The world's best IPO this year was held in April in Hong Kong. Since then, the return on investment has exceeded 6000%, but it has nothing to do with the business of the companies.
Luen Wong Group Holdings Ltd Shares. rose to 1438% on the first trading day after placement, and currently prices are higher by 6715%.
Company, which is engaged in laying roads and digging sewers, earned only last year $1,1 million in sales in $41 million, but now it's worth $2,9 billion.
This unexpected discrepancy is common in Hong Kong., where many companies have very little free float, at the same time, engineering companies are in great demand amid the construction boom in China, and they are used in the reverse absorption scheme. Luen Wong Group Papers, seems to be, are so expensive precisely because of the combination of these three factors. But analysts are calling for caution.
Study, conducted by the Securities and Futures Commission, established, what in 2013-2015 yy. the market value of companies increased by more than 1000% within six months, in spite of that 39 of them fix losses.
This growth of small companies poses a problem for Hong Kong Exchanges & Clearing Ltd. Selected studies have shown, that extreme fluctuations are associated with a high concentration of shareholders, however, this is typical for small companies, mainly in the construction sector.
Amazing, but regulators claim, that nothing can be done, although the discussion of the problem is underway. Everything that happens fully complies with the rules of the exchange. У Luen Wong, for example, the two founders own 75% companies, what is the maximum available level. At the same time, in April, the regulator issued a special warning., insofar as 96% the outstanding shares were in the hands of controlling shareholders and 19 other investors. Because of this, the market has become extremely “Thin”: on 1 million of traded shares every day 312 mln publicly placed securities. And according to the rules of the Hong Kong Stock Exchange, these shares cannot be used for short sales., since this requires a capitalization of at least 3 HK $ billion ($387 million), and the total trading turnover is at least 60% from the capitalization of the company.
Among the investors of Luen Wong, the public China Environmental Energy Investment Ltd., which acquired 1,43% behind 124,5 HK $ million in July. The shares of this company for the last 12 months fell by 68%. The second public shareholder of Luen Wong is China New Economy Fund Ltd., holding the package in 0,65% since June. China New Economy Fund shares also fell by 66% for this period. At the same time, both of these companies are actively investing in securities of other small organizations with a minimum trading volume..
But Luen Wong is only the first swallow. Boom in China's engineering and construction sector has already listed six similar companies this year, and not less 20 pending IPO approval. The number of placements last year was 21, and the attracted amount has reached $2,65 billion.
The ratings of such companies are extremely high., but their time passes very quickly. Next year, probably, we will see the strongest fall, as construction costs are reduced, declining demand for pipeline projects due to a decrease in the total number of large infrastructure projects.
Ching Lee Holdings Ltd., which went public in March, could be one of the first examples of the future of such small companies. As of 13 July, its shares rose by 2000% with the current IPO, and in September they collapsed on 91%. The reason for the fall is unknown, no one explains it, but papers have not grown since then.
Analysts note, that the attractiveness of the shares of such companies lies in the possibility of their use by companies in mainland China, who would otherwise never gain access to the Hong Kong exchange. They buy shares, reabsorb, that is, the shell is important, not the company itself. Typically, the cost of such a shell starts from 500 million Hong Kong dollars.
Recently, the authorities of China and Hong Kong are trying to tighten the rules, since through the purchase of such casings companies can get to the market, seeking to evade scrutiny of their assets in the initial listing.
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