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Hong Kong Stock Connect subjects face short selling
2017-05-05 14:49

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Fullshare Holdings Limited (00607.HK), a subject of the Hong Kong Stock Connect which suspended trading after plunging nearly 12 percent as a result of the attacks by short sellers, resumed trading yesterday (May 4). Thanks to its strong responses to various allegations, its stock price surged 17.46 percent yesterday and successfully recovered the losses before trading suspension. Mainland investors holding over 5 billion HK dollars can relax for a while finally.

Mainland investors currently hold over 500 billion HK dollars in HK shares. They can no longer act as onlookers against the “short sellers” in overseas markets in recent years. Investors have to learn about the activities of short sellers before making southbound investments. It is also urgent for regulatory authorities in the mainland and Hong Kong to improve the interconnection mechanism and ensure equal access to hedge instruments by investors in HK shares to conduct self-protection. 

Glamour stocks in Hong Kong Stock Connect attacked again

Why Fullshare, a frequent top ten active stock in the Hong Kong Stock Connect, suspended trading temporarily?

It can be traced back to a report released by Glaucus Research Group, a U.S.-funded short seller, on April 25, which alleged that the stock price of Fullshare is under serious manipulation and expected a decrease of 70 to 80 percent. Meanwhile, Glaucus Research Group also alleged that the company disguised the transfer of most valuable assets by its chairman and his family with the surging stock price. The institute also alleged that the valuation of the company is too high and the stock price of the company should be only 0.55 to 0.77 HK dollars. As a result, Fullshare plunged nearly 12 percent during the morning session on April 25 and suspended trading.

Fullshare responded in a clarification announcement released on May 2 night that the report of Glaucus Research Group comprises statements which are misleading, biased, selective, inaccurate and incomplete as well as groundless allegations and irresponsible speculations. It responded to such allegations as “stock manipulation”, “mismatching of the valuation and the continuous operation” and “undisclosed related party disposals and acquisitions”.

Fullshare indicated that the company would like to invite Glaucus Research Group to visit its Nanjing headquarter to have a better understanding of our corporate strategy, business layout and operations. Meanwhile, the company will consider and adopt all reasonable measures, including share repurchase. In addition, Fullshare announced on May 3 night that the company entered into a strategic cooperation agreement with China CITIC Bank Corporation Limited (Nanjing Branch). The bank agrees to provide to the group and/or its related parties with a comprehensive credit and financing limit of not less than 10 billion yuan. The term of the agreement is two years from the date of the agreement.

Based on the performance of Fullshare on the first day after trading resumption, the response of Fullshare has received outstanding results. The stock opened and closed higher. Fullshare closed 17.46 percent higher to 2.96 HK dollars and the trading volume reached 1,272 million HK dollars.

The market performance shows that the response of Fullshare won the trust of mainland capitals. Statistics show that Fullshare ranked first among the top ten active subjects in the Hong Kong Stock Connect on Shenzhen and Shanghai stock exchanges. Based on SSN’s statistics, mainland investors bought the stock with a total of 337 million HK dollars through stock connects on May 4. Besides, relevant individual stocks under it, such as China High Speed Transmission Equipment Group Co., Ltd. (000658.HK), have received investments from mainland capitals since last week.

Mainland investors frequently hurt

Based on SSN’s statistics and calculated on the number of shares held through the Hong Kong Stock Connect as disclosed on the website of the HKEx on May 2 and the closing price of subjects in the Hong Kong Stock Connect on May 2, mainland investors totally hold 516,361 million HK dollars of subjects through the Hong Kong Stock Connect since the opening of the Shanghai-HK and Shenzhen-HK stock connects. 

China Huishan Dairy Holdings Company Limited (06863.HK), Tech Pro Technology Development Limited (03823.HK) and China Hongqiao Group Limited (01378.HK), subjects in the Hong Kong Stock Connect, were attacked by Muddy Waters Research, Glaucus Research Group, Emerson Analytics and other short sellers last year. It is noteworthy that few stocks can recover immediately after resuming trading like Fullshare. In other words, each short selling of subjects in the Hong Kong Stock Connect is a struggle of money for mainland investors.

