The World’s Best IPO Has Gained 6,000%, But Analysts Say Stay AwayBy
Luen Wong Group trades at more than 2,000 times its profit
Rival that also soared after IPO later fell 91% in single day
The world’s best-performing new listing this year is a Hong Kong civil-engineering stock soaring for reasons that appear unrelated to its business.
Luen Wong Group Holdings Ltd. jumped 1,438 percent on the first trading day after its April initial public offering and is now 6,715 percent above its offer price. The company, which reported sales of $41 million last year and profit of $1.1 million from projects like laying roads and digging sewers, is today worth $2.9 billion.
The run-up highlights quirks in Hong Kong’s stock market, where wild swings are a regular occurrence, many firms have a tiny portion of their shares available to trade and there’s a healthy sideline in mainland Chinese firms buying companies to engineer reverse takeovers. Luen Wong’s world-beating showing has been ascribed to a combination of all three and has left analysts urging caution.
“My advice for small retail investors is to stay away,” said Francis Lun, chief executive officer of local brokerage Geo Securities Ltd.
Luen Wong closed down 3.6 percent on Wednesday. The stock’s performance since its debut is a story that Hong Kong has seen fairly often in recent years. A study by the Securities and Futures Commission found that between 2013 and 2015, 56 companies saw their market value jump more than 1,000 percent in a six-month period, even though 39 of them were losing money.
A Luen Wong official answered the phone and requested questions be e-mailed. The firm didn’t respond to the e-mail seeking comment. Henry Yau, an official at the IPO’s sponsor TC Capital Asia Ltd., said his firm wasn’t in a position to comment on share price moves. TC Capital only assisted the company with preparing its listing application and didn’t act as a bookrunner to bring in investors, Yau said in an e-mailed response to questions. Representatives at joint bookrunners Gransing Securities Co. and Suncorp Securities Ltd. didn’t reply to e-mails seeking comment.
Volatility on the small-company exchange where Luen Wong is listed, known as the Growth Enterprise Market, is an issue for bourse operator Hong Kong Exchanges & Clearing Ltd., according to David Graham, the chief regulatory officer and head of the listing division, who was speaking generally. HKEX is working with the SFC to address the matter, he said in a June interview.
In a speech in June, SFC Chief Executive Officer Ashley Alder said the regulator and HKEX were working on a thorough review of GEM and issues surrounding the companies that list there.
“Newly-listed GEM companies are often associated with extreme price fluctuations, small public floats and high shareholding concentrations,” Alder said. “It goes without saying that we have been very concerned about these and other developments in our listed market.”
Ernest Kong, a spokesman for the SFC, declined to comment.
Alder’s comments came amid broader complaints that GEM, conceived in 1999 with the tagline “A ‘Buyers Beware’ Market for Informed Investors,” failed to attract sufficient listings. The exchange was targeting a consultation on GEM by year-end, Graham said in June. That time frame now looks unlikely with the exchange and regulator busy with a consultation on changes to IPO application procedures.
“We have done some work on GEM. We are discussing with our regulator our thoughts and we are not yet ready for discussion with the market,” an HKEX spokesman said in an e-mail on Tuesday. “We will update the market in due course.”
Luen Wong’s tightly controlled shares may also have played a role in the price gains. The firm’s two founders own 75 percent of the company, the maximum allowed under exchange rules. In April, the Hong Kong regulator issued a warning about the stock because 96 percent of its outstanding shares were in the hands of the controlling shareholders and 19 other investors. Wafer-thin trading volumes, with daily trading averaging roughly 1 million shares on 312 million publicly-floated shares, mean it’s vulnerable to extreme moves.
The shares are also free from shorting, which can dampen outsized gains. Under the city’s rules, companies can be eligible for short selling if market value is at least HK$3 billion ($387 million) and total trading turnover is at least 60 percent of the company’s capitalization.
Among the investors in Luen Wong is China Environmental Energy Investment Ltd., which bought a 1.43 percent stake for HK$124.5 million in July, according to filings. The firm’s 2016 annual report named 10 mostly thinly-traded stocks held in a HK$805 million portfolio. China Environmental Energy has fallen 68 percent in the past 12 months.
A second listed investor, China New Economy Fund Ltd., held a 0.65 percent stake in Luen Wong as of June, according to an interim results report. The seven other Hong Kong stocks in its portfolio rose an average 7.8 percent over the past 12 months, though China New Economy is down 66 percent during that period.
Questions e-mailed and faxed upon request to China New Economy were not returned. A spokeswoman for China Environmental Energy did not reply to queries seeking comment.
Luen Wong, which trades at 2,196 its earnings, may have at least one thing going for it: the recent boom enjoyed by the engineering and construction sector in Hong Kong. Years of bumper revenues cemented by big-ticket government contracts and a surge in new home developments has buoyed the industry. Six of Luen Wong’s peers listed this year, with at least 20 more awaiting approval, according to Bloomberg and stock exchange data. Last year, 21 firms from the sector raised $2.65 billion in IPOs.
Building contractors are taking advantage of recent windfalls to list while valuations are high, said Alex Wong, fund manager at Ample Capital Ltd., who predicted the sector’s stocks will slide in the next year given the high valuations, steep construction costs and a dwindling pipeline for large infrastructure projects.
An early warning may have been Ching Lee Holdings Ltd., which went public in March. The shares soared nearly 2,000 percent through July 13, but one day in September suddenly tumbled 91 percent for reasons the firm never publicly explained. The stock has not recovered. A woman who answered the phone in Ching Lee’s communications department said the company would not comment on share price moves.
Lun of Geo Securities said small Hong Kong companies often trade at their potential shell value, the amount mainland investors would pay to take control of a Hong Kong-listed company. The going rate for a shell is HK$500 million, he said, speaking generally.
Hong Kong and China have recently sought to tighten rules on shell transactions amid concerns that incoming owners and asset injections were evading the scrutiny applied to new listings. Last year, a record 45 Hong Kong public companies completed a change of ownership through majority equity sales, data compiled by Bloomberg show.
Even if Luen Wong is an attractive target for a buyer, its dramatic post-IPO climb has made it too expensive, according to Ample Capital’s Wong.
“I don’t think the price is justifiable,” he said. “Even for a shell.”