The Hong Kong stock market is presenting a clear "two-tier" phenomenon.

On one hand, there is a hot rush to go to Hong Kong for IPO, and on the other hand, there is a trend of privatization, delisting, and delisting away from Hong Kong. The mechanism behind this reflects the significant acceleration of the Hong Kong stock market's "de-cluttering" movement.

According to the data from the Intelligent Finance app, a total of 26 new stocks have been listed on the Hong Kong stock market from 2024 to June 14th. With respect to the rise and fall of new stocks, about 17 rose in the dark market, 1 remained unchanged, and 8 declined; on the first day, 18 rose, 1 remained unchanged and 7 declined. Among them, Jingwei TianDi, Hing Kee Holdings Group, Yisou Technology all surged over 100%, Yongsheng Mat rose over 84%, Silkroad Log rose 40%, and these stocks performed well in the dark market.

In contrast, according to the announcement of Hong Kong Stock Exchange, 21 listed companies have "bid farewell" to Hong Kong stocks since this year, and the mechanism of market selection and elimination has been functioning more effectively. Among them, 13 companies were forcibly delisted, 7 chose to go private and be delisted, and 1 chose to proactively withdraw from the list. Specifically, since this year, 13 Hong Kong listed companies have lost their listing status, including Titan Invo Tech, Seamless Green, Dongzheng AFC, Polyard Petro, Bao Shen Hldgs, Silkroad Log, Bay Area Gold, Wah Ha Realty.

It is worth noting that there are also some opportunities to be found in this wave of "out with the old, in with the new" action in the Hong Kong stock market.

For example, some stocks that surged on the first day due to the adoption of some "special play" in the new stock issuance process during the surge. Such as the release of the beggar's edition, the trick of the callback and other new stock issuance methods. For example, the beggar's edition issuance of Maifengshi and the callback tricks of EDA and Yisou Technology all led to first-day price spikes.

In fact, on the road to delisting, due to different delisting strategies, such as proactive privatization and voluntary delisting, there are different opportunities for development potential. For example, common characteristics of delisted companies include small market capitalization, poor performance, difficult to produce annual reports, and long-term trading suspension. Proactive privatization may be due to severe undervaluation of stock prices, major shareholders or internal restructuring for future return to the stock market, which presents some opportunistic opportunities.

"Returning as a hero" after private delisting?

According to the data from the Intelligent Finance app, seven companies have successfully completed private delisting from 2024 to the present, including Bank of Jinzhou, Haitong Int'l, Weiqiao Textile, Intellicentrics, Pine Care Gp, Yongsheng Mat, and Sinosoft Tech. In addition, A8 New Media (00800), Vinda Int'l(03331), Trad Chi Med(00570), Luoxin Pharmaceuticals Group Stock(06600), L'occitane and many other relevant stocks are currently in the process of advancing privatization.

In general, there are three main reasons for Hong Kong listed companies to propose privatization, as follows:

On the one hand, the stock price is depressed, even below the net asset value, and the long-term low trading volume makes the company lose the function of refinancing. On the other hand, the stock price fails to reflect the actual value of the company, and the major shareholders of the company believe that the current stock price of the company is severely undervalued. Finally, a major shareholder or internal restructuring is carried out in order to return to the stock market in the future.

In this regard, the path of private delisting of Hong Kong stocks usually includes comprehensive tender offer acquisition and merger. For example, Weiqiao Textile was absorbed and merged by Shandong Weiqiao Textile Technology, and officially delisted after close of play; Bank of Jinzhou was delisted after being fully tendered for acquisition by Liaoning Financial Holding Group; while Vinda Int'l was promoted, having previously stated that it has accepted the valid offer of Asia Pacific Resources Group to acquire about 90.98% of issued shares.

After private delisting, the Intelligent Finance app found that there are mainly "two ways" to go.

One is that some companies that choose private delisting will no longer be listed; the other is that some companies that choose private delisting will choose to return to the stock market, mainly returning to the A-share market. For example, Luoxin Pharmaceuticals Group Stock, which was previously delisted from the Hong Kong stock market, later returned to the A-share market through the shell of Dongyin shares. Wah Ha Realty, China Resources Microelectronics have also returned to A-share market after private delisting from Hong Kong stock market and listed on the Star Market.

Currently, the companies that have successfully completed privatization and delisting this year have not announced their follow-up actions, but the benefits they bring are still quite significant.

For instance, CIMC Vehicles, due to the undervaluation of the company in the Hong Kong stock market, its voluntary delisting will undoubtedly clear some obstacles for its new journey in the A-share market and its A-share valuation will no longer be affected by the "A+H" linkage. According to a previous announcement, the company plans to repurchase all the H-shares already issued by CIMC Vehicles and voluntarily delist from the Hong Kong Stock Exchange for HKD 7.5 per H share, with a total investment of about HKD 1.1 billion, and its A-share listing status will remain unchanged.

It's worth noting that regardless of the reason for privatization and delisting, after the privatization plan is announced, the relevant stocks generally show a significant increase in valuation. This is an excellent opportunity to "dig for treasures".

Take A8 New Media (00800), which recently announced its privatization and delisting plan, as an example. One day after the announcement of the plan, on June 13th, the stock soared to a high of 144.53% to HKD 0.335 at one point, reaching a new high since the end of December 2022. At the close of the market, the stock price rose sharply by 140.88% to HKD 0.33. The primary reason for the sharp rise was the 163% premium offered for the privatization.

From the above performances, the privatization of listed companies is undoubtedly a good thing. But there is a prerequisite that outperforming stocks should be completely distinguished from those forced to delist in order to bring positive effects.

