Cleaning up Hong Kong’s small caps is dirty work

Carmen Century Investment

22/03/2019 02:52

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Pete Sweeney
    HONG KONG, March 22 (Reuters Breakingviews) - Cleaning up
Hong Kong’s small caps will be a slog. Scandals and high fees
have condemned over 1,000 companies to low valuations and feeble
trading volumes. Now stock market operator Hong Kong Exchanges
and Clearing Limited  0388.HK  may cut transaction costs to
boost turnover, The South China Morning Post reported last week,
but that won’t solve deeper issues. A better current option for
many will be to delist.
    The city's bourse is famously lopsided. With over 2,300
companies listed, market value and turnover are monopolised by
just 494 tickers tracked by the benchmark Hang Seng Composite
Index (HSCI). The rest are largely ignored unless they generate
scandals, as in the case of China Ding Yi Feng  0612.HK , an
investment holding company that saw its share price blow up over
3,000 percent from July 2017 until trading halted in early
March. On Wednesday regulators froze related accounts at nine
brokerages as they investigate suspected manipulation.
    Part of the problem is thin volume, which activist investor
David Webb blames on relatively high transaction costs and other
trading constraints on low-priced shares. These are further
discounted because of a shortage of strong legal remedies - like
class action suits - available for independent shareholders to
deal with dodgy governance. The Hang Seng Small Cap Index - a
189 constituent subset of the market - has an historical price
to earnings ratio around 11, compared to 19 for the Dow Jones
U.S. Small Cap Index. In five years, it has gained around 6
percent, compared to a 21 percent rise in the HSCI. 
    All this means executives are buying back assets on the
cheap. Property tycoon Gordon Wu, for example, on Thursday won
shareholder approval to take Hopewell Holdings  0054.HK  private
for $2.7 billion, a 47 percent premium to the undisturbed share
price, around 30 percent less than its book value. Troubled
Chinese firm Hanergy Thin Film Power  0566.HK  may get away with
giving shareholders stakes in an unlisted special purpose
vehicle instead of cash before it delists. 
    Few retail investors have the resources or willingness to
haggle provided some premium is offered. Many of these
take-privates won't look pretty, but unless authorities consider
a more encompassing overhaul that empowers minority
shareholders, few will miss these companies when they go.
    On Twitter https://twitter.com/petesweeneypro 
    
    CONTEXT NEWS
    - Hong Kong's securities regulator on March 20 ordered nine
brokers to freeze client accounts linked to the suspected
manipulation of shares in investment firm China Ding Yi Feng
Holdings. Trading in the company's shares has been suspended.
    - Eikon data shows the company's shares began rallying
sharply in July 2017, gaining as much as 3,680 percent before
peaking in November 2018.
    - In a statement, China Ding Yi Feng said its offices had
been visited by officials from the Securities and Futures
Commission on March 8. It said operations had not been
materially affected, adding the board was now considering next
steps.
    - The South China Morning Post reported on March 18 that
proposals being considered by Hong Kong Exchanges and Clearing
to increase trading in smaller stocks include lowering fees for
trading, and making more of shares eligible for sale and
purchase by mainland investors through the cross-border Stock
Connect programme.
    -  For previous columns by the author, Reuters customers can
click on  SWEENEY/ 
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    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
China Ding Yi Feng announcement    http://www.cifund.com.hk/sites/default/files/Announcements/INSIDE%20INFORMATION_0.pdf
Hong Kong regulator freezes broker accounts linked to firm whose
shares jumped 1,300 pct     urn:newsml:reuters.com:*:nL3N21728A
BREAKINGVIEWS-Hong Kong fumbles its China extradition fix   
 urn:newsml:reuters.com:*:nL3N218078
BREAKINGVIEWS-Breakdown: Shanghai stock venue shows promise   
 urn:newsml:reuters.com:*:nL3N21505L
BREAKINGVIEWS-Stricken Hanergy drops investors into black hole  
  urn:newsml:reuters.com:*:nL3N20O097
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Clara Ferreira Marques and Katrina Hamlin)
 ((pete.sweeney@thomsonreuters.com; Reuters Messaging:
pete.sweeney.thomsonreuters.com@reuters.net))