Stock-picking can be hard. While understanding a company is challenging enough, personal conduct of CEOs can sometimes bring unexpectedly large risks.
On Wednesday, the share price of Future Land Development Holdings (01030.HK) plunged 24 percent on a report that its billionaire founder Wang Zhenhua has been detained for an alleged crime.
According to a Shanghai newspaper report, which has since been withdrawn, the arrest was in relation to a suspected child molestation incident.
The news triggered a selloff of Future Land, which lost almost a quarter of its market value within one hour.
The company said in a regulatory filing late Wednesday that its founder is being held by the Putuo branch of the Shanghai Public Security Bureau for “personal reasons”. It did not elaborate.
Future Land has been aggressively expanding its business in recent years. Sales revenue soared 75 percent to 221 billion yuan last year from a year ago. It now ranks the eighth largest Chinese developer in terms of sales.
Future Land’s share price has spiked 11-fold over last three years, outpacing the share price gain of Sunac China Holdings (01918.HK) and China Evergrande Group (03333.HK) during the same period.
But now the incident involving its 57-year-old founder could bring an abrupt stop to the company’s expansion.
Future Land has been relying heavily on borrowing to finance its growth. The company had a debt pile of 291.1 billion yuan by the end of last year. One of the most leveraged developers, the company reported a debt ratio of as much as 177 percent.
It could be difficult for the company to obtain bank financing going forward as lenders would find it hard to trust a company whose owner is caught up in a criminal case.
Future Land could find itself in real crisis if there is liquidity crunch.
Among similar cases in the past, Chen Zhuolin, chairman of real estate developer Agile Property, was arrested in 2012 on suspicion of indecently assaulting a 28-year-old female employee at his luxury home in Happy Valley in Hong Kong.
The full article appeared in the Hong Kong Economic Journal on July 4
Translation by Julie Zhu with additional reporting
[Chinese version 中文版]
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