Small Companies Yank Hong Kong IPOs After Official Crackdown

(Bloomberg) -- Four planned listings on Hong Kong’s small-company exchange, known for its wild price swings, were shelved this week in the wake of a warning that participants would be more thoroughly scrutinized.

Logistics provider XiangXing International Holding Ltd. said Monday it will postpone its initial public offering on the Growth Enterprise Market after receiving inquiries from regulators. Local lingerie brand My Heart Bodibra Group Ltd., swimming pool contractor Hao Bai International (Cayman) Ltd. and knitwear supplier Speed Apparel Holding Ltd. all announced this week they will let plans for GEM debuts lapse after failing to meeting listing conditions.

Closer scrutiny of GEM, the city’s second exchange, comes after years of extreme price movements, with shares rising by thousands of percent before plunging. Charles Li, chief executive officer of bourse operator Hong Kong Exchanges & Clearing Ltd., said Monday that wrongdoing on GEM damages Hong Kong’s status as a financial center. The Securities and Futures Commission signaled a tougher approach last week when it shocked the market by suspending shares of GME Group Holdings Ltd. on its debut trading day.

“This happening to different companies repeatedly is actually quite rare,” Mike Wong, chief executive officer of the Chamber of Hong Kong Listed Companies, said by phone Tuesday. “But on the positive side, the SFC clarifying what it’s looking for will give companies a better idea whether their listings may face problems.”

Price Swings

One issue concerning GEM stocks is that many have a small portion of their shares available to trade, which leads to low volumes and can exacerbate price swings. Three of the four firms failed to satisfy a rule governing how share placements are distributed prior to trading, according to their filings. The requirement was highlighted by the SFC and HKEX in a joint statement Jan. 20 that reminded GEM participants to ensure a fair and open market.

Tunnel excavating subcontractor GME, which surged 543 percent on its first day on Feb. 22, was suspended by the SFC a few hours after trading started. Extreme moves have long been a feature of GEM stocks. Half of the 10 best first-day gainers in 2015 saw their share prices plunge by more than 90 percent from their peak within a month, the joint statement said.

Listings conditions are now stricter, David Graham, chief regulatory officer and head of the listings division at HKEX, said in an interview Monday. A public consultation on the exchange’s future is planned this year.

Stricter Conditions

“The January statement makes it clear that simply meeting minimum requirements is no longer enough,” Graham said. Among the questions to be asked in the consultation are whether GEM placements should include a public offering, and if the minimum number of placees should be increased above the current requirement of 100, according to Graham.

Representatives for Speed Apparel and Hao Bai International declined to comment beyond their exchange filings. People who answered the phone at the offices of My Heart Bodibra and XiangXing International said nobody was immediately available to comment.

Last year’s top-performing IPO globally was Luen Wong Group Holdings Ltd., another GEM-listed civil engineering firm, which rose 8,515 percent from its April debut through Dec. 31. Shortly after its listing, the SFC issued a warning about the stock because 96 percent of its outstanding shares were in the hands of the controlling shareholders and 19 other investors. 

Low trading volumes, with about 780,000 shares changing hands on an average day, mean Luen Wong is vulnerable to extreme moves. It has fallen 27 percent since the start of this year.

“The SFC is tightening the control on the GEM board because too many GEM companies fell sharply after an initial strong rise,” Alex Wong, a fund manager at Ample Capital Ltd., said by e-mail. “They think the market is unhealthy and that also affected the image of the whole market.”

To contact the reporters on this story: Crystal Tse in Hong Kong at ctse44@bloomberg.net, Benjamin Robertson in Hong Kong at brobertson29@bloomberg.net.

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Ben Scent at bscent@bloomberg.net.