Banking & Finance

Stratospheric

Chinese stock goes up over 300 times in IPO in US

Calvin-Choi-w

AMTD boss Calvin Choi

News last week that some of China’s largest firms are saying farewell to Wall Street has highlighted how a longstanding row about giving local auditors access to their books is far from over.

China Life Insurance, Chalco PetroChina, Sinopec and its key unit Shanghai Petrochemical are valued at more than $300 billion between them. But they have all announced that they are going to delist from the New York Stock Exchange rather than submit to demands that they comply with rules on audit access.

US senators Marco Rubio and John Kennedy have been spearheading the campaign for fuller scrutiny of Chinese financial information in the name of protecting local investors from accounting fraud and other financial misbehaviour, with firms from Hong Kong also the targets of the auditing overhaul. With that mission in mind, it’s a little counterintuitive that companies from Hong Kong continue to arrive in New York to sell shares, some of which have been soaring to unsustainable levels.

The debutant getting most attention this month is AMTD Digital, a subsidiary of a financial services group based in Hong Kong that offers loans and other services to fintech startups. After listing on the NYSE on 15 July at $7.80 a share, its stock went on a surge to a peak of $2,555 in early August. That made it the most rapid riser of any newly listed US stock in history, according to Dealogic.

Indeed, AMTD Digital was suddenly worth more than the likes of Disney, Walmart, Facebook, Goldman Sachs and JPMorgan – not bad for a three-year old operation with 50 employees.

In response AMTD Digital thanked its investors but said there hadn’t been any material change to its operating activities. Revenues in the most recent financial year were only $25 million, a long way short of justifying its valuation. Nor was there any hint of a groundbreaking product or patent in the pipeline. Journalists scouring the company’s website found only clichés about one-stop digital solutions and talk of how its “SpiderNet ecosystem” serves as a “fusion reactor” for its clients.

Almost inevitably the shares began a descent that had taken them back to about $190 each as of early this week, although that still delivered a flabbergasting market value of more than $35 billion.

Commentators in the US have picked up on the story, asking whether it was another case of retail investors working together to drive up the price through a short squeeze. That scenario was soon ruled out, because there was no indication of equivalent interest from day traders or anything close to the same volumes of trading.

Attention then turned to AMTD Digital’s free float, which is limited to about 19 million shares or a tenth of the total. That triggered questions about its concentrated ownership, with the rest of the register almost entirely in the hands of its parent AMTD Idea Group, an investment holding company also listed on the NYSE. Calvin Choi, the parent firm’s chairman, has been fighting a two-year ban in Hong Kong for failing to disclose conflicts of interest, the Financial Times noted.

“It seems strange and I’m surprised the stock exchanges or regulators are not getting more involved because it doesn’t sound like an efficient market,” Joe Saluzzi from Themis Trading in New Jersey, told Reuters about AMTD Digital’s wild ride.

Yet something similar happened just a few days later when Magic Empire Global, another underwriter of small-cap IPOs in Hong Kong, went public on Nasdaq. Although not climbing to AMTD’s heights, its stock blasted up more than sixty times in value to reach a market capitalisation of $5 billion within a few days, despite reporting sales of just $2.2 million last year. Interest wasn’t sufficient to keep the price moving skyward, however, with the shares soon slumping 90% from their peak.

Such modest revenues qualify Magic Empire as an “emerging growth company” under American legislation, Bloomberg noted, which makes it subject to fewer reporting requirements and more limited disclosure rules than larger public firms from the US. Minor listings by companies based in China or Hong Kong have sparked wild surges at least seven times this year on American bourses, the news agency added.


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