Sky-High Asset Valuations a Concern for Hong Kong Regulator

  • Bubble stocks and governance shortfalls are issues for SFC
  • Recent action against Growth Enterprise Market judged a sucess

Hong Kong’s Securities and Futures Commission plans to look more closely at corporate asset valuations, according to Chief Executive Officer Ashley Alder.

Assets such as coal mines or residential property are valued by independent appraisers and their conclusions are used to justify prices paid by companies. It’s time for a “fresh look” at the issue, Alder said at a media event on Thursday, adding that valuation firms are not regulated by the SFC. The agency plans to address the issue by targeting licensed intermediaries such as corporate finance firms that advise on transactions, he said.

Alder, who last week was reappointed by the government for another three years, said his agency was working to “nip problems in the bud.” The top financial regulator was speaking two days after Hong Kong-listed Fullshare Holdings Ltd. fell 12 percent and saw its trading suspended in the wake of a short-seller report, highlighting the issue of so-called bubble stocks. Last month, another Chinese company listed in the city plunged 85 percent in less than 90 minutes. The market has also seen many stocks experience wild price swings.

“We are increasingly doing this through early, targeted intervention to minimize damage to our markets and to stem irreparable harm to affected investors,” said Alder.

The valuation industry needs an oversight body that can investigate and penalize firms, said Simon Mak, CEO at Ascent Partners, an asset valuation and advisory firm. “There are a lot of problems in the marketplace in terms of valuations,” he said. Among them is a “race to the bottom” by appraisers giving free initial valuations to listed firms who then choose the pitch closest to their view.

Among its efforts, the SFC, working with Hong Kong Exchanges & Clearing Ltd., targeted the small-company Growth Enterprise Market after years of extreme price moves by reminding deal-makers to follow rules that ensure a fair and orderly market. On Feb. 23 the regulator stunned the market by suspending trading in GME Group Holdings Ltd. on its debut, after the stock rose 543 percent in a few hours.

Alder cited the actions on GEM as an example of targeted intervention designed to send a message to participants and change behavior. Some new GEM listings, often placed to a small number of investors, became more balanced while others were withdrawn as a result of the SFC’s action, Alder said.

Glaucus Research published a report Tuesday that called Fullshare “one of the largest stock manipulation schemes trading on any exchange anywhere in the world.” Fullshare called the Glaucus report “misleading.” On March 24, China Huishan Dairy Holdings Co., dropped 85 percent before trading was suspended.

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