Money Matters

Money matters: Listing market shines bright but backdoor must be closed

PUBLISHED : Saturday, 10 October, 2015, 12:35am
UPDATED : Saturday, 10 October, 2015, 12:40am

The economic outlook is gloomy and the market is still in the doldrums. The listing market is, however, shining blindingly bright. Ahsay Backsup, on the GEM board, rocketed 21 times on its first trading day while Madison Wine shot up seven times.


George, a young lawyer, has the answer. He has been looking for a listed shell for his mainland client.

The entrepreneur has been queuing for an A-share listing in China for some time. His dream of a jackpot disappeared without a puff in June when the mainland market crashed and public offerings were suspended.

A backdoor listing via a shell purchase was the only option left. Back then, the quotation George got was HK$250 million for one on the GEM board and HK$500 million for the main board. The entrepreneur hesitated, to his subsequent deep regret.

In less than a month, the price went up by HK$50 million. And, by the way, the buyer has to pay for the seller's expenses as well. George's client went for it because listing status brings him lots of advantages.

There's the trustworthiness needed to bring cheap finance back home, as well as the convenience of being able to move the mainland asset overseas for himself and his friends in the government. He can easily recoup the money if he plays it well in the secondary market.

George's client is not alone. There is no sign of initial public offerings resuming in Shanghai and Shenzhen. Demand for listed shells is ample, and so is its impact on each and every player in the game. First, the shell owner. These used to be professional "shell planters" who would approach the boss of a clean and small business, offer to package the business for listing, share the listing cost, locate a buyer and take 50 per cent of the profit.

Yet, as the shell price went up and the knowhow became no secret, such professionals were ousted. The owners of the small businesses took full control. Why share the 10-times return when you are the one who takes all the legal responsibility?

Unlike the shell planters, selling their listed company is a once-in-a-lifetime chance to get rich for the business owners. They ask a high price.

Next comes the underwriters. For them, an easy story to sell is that a high shell price means a higher price in the secondary market. They are not short of an audience.

Among that audience are investors from China who consider eye-popping price rises for newly listed companies to be the norm. They are used to that in the A-share market.

So the day a listing application is posted on the Hong Kong exchange website, the business owner will get calls from underwriters saying that they can price the share no less than 10 per cent above the sponsor's offer.

The only condition is that they must dominate the underwriting and share allocation. Only by making sure that an overwhelming majority of the shares goes to a handful of investors can a good after-market be orchestrated.

That brings us to the investors. They know three things. One, the so called "free float" is in the hands of only a few. Both Madison Wine and Ahsay Backup have 25 investors holding more than 90 per cent of the shares in public offering.

Two, the rising shell price provides a floor for the share price. Three, the price is likely to go wild when the shell changes hands because the new owner would like to partly recoup the fortune he or she paid for the shell.

The lucky few bet on the IPOs. The man in the street bets on the secondary market. The smaller the company's market capitalisation, the easier it is to manipulate the price and the higher the bet.

It would be naïve to hope that insiders would not play along to reap an early gain.

Are the regulators going to do anything about this? That's a question many of you will ask.

The answer is yes. Ironically, that adds fuel to the manic fire.

As the bourse tightens its vetting of listing applications to save itself from being dubbed a shell factory, the supply of shells goes down, the price goes up, and so on and so forth.

The only way to break the cycle is to make backdoor listing more difficult. Yet, so far the regulators have not demonstrated much determination in that regard.