In a similar incident, shares of Chinese online lender Chong Sing Holdings Fintech Group slumped in September after Bonitas Research questioned its financial reporting. Both companies targeted by the short sellers have denied the allegations.

“There is an increasing tendency for short sellers to target new economy companies because their business is not as tangible,” said Kevin Leung, executive director of investment strategy at Haitong International Securities. “How prepared are investors for such attacks? I’d say not so much.”

These companies, though poised for potentially high growth, have yet to demonstrate a track record of profitable operation, while their underlying technology has yet to BE successfully commercialised, factors that can make it difficult for investors to discern whether the short-sellers are putting forward a legitimate case, analysts say.

GenScript’s shares plummeted as much as 47 per cent and were quoted 27 per cent lower when trading was halted at 11.32am, on the first trading day following the release of the report by Flaming Research. The shares resumed trading on Friday, September 28.

They have since recovered 21 per cent to close at HK$14.38 on Thursday, below the level of HK$16.2 before the report was released.

GenScript may have been singled out because of the complexity and novelty of its cancer therapy technology, as well as the fact that it is still in the early stage of development, according to Zhang Jialin, a research analyst of China health care at ICBC International.

Its subsidiary, Nanjing Legend, presented upbeat results related to a gene therapy to treat a type of blood cancer in June last year. The promising development pipeline was a factor in propelling a more than sevenfold rise in the stock within a year. It partnered with US pharmaceutical giant Johnson & Johnson to develop the chimeric antigen receptor cell therapy, also known as CAR-T, which was the first from China to receive approval to be tested in the US, and could be launched as soon as 2020.

“The whole biotech sector is still in its infancy in Hong Kong so the market doesn’t understand it as well as traditional industries,” said Zhang.

Under reforms that took effect in April, biotechnology companies that have yet to show a profit are eligible to list on the Hong Kong stock exchange.

The valuation of the three biotech companies listed in Hong Kong is largely based on their pipeline drug products, so any update of their clinical data is closely watched, according to Zhang.

“Hong Kong’s investment community currently lacks special knowledge in biotech and medical fields,” Jason Siu, an analyst at Guosen Securities, wrote in a recent note.

In addition, it can be hard to verify data relating to the operations of new economy companies, such as clinical data or the size and scope of an online presence for internet companies, said Peter Pak, executive director at BOCI Research.

“The operations of new economy companies are not as transparent, which makes them more vulnerable to attacks,” said Pak.

Meanwhile, one senior director from GenScript urged investors to try and educate themselves about the business.

“The Hong Kong market lacks sufficient understanding of the biotech industry and is prone to panic when short-selling institutions make up rumours,” said Frank Zhang, chairman and chief executive of GenScript.

GensScript said it would pursue legal action against Flaming Research for publishing statements “which are misleading, biased, selective, inaccurate and incomplete”.

Flaming Research could not be reached for comment.

James Huang, manager partner at Kleiner Perkins Caufield & Byers China, a venture capital fund that led a US$15 million investment in GenScript in 2009, said retail investors could be hurt if more biotech firms are targeted.

“If Hong Kong wants to establish its status as a biotech listing destination, the securities exchange needs to carefully watch firms like Flaming Research,” said Huang.