Activist investor David Webb calls Hong Kong market rout
‘Network of companies aimed to defraud’
HONG KONG, June 28, (RTRS): Six weeks ago, David Webb, an activist investor and former director of the Hong Kong exchange, issued a report titled “The Engima Network: 50 stocks not to own”. On Tuesday, most of the shares he named abruptly plunged, pointing to chronic regulatory problems over small-cap shares in the Asian financial hub.
Webb’s report mapped out a complex web of cross-shareholdings between companies listed on both the main board and its sibling, the Growth Enterprise Market, which he said created a breeding ground for volatility.
Tuesday’s biggest decliners showed characteristics that have long worried regulators and which Webb highlighted in his report: high shareholding concentrations, unrealistic valuations, and complex relationships between companies and listed brokerages.
The Hong Kong government and regulators are growing increasingly concerned that a series of company scandals, many of them centred on mainland companies listed in Hong Kong, have tarnished the territory’s reputation as a financial centre as it marks the 20th anniversary of its handover to China this weekend.
Webb, a successful investor and author who studied mathematics at Oxford, told Reuters on Wednesday he had come across the network through his own research into annual reports and company disclosures.
“I picked up on this network years ago when they started building it. The meltdown shows these stocks are closely related,” he said.
His report only covers cross-shareholding relationships but the companies also have many directors in common as well as related transactions, Webb said.
The purpose of such networks, Webb said, “is to defraud investors - extract and misappropriate money and part of that involves manipulating stocks.”
Webb, an outspoken critic of the Hong Kong market since he quit the HKEX board in 2008, said it was unclear what triggered Tuesday’s sell-off.
“I can only speculate. But it’s possible margin calls have been triggering the sell-off. It’s possible the brokers involved have been told to stop lending against those shares ... Maybe the people operating the network have decided to dump and run.”
Webb said he never shorts Hong Kong shares.
“The bigger picture here is that this again reminds us that the current regulatory system is not working and these problems have been allowed to build up by the Hong Kong exchange (HKEX).” He also blamed the independent market regulator, the Securities and Futures Commission (SFC), “for not stopping it.”
An SFC spokesman declined to comment on whether the regulator was investigating any of the companies in the network.
In a statement, the SFC said: “The stocks which have experienced large WASHINGTON, June 28, (RTRS): US President Donald Trump plans to promote US natural gas exports at a meeting next week in Warsaw with a dozen leaders from central and eastern Europe, a region heavily reliant on Russian supplies, his top economic adviser told Reuters.
On his way to the G20 summit in Germany, Trump is slated to speak in Poland – which received its first shipment of US liquefied natural gas (LNG) this month – to a group of leaders eager to reduce their dependence on Moscow for energy.
“There are people who use supply almost as a political weapon, in
price declines yesterday occupy a market segment characterized by thin turnover, small public floats, high shareholding concentrations, and multiple relationships between different companies and listed brokerage firms. These characteristics can be especially conducive to extreme volatility and also to market misconduct.”
The exchange denied speculation on Tuesday it was planning to delist thinly traded shares.
WLS Holdings, which had a market value of HK$409 million, was the biggest loser on Wednesday with its shares sliding 47 percent, while Greaterchina Professional Services Ltd dropped 34 percent after a 93 percent drop on Tuesday. threatening to cut off supply in the coldest parts of the year – in the winter, when people need gas to heat their homes,” Gary Cohn, director of the White House National Economic Council, said in an interview.
“Our intention is to be a force for good and make gas readily available for anyone who needs it,” Cohn said.
Moscow cut off gas shipments during pricing disputes in 2006 and 2009, causing shortages during winter months in Ukraine and many other European nations.
The United States has looked at boosting its LNG exports for years, since drilling advances vastly expanded
Webb said he opposed a recent HKEX proposal to add a third board, catering to start-ups, and argued the two existing boards should be merged and put under the jurisdiction of the SFC.
The investor activist said Hong Kong also needs a class action legal provision so investors can hold boards accountable. He said all companies should be compelled to file results on a quarterly basis, with restrictions on how much companies can invest in other stocks.
Webb, a member of the SFC’s takeover panel, has been a thorn in the side of the establishment and Hong Kong’s mega-rich business elites through his public commentary and eponymous its domestic supplies.
The Trump administration sees growth in LNG exports as a way to reduce trade deficits with other nations and expand the economy.
Trump is set to outline his plans to help expand natural gas production and expedite LNG exports in a speech in Washington on Thursday.
The White House does not have projections for how quickly exports could ramp up, noting those decisions will be driven by market conditions and made by independent producers and exporters rather than the government.
Trump has also vowed to do what
“Webbsite” for much of the past 26 years he has been resident in the city.
Last year, however, Webb told readers of his newsletter he would dial back his commentary and public activism in frustration that his efforts had yielded little change in the financial hub over the years.
The HK$28.6 trillion ($3.7 trillion) market has grown nine-fold since the former British colony reverted to China rule in 1997, largely on an influx of listings from mainland firms. They now make up two-thirds of market value and represent 90 percent of the funds raised from IPOs in the five years to 2016.
Investors seem to discount the market, with the Hang Seng index trading he can to boost the US manufacturing sector. Some manufacturers, including Dow Chemical Co and Nucor Corp, had long fought to prevent a flood of exports, arguing that cheap domestic energy has helped them compete in world markets.
But the White House has rejected that view, instead pushing for infrastructure renewal and regulatory reforms.
Cohn said abundant reserves of natural gas should satisfy the needs of domestic users and exporters alike “as long as the infrastructure and the backbone of our natural gas system works.”
at around 14 times earnings, versus 22 times for world stocks and 23 times for US equities.
The SFC, along with the Hong Kong stock exchange, have issued several warnings over concentrated shareholdings in penny stocks listed on the GEM. The average first-day price rise for a GEM company debut during the first half of 2016 was 454 percent due to such concentrations, SFC data shows.
This month the HKEX launched a wide-ranging consultation to try to address this problem, including a proposal to raise the minimum market capitalization by 50 percent to HK$150 million and increasing the cash flow requirement for initial listings.