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Be Wary of Hong Kong's Eye-Popping IPO Gains

  • New listings on Hong Kong’s second exchange jump then plunge
  • GEM hosted 18 of world’s top 20 stock debuts this year

Hong Kong’s Growth Enterprise Market has seen a string of the world’s best stock debuts this year. It’s also been home to some of the biggest plunges, wiping out gains and raising questions about how the exchange operates.

Vegetable supplier Goal Forward Holdings Ltd., whose shares jumped 1,500 percent on their October debut, is trading 21 percent below its offer price. Cmon Ltd., designer of board games including “Zombicide: Black Plague,” gained 1,330 percent on its first trading day on Dec. 2 and then fell for six consecutive sessions to below its offering price. It’s a pattern that plays out regularly on the city’s exchange for small companies.

Concentrated holdings, preferred investors during initial public offerings and low trading volumes all contribute to the roller-coaster performances, which have caught the attention of the city’s chief regulator. Ashley Alder, head of the Securities and Futures Commission, said last month he wants his agency to look at the issues on GEM. The scrutiny comes as mainland investors start to trade the city’s small-cap shares through the stock-trading link with Shenzhen that opened on Dec. 5.

“You can see now nobody would chase or buy stocks on the Growth Enterprise Market if they aren’t crazy enough,” Ringo Choi, Asia Pacific IPO leader at Ernst & Young Global Ltd., said in a Dec. 12 interview in Hong Kong. “Speculators obviously win big time.”

Eighteen of the 20 top global IPO debuts this year are from GEM listings, all of which recorded a first-day gain of at least 500 percent, according to data compiled by Bloomberg. The 44 companies that debuted on the exchange in 2016 closed up an average of 541 percent on the first trading day, the data show.

The surges rarely last. K W Nelson Interior Architect Group Ltd. rose 2,005 percent on its first day of trading on Dec. 8, this year’s best first day anywhere in the world. The stock declined 14 percent last week. That debut surpassed November’s IPO of night-club operator Luk Hing Entertainment Group Holdings Ltd., which lept 1,900 percent in its first session before falling by more than two-thirds the next day. Expert Systems Holdings Ltd., a provider of technology infrastructure, jumped 1,100 percent on its April 12 debut but is now 17 percent below its offer price.

The initial moves “created the misleading illusion for Hong Kong investors that whatever’s going up must be good -- or that whatever goes up, must go up even further,” said Mike Leung, an investment manager at local brokerage Wocom Securities Ltd. “A lot of investors don’t understand the market that well.”

An external spokeswoman for Goal Forward said the company’s stock price is solely determined by the market, adding it believes the stock market is promising and will continue to develop. K W Nelson’s company secretary, Simon Ho, declined to comment. Cmon Chairman Ng Chern Ann and representatives for Luk Hing didn’t reply to e-mailed questions. A spokeswoman for Expert Systems said she can’t comment as the moves are led by the market.

While Alder has voiced his concerns, officials at bourse operator Hong Kong Exchanges & Clearing Ltd. have suggested a review of its second exchange, though without providing concrete promises. HKEX Chairman Chow Chung-kong said a decision on whether to hold a GEM consultation would be made early next year, the city’s Oriental Daily newspaper reported on Dec. 11.

Lorraine Chan, an HKEX spokeswoman, said in an e-mail that the company is “discussing with our regulator our thoughts and we are not yet ready to discuss with the market.” Ernest Kong, a representative for the SFC, declined to comment.

Many in the market say the issue is the closely-held nature of GEM companies, and the fact that IPO placements see shares handed to a small group of hand-picked investors. The SFC made eight announcements this year about companies on the exchange that have highly concentrated shareholdings, alerting investors that share prices could fluctuate substantially and that they should exercise extreme caution.

“They need to review the way placements are done, so the first-day value of a company is reflected more accurately than what is happening now,” said Bernard Pouliot, chairman of Hong Kong securities firm Quam Ltd., the No. 4 arranger of GEM listings this year, according to Bloomberg’s league table.

The fourth quarter of 2016 has been GEM’s busiest in 15 years in terms of number of debuts, according to Bloomberg calculations based on data from the bourse’s website. More than HK$2.6 billion ($336 million) was raised, the most in a quarter since 2002, the data show. Companies are rushing to list before any review of the exchange takes place, Ernst & Young’s Choi said.

Despite the eye-popping gains to be had with some of the trading debuts, investors should stay away, according to Leung of Wocom Securities.

“You can perhaps consider buying when it has dropped below the offer price,” he said.

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