Will more mainland tycoons face Hanergy-style crisis?

May 22, 2015 18:38
Hanergy Thin Film Power, controlled by China’s richest man Li Hejun, has seen its shares nearly halve in Hong Kong trading on May 20. Photo: baidu.com

Hanergy Thin Film Power Group (00566.HK), controlled by China’s richest man Li Hejun, has seen its shares plunge nearly 50 percent Wednesday and trade being suspended.

Goldin Properties (00283.HK) and Goldin Financial (00530.HK), both controlled by another billionaire Pan Sutong, saw their stocks tumble about 40 percent on Thursday.

Why are the once-high-flying stocks controlled by Chinese billionaires crashing from record high levels one after the other?

Pan Sutong had been ranked the fourth richest man in Asia before the stock crash. His wealth has expanded much faster than that of Alibaba's founder Jack Ma, mainly due to a multi-fold jump in share price so far this year.

China Business News has done an investigative report on Hanergy before, shedding light on the construction progress of the company's various projects, financing situation and the whereabouts of massive capital. The report has put a big question mark over Li’s claim that the company’s hydro-power assets are cash cows.

Investors had been willing to put aside suspicion over a company’s business model and balance sheet as long as there was whopping gains in the share price. However, truth will come to light sooner or later, and that’s when the magic disappears.

Both Hanergy and the two Goldin firms have high concentration of shareholding by big shareholders, as well as suspicious connected transactions, which are not unusual among Chinese private enterprises.

These stocks are good targets for short-sellers. However, people might be very cautious in doing the same.

Many problematic firms either have spectacular earnings that go beyond reasonable expectation, or have exorbitantly high valuation. Goldin Financial is a typical example.

The company stock hit a record HK$34.2 on May 15, equivalent to P/B ratio of nearly 25 times, compared with average P/B ratio of 1.5 times the Hang Seng index constituent stocks.

Also, Bloomberg data shows that the firm's profit has topped at US$181 million for the second half of last year, while its revenue only reached US$34 million in the period. That does not make any sense. The company gave an explanation, saying that over 99 percent of the profit came from re-valuation of a commercial building still under construction.

Investors are concerned whether other mainland company stocks will follow suit of Hanergy and the Goldin twins.

Li Hejun and Pan Sutong had personal wealth of US$33 billion and US$28 billion respectively until Tuesday, according to Forbes.

They lost US$14 billion and US$11 billion respectively after the stock price crash on Thursday.

In New Zealand, there are only two people with personal wealth above US$1 billion, and their combined wealth was at US$9.9 billion. In another small economy, Belgium, there are only three people with personal wealth of above US$1 billion, and their combined wealth reached US$8.2 billion.

Thus, the wealth lost by Li and Pan during this week's stock crash exceeded the total wealth held by billionaires in New Zealand and Belgium.

That's some food for thought!

This article appeared in the Hong Kong Economic Journal on May 22.

Translation by Julie Zhu

[Chinese version中文版]

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Columnist at the Hong Kong Economic Journal