Hong Kong Small Cap Stock Plunge Wipes Out $6.1 Billion in Value

  • Index of GEM-listed companies saw biggest drop since 2015
  • China Jicheng, GreaterChina Professional fell more than 90%

Hong Kong Small Cap Plunge Wipes Out $6.1B

A string of Hong Kong stocks suddenly plunged Tuesday, with traders pointing to links between some of the companies and a brokerage that’s under regulatory investigation.

Seventeen firms tumbled by more than 40 percent at the close, losing a combined HK$47.8 billion ($6.1 billion) in market value. China Jicheng Holdings Ltd., an umbrella maker, and GreaterChina Professional Services Ltd. sank more 90 percent. Lerado Financial Group Co., whose shares were halted by Hong Kong’s securities regulator this month, has previously disclosed an investment in China Jicheng and an underwriter role on a GreaterChina share placement in 2015.

“We’re seeing a domino effect; all the companies in the same network got cut,” said Francis Lun, the Hong Kong-based chief executive officer of Geo Securities Ltd. These shares are “owned by the same group of people so they must be experiencing a liquidity crunch and they don’t have the money to support the share prices,” he said.

The selloff, which sent the city’s Growth Enterprise Market sinking the most since 2015, is reinforcing concerns about risks in the world’s fourth-largest equity market after a series of spectacular plunges. While Hong Kong’s benchmark index is among the best performers this year, declines in companies such as China Huishan Dairy Holdings Co. -- which tumbled 85 percent in a single day in March -- have burnt some investors.

The stocks that saw large price drops on Tuesday tended to have characteristics that can be conducive to extreme volatility and to market misconduct: multiple relationships between different companies and listed brokerage firms, high shareholding concentrations, thin turnover and small public floats, Ernest Kong, a spokesman at the Securities & Futures Commission, said in an emailed statement. The regulator won’t comment on whether it has been or will be pursuing investigations into specific individuals or related companies, he said.

Lerado Suspension

The SFC suspended trading in Lerado’s shares from June 6, saying a company circular dated Oct. 26, 2015 included “materially false, incomplete or misleading information.”

In that 2015 document, Lerado outlined plans to raise money to expand the margin lending business of unit Black Marble, and said that Black Marble -- which was formerly called Yim Cheong Share Broking and Investment Co. -- was planning to underwrite a placement for GreaterChina Professional and an open offer for China Investment & Finance Group Ltd. China Investment fell as much as 94 percent Tuesday before paring its loss to 50 percent.

Lerado owned almost 1.5 billion shares in China Jicheng as of Dec. 31, according to its annual report.

Hong Kong Exchanges & Clearing Ltd. said it wasn’t in a position to explain the share price declines. Calls to Lerado and GreaterChina Professional weren’t answered. The person who answered the phone at China Jicheng said they weren’t aware of the share price decline and couldn’t comment, while at China Investment & Finance, a separate person said they’ll respond to questions after a staff meeting.

Carrying On

Lerado said in a June 7 filing that the company is carrying on with its business and doesn’t expect the share suspension to have a material adverse effect on its daily operations.

The broader Hong Kong market was resilient to the declines on Tuesday, with the benchmark Hang Seng Index losing 0.1 percent and the Hang Seng Composite Small Cap Index sliding 0.4 percent. Still, the picture looked more grim on the city’s small-cap Growth Enterprise Market, which is home to some of the plunging shares.

The S&P/HKEX GEM Index sank 9.6 percent, its biggest retreat since August 2015, and closed at its lowest level on record. The gauge has lost more than 90 percent since 2000.

Of the stocks that fell more than 40 percent, Black Marble had positions lodged in Hong Kong’s central clearing system for all of them, with more than half exceeding 5 percent, an analysis of the most recent data shows. The Central Clearing and Settlement System data can represent brokerages holding stock to facilitate standard client trades or company capital changes such as rights issues, and can also signal the existence of share pledges. It’s not possible to tell which.

“Obviously there’s been some margin calls and forced liquidation of shares among these companies,” said Hao Hong, Hong Kong based strategist with Bocom International Holdings Co.

The GEM board has been so beset by scandals that Hong Kong Exchanges’ chief executive officer warned in February it was damaging Hong Kong’s reputation as a financial center. HKEX proposed sweeping changes to GEM this month, including higher minimum market-value requirements and tighter rules on when controlling shareholders can sell their stakes.

— With assistance by Kana Nishizawa, Amanda Wang, Jeanny Yu, Ryan Lovdahl, Sam Mamudi, and Michael Patterson

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