July 2, 2015 4:52 am
Hong Kong share suspensions irk investors
Jennifer Hughes in Hong Kong
When Silchester first bought into the South China Morning Post, the fund manager was investing in a group once touted as the most profitable newspaper in the world. Seventeen years later, the media landscape has changed dramatically but Silchester’s investment has not — partly because SCMP Group shares have been frozen for two-plus years by Hong Kong rules that allow stocks to languish for years without being traded. The issue is a perennial source of frustration for investors, particularly given the city’s status as Asia’s leading stock market and the gateway to China. “We find the whole saga astounding — we would not expect such an affair in any developed stock market,” says Stephen Butt, chairman and chief executive of Silchester International Investors, which holds 14 per cent of SCMP Group. He adds: “Our clients, who include many leading international foundations, endowments and charities, are suffering. Why should their interests be abused in this way and to whose benefit?”
About $12bn of equity capital is trapped in companies that have not traded in at least three months — a number that will more than double if Hanergy Thin Film, now frozen for six weeks following its spectacular fall from grace, does not resume trading soon.Hong Kong is not alone in allowing shares to be suspended — or demanding it if circumstances require — but what sets it apart is the length of time shareholders can be stuck in a deep freeze.
The SCMP Group was suspended in February 2013 after its free float dropped below the 25 per cent minimum required by the exchange. Since then the company has operated normally but its minority shareholders have been unable to trade the shares.
Kerry Media, the majority shareholder, is part of the empire run by Malaysian billionaire Robert Kuok, better known for his Shangri-La hotels and his control of Wilmar, the Singapore commodities trader.
Silchester says the SCMP Group board has made one effort to buy the outstanding shares while the Kong Kong Exchange has done no more than threaten delisting.
The HKEx says it does not comment on individual situations.
The SCMP Group says its board has frequently discussed possible resolutions and it is working closely with regulators and shareholders.
SCMP Group, however, is just one of a 36-strong list of long-suspended companies, the oldest of which has not traded since late 2009.
Others include Birmingham International, owners of Birmingham City football club. Suspended since December, this week its receivers have given a mysterious group called Trillion Trophy Asia exclusivity for two years to attempt a takeover. The group’s former head, hairdresser-turned-tycoon Carson Yeung, was jailed last year for money laundering.
The market value of the trapped capital is likely to grow by a third next week if Tianhe Chemical does not begin trading in the meantime. The group suspended its shares in late March after it said it needed time to give its auditors more information.
Suspension leaves would-be sellers reliant on finding a buyer privately as Hong Kong has no equivalent to the US over-the-counter “pink sheets” market.
“The lack of an exit is a major cause of frustration for investors — they ask why can’t the regulator provide one,” says Michael Cheng, research director of the Asian Corporate Governance Association. “There has to be a point where there’s sufficient caveat emptor to let some trading happen.”
This week Guggenheim Investments said it had sold its holdings in Hanergy Thin Film from the three exchange traded funds where they were held. It declined to say at what price, although it will have been a sharp discount to their last quoted HK$3.91 close.
HTF, a solar equipment supplier, requested a trading halt in May, pending an announcement still to be made, after its shares plunged almost 50 per cent in half an hour.
The suspension habit stems from the Hong Kong watchdog’s reading of legislation that mandates it to ensure a “fair, informed and orderly” market. In practice this means the Securities and Futures Commission is reluctant to let trading resume before cases are resolved.
More than three-quarters of the suspended list consists of companies that are in financial difficulties or have irregularities such as being under investigation.
Officials often refer to the need also to protect Hong Kong’s mom-and-pop investors — retail makes up about 20 per cent of the market, compared with 2 per cent in New York — by ensuring they have time to access new information.
Others, however, point out that the city’s small traders know exactly what they are doing. Hong Kong has a mobile penetration rate of 233 per cent and smartphones come preinstalled with trading apps.
Mr Cheng suggested companies still under a cloud could trade with perhaps an extra number — Hong Kong stocks have number codes, not letters — to provide a health warning to investors.
Meanwhile Silchester says it will continue to seek resolution on its SCMP Group stake while trying to explain to its investors what is going on.
“If you are a foundation, you are meant to be giving your money to charity, not to tycoons,” says Mr Butt.