Penny Dreadful in Hong Kong? Think penny stocks

As rumours swirled that the end of the road is near, more than a dozen penny stocks lost more than 50 per cent in value on Tuesday

PUBLISHED : Tuesday, 27 June, 2017, 6:33pm
UPDATED : Tuesday, 27 June, 2017, 11:02pm

Are penny stocks reaching the end of the road?

Shares of more than a dozen Hong Kong-listed companies – most of them penny stocks – plunged more than 50 per cent on Tuesday morning, on expectations that the Hong Kong securities regulator could act to address the longstanding stigma.

Penny stocks, whose prices are under 50 HK cents per piece, have small market capitalisation and are easy targets for price rigging and manipulation. Moreover, their listings draw investor interest as value vehicles for back-door listings, on top of their core business.

By the time trading closed on Tuesday, prices of 13 penny stocks were at least halved.

China Jicheng Holdings, an umbrella manufacturer, was the biggest loser, plunging 94.3 per cent to close at 1.6 HK cents.

GreaterChina Professional Services, an investment company engaged in asset appraisal, was the second-most severely beaten, ending down 93.4 per cent at 6.4 HK cents.

Luen Wong Group Holdings, which was once considered a penny stock, plummeted 89.4 per cent to HK$1.06.

Market rumours have been circulating since Tuesday morning that the Hong Kong Stock Exchanges and Clearing Limited (HKEX) is considering revoking the listed status of penny stocks, and introducing new rules to block back-door listings.

Penny stock has been a disturbing factor, pointed out Kevin Leung, director of global investment strategy at Haitong International Securities in Hong Kong.

“There has been market chatters that the regulators are looking to close the back-door listing loopholes,” he said.

“But what happened today seems more like chain effects caused by the failure of one or two certain investors, who has big holdings in several penny stocks. When margin call was triggered, automatic sell off started.”

The chatter also included Black Marble Securities having been revoked of its business licence, which triggered a sell-off of the stocks it overweighted.

There has been market chatters that the regulators are looking to close the back-door listing loopholes
Kevin Leung, Haitong International Securities

Black Marble Securities has been the biggest shareholder of Tuesday’s biggest losers. It holds 9.7 per cent stake of China Jicheng, and 10.4 per cent stake in GCPS as of Monday, HKEX data showed.

The brokerage is not listed as a target for license revoking on the website of the Securities and Futures Commission (SFC).

But Black Marble’s parent, the listed Lerado Financial said in a filing on June 7 that trading in the shares of the company had been suspended on the order of the SFC since 6 June, without giving details.

Lerado was not available for comment on Tuesday.

A HKEX spokesperson said the bourse was “aware of market rumours that HKEX had proposed earlier that it would force “zombie stocks” which were traded below HK$1 and inactive in terms of transactions to delist”.

“We would like to clarify that the above rumour is completely unfounded,” he said.

He added the bourse had established rules and practises to deal with back-door listing, and would continue to monitor market activities and take appropriate risk management and regulatory actions when necessary, including working with the statutory regulator.

A spokesperson with SFC declined to confirm whether it has been or will be pursing investigations into specific individuals or companies operating in this market segment.