Banking & Finance

The Icarus moment?

Hanergy dubbed as “demon stock” by Hong Kong investors

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Li’s billions: blink, and lose them?

In January a Gulfstream jet nearly crashed on a trip from Beijing to Hong Kong. It was carrying passengers from solar energy firm Hanergy. According to the Hong Kong Civil Aviation Department, the jet was moments from landing when it rapidly lost height from 2,000 feet to about 500 feet. A proximity warning was triggered and the aircraft had to land on its second approach. It was classified as a “serious incident” and the authorities are continuing to investigate the case.

At the time it was widely assumed that Hanergy’s boss Li Hejun was on board (although he has not confirmed it). At the time of the aviation incident Li had just been ranked as China’s richest man by wealth rankings specialist Hurun. His company was heading for the stratosphere, after an extraordinary six-fold rally in its share price late last year (see WiC270).

Four months after that drama in Hong Kong’s skies, Li experienced another jaw-dropping plunge, although this time the action had moved to the city’s stock exchange.

Before the opening bell on May 20, Hanergy Thin Film Power (HTF), Hanergy’s Hong Kong-listed unit, was sitting proudly with a market capitalisation of HK$300 billion ($39 billion). That heady figure meant that it started the session with a valuation on a par with CK Hutchison, the flagship of Asia’s richest tycoon Li Ka-shing. But only 24 minutes after the opening gong, HTF stock had dropped a staggering 47%, before trading in its shares was suspended.

“It has to be the craziest thing ever to happen in Hong Kong’s stock market,” a columnist at Apple Daily has suggested.

“Not many people could start the day as rich as Li Ka-shing, and then have his net worth chopped at the waist,” Hong Kong Daily News added, in a reference to a barbaric form of execution meted out in ancient China.

HTF was holding its annual shareholders meeting at the moment its shares started to nosedive. And stranger still, Li Hejun wasn’t present at the meeting, which might have been just as well as minority shareholders started to realise that their net worth had been frazzled by $14 billion in less 30 minutes. According to the Wall Street Journal, Li had skipped the annual meeting to attend “what Hanergy said was a clean-energy exhibition in Beijing”.

For a company of its market size, HTF doesn’t have too many minority shareholders. Li alone owns more than 80% of HTF’s tradable stocks. But one of the shareholders who did attend the AGM still managed to ask HTF’s management: “Are you hiding something from us that we should know?”

A pertinent question, perhaps, in light of the chaotic morning HTF had on the Hong Kong bourse.

In a brief stock exchange announcement, HTF said its shares would stay suspended from trading pending the publication of any “inside information” relevant to shareholders. But on Thursday this week, it was yet to come up with a satisfying explanation for the plunge.

Market watchdogs are also investigating the collapse. The Hong Kong’s Securities and Futures Commission (SFC), announced this week: “The SFC wishes to clarify that a formal investigation into the affairs of Hanergy has been active and is continuing.”

Most analysts have claimed that HTF’s shares were overvalued for some time. The company’s major product – solar thin-film technology ­­– features thin, flexible panels that can be attached to vehicles or clothing. They are cheaper to produce but generally less efficient in converting sunlight to energy than rival solutions. As a result, they make up less than a tenth of sales in the overall market, which is dominated by panels based on crystalline silicon.

Thus for the legions of Hanergy sceptics, last Wednesday looked to be their ‘I-told-you-so’ moment.

Newspapers like the Financial Times have published several investigative reports on the “unconventional practices behind HTF’s soaring fortunes”, warning that the bulk of Hanergy’s revenues have been generated from connected transactions with its parent group.

And the FT came up with another round of glaring exposures this week, reporting that Li Hejun took out a $200 million loan pledged against millions of shares in HTF just before its share price crashed last week.

The implication? His personal finances may not have been as healthy as many thought (few could imagine Bill Gates taking out a personal bank loan collateralised with Microsoft shares).

Meanwhile, Caixin Weekly has been speculating that Hanergy may have failed to repay some of its loans, resulting in HTF shares held as collateral being sold off and triggering the crash.

“Our group’s operations are normal in all respects and we maintain a good financial position with no overdue loans. There was no forced liquidation of the group shares as cited in some media reports as the cause of the price plunge of the shares of Hanergy Thin Film,” the company said in a rebuttal statement. Li went further. He defiantly told Xinhua yesterday: “Hanergy has never in its history been better than it is today.”

Hanergy wasn’t alone in experiencing a miserable week. Other Chinese solar firms also faced a punishing time, with Nasdaq-listed Yingli Green Energy dropping nearly 50% last Tuesday after a profit warning.

But HTF’s meltdown has been the highest profile collapse, stoking concerns that Hong Kong’s stock market is getting more volatile because of a recent influx of capital from the mainland.

HTF is one of the Hong Kong stocks eligible for trading under the Shanghai-Hong Kong Stock Connect and it has been the third most heavily traded share by mainland investors since the scheme was introduced last November.

However, a day after HTF’s flash crash, market attention shifted to similarly steep falls in Goldin Financial, a broker that provides short-term corporate lending. The company’s stock plunged 43% on May 21, wiping out $12 billion of value. A real estate firm, Goldin Properties, which shares the same controlling shareholder, also dropped by 41%, erasing $4.6 billion of market value.

Goldin Financial was the advisor appointed by HTF for a connected transaction with its parent group in February. And just like HTF, Goldin Financial and its sister firm have staged remarkable gains since the Stock Connect programme was launched. As with HTF, Goldin shares are closely held too. Earlier this year, Hong Kong’s SFC warned that more than 98% of Goldin Financial’s public float was “highly concentrated” among its chairman and 19 other shareholders.

“These [three] companies are bubbles,” said David Webb, a Hong Kong corporate governance activist and the editor of webb-site.com. “They still have a long way to fall before they can reflect their fundamental values.”

As such, a new term – “A-sharisation” – has become modish in Hong Kong’s investment community. It reffers to stocks in the city that seem to be behaving like some of their fruitier cousins on the more speculative A-share market.

“I am not too worried about the Hong Kong stock market being ‘A-sharised’ as long as investors trade fairly, according to the law,” the SFC’s chairman Carlson Tong told reporters last week.“The SFC will maintain a watchful eye over the market to make sure this happens.”

So is it the case that Hong Kong has been importing some of the bad habits of the mainland investment market? In truth, Hongkongers are no slouches themselves when a speculative opportunity presents itself. And while Hanergy is now being dubbed as a “demon stock” – a local term denoting companies with unbelievable share prices but few fundamentals to support them – the label was not invented for the solar firm.

In fact, the first demon stock was an obscure Hong Kong telecoms firm that renamed itself Mongolia Energy in 2007. In the year afterwards its share price surged from less than HK$0.1 to a peak of HK$18, topping out at a market value of more than HK$100 billion (it hadn’t produced a single lump of coal at the time). But the euphoria didn’t last. As of this week Mongolia Energy had a market cap of HK$1 billon – still respectable but HK$99 billion less than its heyday.

That leaves the more jaded brokers in the city whispering that the strategies for a successful ‘stock ramp’ were perfected by Hong Kong’s wily financiers long ago. Hence far from ‘contaminating’ the Hong Kong market with new-fangled methods, those from north of the border may just be emulating some of the city’s more well-worn speculative techniques…


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