Surge-plunge game be­dev­ils HK GEM, sparks scru­tiny

China Daily (Hong Kong) - - BUSINESS - By BLOOMBERG

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 20 per­cent be­low its of­fer 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 con­trib­uted 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 con­nected to the 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.

But the surges rarely last. For ex­am­ple, Ex­pert Sys­tems Hold­ings Ltd, a provider of tech­nol­ogy in­fra­struc­ture, jumped 1,100 per­cent on its April 12 de­but but is now 16 per­cent be­low its of­fer price.

The ini­tial moves “cre­ated per­cent

first-day gain for 18 IPOs on GEM this year, but such surges rarely last be­yond a few days

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.

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 Chungkong 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.

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,” said Bernard Pouliot, chair­man of Hong Kong Se­cu­ri­ties firm Quam Ltd.

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