Hong Kong has a high and increasing number of poorly performing penny stocks that could threaten the market's reputation and role as an international financial centre if left unchecked, a Securities and Futures Commission study has concluded. The survey was released yesterday as Hong Kong Exchanges and Clearing unveiled radical proposals to de-list poor performers and eradicate penny stocks in an effort to raise market quality. News that the SFC has been examining the issue of market quality since last year will fuel speculation that pressure from the commission led to the HKEx de-listing and share-consolidation proposals. HKEx, the frontline regulator for listed companies, has faced fierce criticism over deteriorating standards, including from a former SFC director of enforcement. An SFC spokesman yesterday declined to say whether it had been the driving force behind the changes. 'We believe an effective de-listing mechanism may facilitate an orderly exit of companies which market forces have shown to be no longer suitable for listing,' he said. The survey said Hong Kong had far more penny stocks than rival overseas markets and the performance of such companies was bad and deteriorating. At the end of May, 107 companies, or 13.7 per cent of the 781 listed companies, traded at less than 10 HK cents - defined as penny stocks. A total of 72.9 per cent of main-board stocks were trading below 20 US cents, compared with 56.7 per cent in Singapore, 53.9 per cent in Australia, 20 per cent in London and Taiwan, less than 1 per cent in Tokyo and South Korea, and none in New York or China. Of the 107 companies trading at less than 10 HK cents, 80 per cent were loss-making, compared with 12.4 per cent of the 298 companies trading at more than HK$1. The survey said: 'Many small-cap companies listed in the last few years recorded lower earnings, lower share prices, and lower market capitalisation in the years following their initial public offering.' Of the 268 companies listed between 1996 and last year, 53 per cent had a lower market capitalisation, 66 per cent had a lower share price and 69 per cent had lower earnings last year compared with the time they listed. 'As new listings in the Hong Kong stock markets are often of small and less established companies, it is becoming more important for us to have an effective de-listing mechanism to facilitate an orderly exit of companies that turn out to be poor performing. Accumulating a large number of poorly performing penny stocks could erode the reputation of our market,' the report said. Smaller firms with lower market capitalisations are more likely to be loss-makers: 72 of 95 companies with a market cap of less than HK$100 million were loss-making, whereas only two of 71 companies with a market cap of more than HK$5 billion reported losses. The survey was produced by a group of executives in the SFC's corporate finance division and research department and was published in the SFC's quarterly bulletin. The authors said it reflected their personal views and not those of the SFC but the timing of the release - an hour before HKEx outlined its proposals - underlined the SFC's strong support for firmer de-listing procedures. 'Some argued that de-listing would deny existing shareholders the opportunity to exit. But one should consider the interests of the investing public as a whole,' the report said. Laurence Li, SFC director of corporate finance and one of the report's authors, said markets that did not have a minimum price requirement - including Hong Kong, Australia and Singapore - had more low-priced stocks. 'The prevalence of stocks with low nominal prices is inconsistent with the international markets,' Mr Li said. Graphic: stoc26gbz