In early March, Emerson Analytics released a report, alleging that China Hongqiao has false financial information. The stock price of the company plunged over 8 percent in less than half an hour. The company applied for emergency trading suspension immediately. Statistics show that mainland investors totally hold over 600 million shares of China Hongqiao through the Hong Kong Stock Connect on Feb. 28 before the short selling report was released. Calculated on the price of 7.15 HK dollars before trading suspension, it totally involves 4,292 million HK dollars of mainland capitals. Based on the closing price and the number of shares on two trading days before and after the release of the report, the market value of the stock held by mainland investors reduced nearly 400 million HK dollars.

Tech Pro Technology, a subject in the Hong Kong Stock Connect, saw its stock price plunging 94 percent in two trading days in late July 2016. Its stock price plummeted to less than 1 HK dollar in short time. 

Glaucus Research Group released a report, alleging that the performance of Tech Pro Technology is false. It set the target price of Tech Pro Technology at 0 HK dollars per share. If an A-share investor bought Tech Pro Technology at about 2 HK dollars per share with 1 million HK dollars, there would be only less than 60,000 HK dollars after July 28 and 29, 2016.

Although the stock price of Tech Pro Technology recovered after the two days of plunge and the company strongly denied the allegations, the current stock price is only 0.13 HK dollars, far below 2.27 HK dollars before the short selling.

Hong Kong Stock Connect in urgent need for hedge instruments

Analysts on the HKEx pointed out that mainland investors are frequently hurt in short selling is attributed to the following reasons: Firstly, the Hong Kong stock market has the short selling mechanism but mainland investors currently cannot short sell Hong Kong stocks through the Hong Kong Stock Connect under Shenzhen-Hong Kong Stock Connect. Secondly, although the HKEx has introduced a market fluctuation adjustment mechanism to curb the violent fluctuation of stock prices, there are no limits on the surging or falling of the Hong Kong stocks and the market value may see significant fluctuations during a day.
As a result, Shenzhen Stock Exchange and other regulatory authorities reaffirmed that mainland investors should have “double insurances” when making investments in Hong Kong stock market through the Hong Kong Stock Connect. On the one hand, they should learn about the information disclosed by listed companies to fully understand the financial conditions and operation models of listed companies in the Hong Kong Stock Connect. On the other hand, they should learn about the operation mechanism of the Hong Kong securities market to fully safeguard the legitimate interests of investors.

As a matter of fact, the market has different opinions on short sellers.

“It is common that short sellers sell individual stocks in the Hong Kong stock market. They are essential parts in the financial chain. Reasonable short selling is a value investment and can better realize the price discovery function. If listed companies have problems, it can alarm the warning against listed companies. Short sellers can alarm and promote the healthy development of the whole market.” A person from a securities company in Hong Kong indicated.

However, some short sellers use all means to attack target companies to obtain profits in actual operation.

“For short selling reports, some are reasonable, but some are full of speculations and exaggerations. Such reports will disturb the capital market to create panic among investors, which trigger the plunge of the stock price of listed companies.” A market participant indicated.

Hong Kong regulatory authorities have increased the regulation on deliberate short sellers. Andrew Left, the founder of Citron Research, was prohibited to participate in the Hong Kong market for five years by the Securities and Futures Commission as a result of the publication of short selling reports with false contents last October. He was also ordered to surrender a profit of about 1.6 million HK dollars from the short selling of China Evergrande Group (03333.HK).

For listed companies, they tend to issue clarification announcements and seek capital assistance under such circumstances. However, it depends on their own conditions. “It depends on their fundamentals on whether they can defeat short sellers.” A market participant indicated.

Take China Hongqiao as an example, the company released the unaudited performance for 2016 on May 2 during the trading suspension. Its total revenue reached 61,396 million yuan, increasing 39.2 percent year on year. The net profit surged 98.87 percent to 7.2 billion yuan. The outstanding strongly fight back against short sellers. 

“When the company is resolute and discloses information in a more open and transparent way to eliminate information asymmetry, it will help restore the market confidence.” The above analyst indicated. 

Translated by Star Zhang
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