Hong Kong traders are used to seeing strange things on the territory’s small-cap exchange, home to some of the world’s biggest price swings. However, the initial public offering of GME Group Holdings Ltd (駿傑集團控股) on Wednesday last week had even hardened market watchers scratching their heads.
Shares of the tunnel excavating subcontractor rose 543 percent before they were suspended from 1pm local time by the Hong Kong Securities and Futures Commission (SFC). The stock was trading for the first time on the city’s Growth Enterprise Market (GEM).
The move raised eyebrows in the territory, which is known for its laissez-faire markets and light-touch approach to regulation.
It comes after a year in which initial public offerings (IPOs) on GEM soared by thousands of percentage points for reasons seemingly unrelated to company performance.
Last month, the SFC and the operator of the territory’s exchanges issued a joint statement reminding participants to follow market rules.
“This is very surprising,” said Ricky Chim (詹劍崙), who represents the financial services constituency in the city’s election committee, in reference to the suspension occurring on the stock’s first trading day. “It has never happened according to my recollection.”
Hong Kong Exchanges and Clearing Ltd (HKEX) and the SFC said in last month’s joint statement that many GEM stocks have highly concentrated shareholdings and a small shareholder base.
Half of the 10 best first-day gainers in 2015 saw their share prices plunge by more than 90 percent from their peak within a month, they said.
The joint statement laid out conditions for GEM listings, including the need to operate in a “fair and orderly manner,” and threatened action against companies and brokers that fail to have “appropriate policies and procedures” in place.
Several GEM placements, including clothing firm My Heart Bodibra Group Ltd (心心芭迪貝伊集團), shelved their listings after the statement.
Wednesday’s IPO was the just the third on GEM since the joint statement, and by far the largest mover.
The other debuts were by Dadi Education Holdings Ltd (大地教育控股), which fell 2.9 percent on its first day, and CBK Holdings Ltd (國茂控股), which rose 18 percent, according to data compiled by Bloomberg.
GME Group’s stock jumped from HK$0.54 to HK$3.47 by the time of the halt, the data show.
That activity and price rise suggested to the regulator “that there may not be an open market in the trading of the shares,” GME said in a statement released after the suspension.
Run-ups, such as GME’s highlight quirks in Hong Kong’s market for small-caps, where wild swings are a regular occurrence, many firms have a tiny portion of their shares available to trade and Chinese firms buy companies to engineer reverse takeovers.
Last year’s top performing IPO globally was Luen Wong Group Holdings Ltd (聯旺集團), another GEM listed civil engineering firm, which rose 8,515 percent from its April last year debut through Dec. 31 last year.
Shortly after its listing, the SFC issued a warning about the stock because 96 percent of its outstanding shares were in the hands of the controlling shareholders and 19 other investors.
Low trading volumes, with 790,000 shares changing hands each day, mean it is vulnerable to extreme moves.
HKEX is planning to overhaul GEM and begin a public consultation on the exchange this year.
Chief executive officer Charles Li (李小加) last month said that such a review could be linked to a proposal to introduce a third exchange that might target professional investors and include new listings standards, including dual-class shares.
He did not give specific timing for the plans.
Geo Securities Ltd (智易東方證券) chief executive officer Francis Lun (藺常念) said it was the first time he knew of a stock being suspended on its first day.
“A question is how can the authorities list if they have questions,” he said. “They should stop it before it gets listed.”
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