22 August 2019
There could be a 'penny stock heat' as the stock link brings waves of speculative flows. Photo: Bloomberg
There could be a 'penny stock heat' as the stock link brings waves of speculative flows. Photo: Bloomberg

How stock link can stir Hong Kong penny stock frenzy

Shanghai-Hong Kong Stock Connect, which officially starts today, is expected to boost demand for quality blue-chip mainland companies such as Tencent (00700.HK) and China Mobile (00941.HK) which are only available in Hong Kong.

General attention is focused on these big firms but some mainland individual players, particularly big speculators, known as “tuhao gu shen”, are reportedly keener on penny stocks.

This type of punters is only interested in stocks that can potentially reward them 100 percent return or more. Usually, only medium to small caps can be so volatile.

Retired professor and stock commentator Dr. Chan Yan-chong once said most of the players in the mainland stock market are speculators and only a few are investors.

TMT (technology, media and telecom) and new energy sectors are some of their favorite targets.

An insider story reported by the Chinese Securities Journal revealed how these speculators make money from penny stocks.

The report quoted a fund manager from a large Hong Kong fund, known only by the fictitious name Alan.

Alan met an investor named Luk from China in August. At first, Alan thought Luk would be a potential fund investor. However, Luk later said he actually wanted to “cooperate” with the fund.

Luk asked Alan to use US$100 million from the fund to buy a penny stock and run up its share price.

“Let’s do something as the Stock Connect program will be launched soon,” Luk told Alan. “Don’t worry, we will signal you in advance before cashing out, so we can make money together,” he said.

Alan, however, refused the offer.

One of the main reasons, as reported by the Journal, is that most penny stocks are of low quality. Secondly, Hong Kong players know too well how the game will be played: they will probably sell out in the end.

Recent penny stock movement indicates some mainland speculators might have already positioned themselves for the link.

Penny stocks have gone through a rollercoaster ride in the past few months.

According to Wind Information, nearly 30 penny stocks in Hong Kong have surged more than 100 percent in the past quarter, including two hot bets — China LNG Group (00931.HK) and ICube Technology (00139.HK).

China LNG Group was once up 313 percent in just over a month. On Sept. 25, after it climbed to its highest, the stock suddenly plunged more than 71 percent within an hour to near where it started and rebounded vigorously in the last trading hour.

ICube Technology also experienced a similar trend. In the past few months, it quadrupled at some point before collapsing back to its original level.

There could be a “penny stock heat” as the stock link brings waves of speculative flows, the Journal quoted Alan as saying.

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EJ Insight writer

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