HK Demon Stocks: Manip, Plunges, Regulatory Chall.
Recently, the Hong Kong stock market has seen a 10-fold "demon stock" in the form of Rising Energy Group, which plummeted by 98% within a single day, drawing investor attention. Despite the overall downturn in the Hong Kong stock market, since last year, there have been suspected "demon stocks" that have soared more than 10 times in a short period. These companies generally share common characteristics: they are newly listed stocks or recent IPOs with small market capitalization and highly concentrated equity.
Investigations by Securities Times reporters have revealed that behind such stocks, there are often professional trading teams manipulating the market. After continuously releasing positive news and driving up stock prices for a period, they convince retail investors that there is a "sweet deal" 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 to "enter the Connect," and after entering, major shareholders quickly sell off their shares and cash out. Some Hong Kong stock investment institutions suggest that in addition to controlling the quality of newly listed stocks in Hong Kong from the source, for Southbound capital, understanding the manipulators' tactics can also help avoid being caught and enhance investors' ability to avoid pitfalls.
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Professional Trading Teams at the Helm
Taking the recent plunge of Rising 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 successively included in the Hang Seng Composite Index and the MSCI Hong Kong Small Cap Index. Influenced by the aforementioned positive factors, the stock price of Rising Energy Group reached a historical high of 23.1 Hong Kong dollars on August 30, surging more than 10.7 times from the low point of 1.97 Hong Kong dollars in April, with a total market value exceeding 23 billion Hong Kong dollars. However, on September 3, the stock price of Rising Energy Group suddenly "collapsed," plummeting by more than 98%, and the 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 of this year, the Hong Kong Securities and Futures Commission had issued a warning that the equity of Rising Energy Group was highly concentrated, with Otautahi Capital Inc. holding the majority of the company's interests. In addition, 25 other shareholders also held interests in Rising Energy Group (it is not yet known whether they are acting in concert), collectively accounting for 85.32% of the company's interests at that time.
With the surge in Rising Energy Group's stock price, Otautahi Capital also made multiple reductions. Data from Tonghuashun iFind shows that from April 30 to June 20, Otautahi Capital reduced its holdings in the company three times, with a total reduction of 156.5 million shares, 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 shares," revealed a local broker familiar with Hong Kong's trading rules. "This time, after being named by the Hong Kong Securities and Futures Commission, the stock price plummeted 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. As the Hong Kong stock market has continued to be sluggish in recent years, many Hong Kong stocks have poor liquidity, and some new or recent IPOs have the need to enter the Southbound Trading, thus giving rise to a series of common operational routines.
At present, the Hong Kong stock market is suffering from a lack of liquidity, and the incremental Southbound capital is vividly referred to as "northern water" by the Hong Kong capital market and shows a continuous inflow trend. Wind data shows that as of August 30, the Southbound capital had a 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 Stock Connect list, they must first become constituents of the Hang Seng Composite Index. A senior investment manager specializing in Hong Kong stock trading in Shenzhen told reporters that small and medium-sized market value 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 prepare in advance, such as market value requirements and transaction 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 "depositing stocks"; or transfer stocks stored elsewhere to the broker that will be used for the sale, known as "transferring stocks." The most famous instance of stock transferring is when Nasper, the major shareholder of Tencent, had transferring and depositing actions before reducing its holdings, and Warren Buffett also deposited his BYD shares into his Citibank Hong Kong account before reducing his holdings.
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 transferring and depositing stocks of the Rising Energy Group were at the end of last year and from June this year to the present, suggesting that these two periods are when the behind-the-scenes trading team is making advance preparations.
The senior investment manager in Hong Kong stock trading also summarized that a stock with manipulative trading activities will attract different investors at different stages of price lifting: the first wave consists of investors who try to follow the trend when they see signs of unusual stock price movements; the second wave often comes after being included in the index, attracting index funds for passive allocation; the third wave involves investors who take over large blocks of shares or pledge equity at high stock prices; the fourth wave includes those who originally intended to reduce their holdings at lower prices and, after a sharp drop in stock prices, seize the opportunity of subsequent rebounds to actually sell. "For example, after the sharp drop, the trading volume of the Rising Energy Group increased significantly, and the two subsequent trading days rebounded by 78% and 34%, respectively, which is also a good time for the manipulators to sell their shares," he said. This is particularly something that retail investors participating in the Hong Kong stock market through the Stock Connect should be wary of to avoid being harvested.
Industry insiders call for strengthened regulation. It is worth noting that previously, the Hong Kong regulatory authorities have also successively investigated market-disrupting behaviors such as "pump and dump" schemes. 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 subsequently damage the liquidity and valuation of the small-cap stock sector.
Hong Hao, Chief Economist at Smart Group, said that the manipulation of stocks by companies with highly concentrated shareholdings is a long-standing phenomenon in the Hong Kong market, which has been repeatedly banned without success. Only by severely cracking down on such behavior can regulatory agencies possibly achieve some effect.
Wen Tianna, President of Broad Capital International, also suggested: First, regulatory agencies should pay double attention to such highly concentrated listed companies and strengthen penalties if illegal and irregular situations really occur, bursting the bubble; second, the quality of new listings in Hong Kong should be improved, from the sustainability of company performance, the health of business operations, the trading volume and activity of company shares, as well as the participation of institutional investors, and the analysis of rating agencies, and a series of standards to raise the threshold from the source.
A fund manager with a Chinese background in Hong Kong also said that when the market adjusts, inflated stock prices cannot be sustained, especially after being named by regulatory agencies. 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 funds, understanding the manipulators' tactics can also help avoid being caught in investments and enhance investors' ability to avoid pitfalls.
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