http://www.wsj.com/articles/hong-kong-has-goldin-touch-heard-on-the-street-1426842391

Hong Kong Has a Goldin Touch

Goldin Financial’s meteoric gains raise questions over what is fueling the rally

Goldin Financial’s fivefold share-price increase in the past year has made its owner, Pan Sutong, one of the richest men in Hong Kong.PHOTO: BLOOMBERG NEWS

JACKY WONG

Updated March 20, 2015 6:45 a.m. ET

Hong Kong’s stock market has become a factory for overnight billionaires. It is probably not the sort of wealth that will stand the test of time. The most prominent case is Hanergy Thin Film Power, a solar company whose meteoric rise and curious business model has made its founder, Li Hejun, the richest man in China, by Forbes’s count. Hanergy, under suspicion in local media that someone is manipulating the stock, issued a statement Thursday to explain the rally, attributing it to a number of factors, including bullish brokerage research reports.

Another company is nipping at Hanergy’s heels. Goldin Financial, controlled by Hong Kong businessman Pan Sutong, has risen fivefold in share price in the past year. Mr. Pan is now the fourth-richest person in Hong Kong, according to Forbes. Goldin is larger than the combined value ofBank of East Asia, Hong Kong’s biggest independent local bank, and Cathay Pacific,the city’s flagship airline. Mr. Pan’s other holdings include a company that is building a 117-story skyscraper, the tallest in northern China, ringed by the country’s largest polo complex.

Goldin Financial provides short-term corporate financing known as factoring. It also owns wineries in France and California, wine storage in China and invests in property. For this, it trades at 116 times 2014 earnings. Nearly all of its profits last year came from fair-value gains on a commercial building in the Kowloon Bay area of Hong Kong that is under construction. Strip that out, and its price-to-earnings ratio is more than 1,000.The company trades at a book value multiple of 15. Most Hong Kong-listed real-estate and financial companies trade for between one and two times. The market seems to think the company’s assets that aren’t currently generating much profit will do so in the future.

Goldin’s factoring business involves buying companies’ accounts receivables in exchange for cash, discounted for the risks involved in recovering what is owed. It is capital intensive, and the company raised nearly four billion Hong Kong dollars (US$515.6 million) in a rights issue in 2012, helping expand its factoring business to mainland China.

Yet Goldin does most of its factoring with an electronics firm owned by Mr. Pan. For the 12 months ended June 2014, Goldin has acquired nearly HK$5 billion of receivables that way. It says the debts have a 120-day duration and most of the risk is borne by financial intermediaries. It earns 8% to 10% annualized returns.

The receivables Goldin acquired are highly concentrated. As of June, around 84% of them were due from two debtors. The identity of the debtors wasn’t disclosed, but the company said it was confident of the risks because of Mr. Pan’s familiarity with the players in the electronics industry.

The question is what’s driving the stock. Hong Kong’s market regulator, the Securities and Futures Commission, warns investors to exercise “extreme caution” with the stock, noting that only 20 shareholders, including Mr. Pan who owns a 70% stake, hold nearly 99% of the company. The company says there is little it can do about the high concentration of shareholders, since the SFC, which has investigative powers, doesn’t disclose the identity of all the shareholders.

With such a small club of owners, outsiders hoping to strike gold in Goldin should probably dig elsewhere.