes trading team is making advance preparations.
The senior investment manager for Hong Kong stock trading also summarized that a stock with market manipulation will attract different investors at different stages of price increases: the first wave is investors who try to follow the trend when they see signs of unusual stock price movements; the second wave is often after being included in the index, attracting passive allocation from index funds; the third wave is investors who take over large blocks of shares or pledge equity at high stock prices; the fourth wave, those who originally wanted to reduce their holdings at a low price, after a sharp drop at a high price, seize the subsequent rebound to actually sell the shares. "For example, after the sharp drop, the trading volume of the Rising Energy Group increased significantly, and it rebounded by 78% and 34% in the following two trading days, which is also a good time for the manipulators to sell their shares," he said, adding that this is something that retail investors participating in the Hong Kong stock market through the Hong Kong Stock Connect should be more vigilant about being harvested.
Industry insiders call for stronger regulation.
It is worth noting that previously, the Hong Kong regulatory authorities have also successively investigated and dealt with market-disrupting behaviors such as "pump and dump." Hong Kong Securities and Futures Commission's Chief Executive Officer Julia Leung had previously stated that although the small-cap stocks involved in the "pump and dump" cases under investigation only account for a small part of the market, these scams could shake investor confidence and thus damage the liquidity and valuation of the small-cap stock sector.
Hong Hao, Chief Economist of the SAGE Group, said that the manipulation of stocks with highly concentrated equity is a long-standing phenomenon in the Hong Kong market, which has been repeatedly banned but not stopped. Only by severely cracking down on this behavior can regulatory authorities possibly achieve some effect.Bodah Capital International's CEO, Tianna Wen, also suggests: First, regulatory authorities should pay double attention to such listed companies with highly concentrated equity, and if there are indeed illegal and irregular situations, they should strengthen punishment and burst the bubble; secondly, the quality of new listings in Hong Kong should be improved, from the sustainability of corporate performance, the health of the business, the trading volume and activity of corporate equity, as well as the participation of institutional investors, the analysis of rating agencies, and a series of standards, to improve the threshold from the source.
Some fund managers with a Chinese background in Hong Kong also stated that when the market adjusts, inflated stock prices cannot be supported, especially after being named by regulatory authorities, investors will definitely avoid such stocks, and shareholders, brokers, and third parties will start to cut positions, accelerating the sharp drop in stock prices. For southbound capital, understanding the manipulative tactics of the market makers can also help avoid being caught in investments and enhance investors' ability to avoid pitfalls.
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