String of Hong Kong stocks in dramatic plunge

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 per cent at the close, losing a combined OK$47.8 billion ($6.1 billion) in market value. China Jacking Holdings Lad, an umbrella maker, and Greater China Professional Services sank more 90 per cent. Lerado Financial Group, 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 Greater China 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 . 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.

Risks

The selloff, which sent the city's Growth Enterprise Market (GEM) 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 – which tumbled 85 percent in a single day in March – have burnt some investors.

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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 and 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.

Trading

The SFC suspended trading in Lerado’s shares from June 6th, saying a company circular dated October 26th, 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 – was planning to underwrite a placement for Greater China Professional and an open offer for China Investment and Finance Group. China Investment fell as much as 94 per cent Tuesday before paring its loss to 50 per cent.

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

Hong Kong Exchanges and Clearing said it wasn’t in a position to explain the share price declines. Calls to Lerado and Greater China 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 and Finance, a separate person said they’ll respond to questions after a staff meeting.

Resilient

The broader Hong Kong market was resilient to the declines on Tuesday, with the benchmark Hang Seng Index losing 0.1 per cent 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 SandP/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 per cent, 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 centre. 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.

- Bloomberg