Specifically, if the major shareholder is willing to spend money to buy back all the shares held by retail investors, it means that he believes that the company's performance is excellent, and that the current stock price is seriously undervalued. This method is itself a recognition of the company. In addition, the major shareholder's action means that he will have a relatively complete control of the company, and other shareholders will not be able to share the company's future earnings. At the same time, after privatization, the company no longer needs to disclose its relevant information regularly, achieving the effect of "prospering in silence".

Of course, not all companies that propose privatization will succeed.

According to incomplete statistics, there are probably 10 stocks that failed to privatize in the past 10 years. For those companies that failed to privatize, their stock prices will face a return to the "original form". For example, the privatization plan of Golden Throat (06896) in August 2021 failed, and the stock price rose from 1.5 to 2.5 yuan, then fell back to 1.5.

However, judging from the performances of the successful privatized companies mentioned above, there are still many opportunities to find treasures. For example, it's better to pay more attention to voluntary delisted and privatized stocks with good fundamentals such as excellent performance, high dividend yield, low P/B ratio, and strong background of shareholders. Once you make the right bet, you can make a lot of premium space. So why not keep an eye on these stocks, maybe you can find one or two "treasure stocks".

If you're delisted, don't get caught in the trap.

After exploring the stock opportunities of "voluntary delisting", let's take a look at the potential of stocks that are "delisted voluntarily".

According to the previous announcement of the Hong Kong Stock Exchange, from 2024 to June 11, a total of 13 Hong Kong-listed companies, including Dongzheng AFC, Chong Kin GP, Universal Star, Wah Ha Realty, Macrolink Capital, Dasheng Agr Fin, Titan Invo Tech, Silkroad Log, Bay Area Gold, Bao Shen Hldgs, China Green, and Seamless Green, have been delisted.

Moreover, according to the announcement on June 13th, Imperial Pac has been canceled its listing status, making it about 14 companies that have canceled the listing status so far this year. According to the announcement, Imperial Pac's listing status was canceled starting from June 17, with the stock price of only HKD 0.064, and the 22-year journey of listing on the Hong Kong stock exchange is coming to an end.

Combined with the introduction of the "Fast Delisting" mechanism by the Hong Kong Stock Exchange in 2018, according to Rule 6.01A of the Listing Rules of the Main Board of the Hong Kong Stock Exchange and Rule 9.14A of the GEM Listing Rules of the Hong Kong Stock Exchange, the Hong Kong Stock Exchange has the right to cancel the listing status of Main Board listed companies that have been suspended from trading for more than 18 months and GEM listed companies that have been suspended from trading for more than 12 months.

Most of the reasons for the suspension of Hong Kong listed companies are due to major inappropriate behavior and the failure to publish financial performance or insider information, the inability of listed companies to maintain business operations, financial reports with unrepresentative or negative opinions, insufficient public ownership, or being instructed to suspend trading by the Hong Kong Securities and Futures Commission.

In summary, this type of delisted enterprise generally has the characteristics of small market value, poor performance, difficult annual report production, long-term suspension of trading, etc.

For example, Imperial Pac. On June 13th, the Hong Kong Stock Exchange announced that as of 9:00 am on June 17th, Imperial Pac's listing status will be canceled according to Rule 6.01A(1) of the Listing Rules. The reason why it has been suspended for so long is that the company is facing a crisis of liquidation. According to a previous announcement, on April 5, 2024, in the case of HCCW408/2023, the High Court issued an order to liquidate the company, and the liquidator of the company became the temporary liquidator of the company because of his position.

It is reported that the company was established in November 2001 and developed a comprehensive resort on Saipan Island in the North Mariana Islands in the Pacific through its subsidiaries. It has a casino, luxury hotels, restaurants, retail stores, and leisure facilities. Imperial Pac's Saipan Casino is said to have been one of the most successful casinos in history. Later, with the company's controlling shareholder Ji Xiaobo being identified as the "mafia leader", the company's revenue dropped sharply, and it quickly fell into losses, with long-term poor performance.

Alternatively, Dongzheng AFC. According to previous public disclosures, HKEX determined that Dongzheng AFC failed to fulfill the resumption guidelines before the resumption deadline of April 6, 2024, and decided to cancel its listed status of shares according to Listing Rules 6.01A. The letter stated that unless Dongzheng AFC applies for a review of the delisting decision under the rights under Chapter 2B of the Listing Rules, the company's listed status will be officially canceled at 9:00 am on April 29, 2024 (date of delisting).

Before this, Dongzheng AFC had been suspended in October 2022. Regarding the reason for the suspension, the company stated that the public shareholding ratio was still below 15%, which did not meet the requirement in the Listing Rules of 'no less than 25% of public shareholding'.

The company was jointly established by ZhengtongAuto and Dongfeng Automobile Group, and was listed on the Hong Kong Stock Exchange in April 2019 as the first licensed automotive financial company to be listed in Hong Kong. However, in 2020, Dongzheng AFC was severely punished by the Shanghai Banking and Insurance Regulatory Bureau due to serious violations of prudential operation rules in some of its dealer loan business. At the same time, the Shanghai Banking and Insurance Regulatory Bureau also revoked Dongzheng AFC's administrative licenses and suspended the company's dealer car loan business and ordered the company's shareholders to withdraw their equity. Since then, Dongzheng AFC has been struggling.

From this, it can be seen that unlike companies that voluntarily delisted or privatized, companies that are delisted are generally due to poor performance, long-term suspension, and other reasons indicating that their future prospects are not good. Therefore, there are few opportunities for value investing in these companies.

The reason why the opportunities for value investing in companies that are privatized and delisted differ from those that are delisted for poor performance lies in the fact that many of these companies have good performance and their value is underestimated by the market. In addition, from another perspective, the high premium privatization actions taken by most major shareholders have greatly increased the company's value, sent bullish signals to the market, and brought about a positive feedback loop.