HKEx’s New Measures to Knock Down Zombie Stocks
The term, referring to companies having long ceased activities in the stock market, is not unique in Hong Kong. Some of them may have been suspended by the Securities and Futures Commission (SFC), while some voluntarily suspend themselves without the hope of resumption. The Hong Kong Stock Exchange (HKEx) recently introduced new guidelines to setting a time frame for delisting these inactive stocks: 18 months of consecutive suspension for companies listed on the Main Board, or 12 months for ones on the GEM, taking effect form 1st August.
A number of reasons can be insinuated from listed companies entering long-suspension in Hong Kong: conflicts on equity, and disclosures of business frauds by the market (mostly probably from short sellers). The storm that swept private enterprises back in 2011 was initiated by none but the investigative research firm Muddy Waters, and since then auditors have paid greater attention during their inspections.
One famous example would be Boshiwa International (01698), which announced in March 2012 that Deloitte ceased to be the auditor of the group due to a lack relevant information. On the same day the accounting company released a statement, suspecting the truthfulness of Boshiwa’s company records.
Reports showcase that more than 60 companies have been suspending for over three months, among which 32 have ceased stock market activities for more than 1,000 days. Some from this list of long-suspenders are not so unfamiliar, for they have been widely discussed in newspapers, for example Hanergy Thin Film Power Group (Hanergy TFP, 00566). However, after three years of suspension, a statement released on 4th April said that the group was now working on fulfilling the two requirements from the SFC, a convincing signal to the market that the company is not far from resumption.
Other firms may not be so hopeful to avoid delisting, since they are usually experiencing significant problems in business operations and asset managements, which put them into the difficult waters of long-suspension. Hanergy TFP was one of such, whose business was said to rely excessively on transactions with its mother company.
The thin film firm is a lucky one, for Hanergy group at large is considered a large corporation in Mainland China and it is not quite challenging to develop new business models for the subsidiary. This is not the case for companies long trapped in suspension: the fact that it is being suspended has already drastically damaged its reputation and in turn set obstacles in looking for funds for new investments or acquisitions.
This is why many long-suspenders have to await a white knight with “recognized social status” to save them. Assuming there is an aider, though, a considerable amount of time is needed for locating new projects. On this ground, whether the period of 18 months is sufficient for these jeopardized companies to save themselves does not come to a consensus: as a matter of fact, the Chamber of Hong Kong Listed Companies suggested a period of 36 months.
Image source: Hong Kong Stock Exchange