Money Matters

Opinion: All you need to know about cheater’s stocks: its lures, its victims and the key opinion leaders

PUBLISHED : Wednesday, 10 May, 2017, 12:40am
UPDATED : Wednesday, 10 May, 2017, 12:40am

How to identify and avoid Lao Qian Gu (or a cheater’s stock) in Hong Kong? When a mainland broker like China International Capital Corp issues a report with that title, one knows how bad things have become.

What’s worse is that the report is part of the broker’s educational series of the Hong Kong market. The “cheater’s stock” is now considered a phenomenon.

The typical operation involves what CICC calls the “downward manipulation”. Now imagine you are the driver.

First, you announce some good news to push up the share price of your company. It can be the sale of control to a big name or acquisition of a strategic asset. The who and what depends on the theme of the market.

Say the price has rocketed from 50 HK cents to HK$1. Now, you begin to sell aggressively, pushing the price down to below the book value of your company, 40 HK cents.

That attracts two types of buyers. Those who have brought at HK$1, trying to “reduce their cost”; and new investors finding the stock “cheap”.

You keep selling to get the price down. The lower, the better, to recoup the stake sold.

The company will either sell some new shares to your friends dressed up as independent parties at a deep discount; or do a high ratio rights issue.

Say the price is now 20 HK cents and a 90 per cent discount placement is done, you retrieve your stake at 20 HK cents. That is a gain of more than 90 per cent.

The effect is similar in the case of a five-for-one rights issue because most shareholders are too terrified by then. They won’t subscribe to the new shares and you will take on them on cheaply.

The price dives to two HK cents or below. Now you consolidate your shares at a 20-to-1 ratio and the trading price becomes 40 HK cents.

This not only keeps them above the delisting hurdle but also makes them look genuine. A penny stock is no good for a second round of downward manipulation.

Yes, the trick will be replayed over and over. If share consolidation is an indicator, the 68 “cheater suspects” listed by CICC (which Money Matters cannot name here, of course) have done it between two to nine times since 2000.

How can the regulators allow this to happen? Other than the falsified claim of share placement to independent parties, there is nothing illegal. The claim is not easy to challenge.

How can people fall into the same trap again and again? The answer is they don’t know they are dealing with the same company.

A facelift is easy. A new name can be easily justified by a change in strategy. Revise only the Chinese name to save the legal hassle.

Or, you can find a friend to play controlling shareholder. In fact, if one studies the overlapping in directors, it is not hard to divide the cheater suspects into less than 10 groups. Moving your subordinates around is not difficult.

Of course, you will have to bring in unsuspecting new victims who are in ample supply in mainland China. The internet makes it so easy.

First, you make a voluntary announcement of good news. It can be some investors committing to inject billions of yuan into your company; or a letter of intent has been signed with a big name.

Second, you hire an online platform to do a favourable write up of your company, saying that you are trading at a deep discount and hinting that the investment is from a major state enterprise.

At least three platforms popular among mainland investors are offering that service and they guarantee that the article will appear on dozens of major financial websites or chat rooms on instructed days.

That costs less than 100,000 yuan. If you are ready to triple that, you will have access to a key opinion leader with millions of followers.

If you want a hit, hire an adviser on search engine optimisation to make sure that whoever types in the name of your company will see a description of you trading at a dirt cheap price before the search key is even clicked.

If you are more generous than that, run a stock-tip magazine or website and getting some key opinion leaders will be a good long-term investment.

Given the depth and breadth of the web, it is not hard to net some innocent investors.

Does this sound all too far-fetched? Try searching for the names of some stocks that have hit the lists of top performers or top turnover in the past two weeks. And they are not even on CICC’s list.