Less than six trading days before the quarterly check of the Hang Seng Stock Connect comes to a close, 15-times bull LongFor Group's 'building' has collapsed.

Tongcaijing app noticed that LongFor Group's stock price opened high and then plummeted on the morning of June 20th, suffering a severe beating in the market with a drop of up to 67.7% at one point, falling to HKD35 from the peak of HKD108.2 earlier that day. By the morning close, the company's stock price was reported at HKD36.2, a decline of 65.52%.

The China Securities Regulatory Commission issued a warning about high concentration of equity.

On June 19th, the Hong Kong Securities and Futures Commission announced that it recently conducted an investigation into the distribution of equity of LongFor Group. The investigation results showed that, as of June 3rd, nine shareholders held a total of 48.739 million shares of the company, equivalent to 24.11% of the company's issued share capital. These shares combined with the 150 million shares held by the chairman and CEO's family account for 74.2% of the company's issued share capital, or 98.31% of the issued share capital. Thus, the remaining 3.421 million shares, representing 1.69% of the issued share capital, are held by other shareholders.

The Hong Kong Securities and Futures Commission pointed out that due to the high concentration of equity among a small number of shareholders, even a small amount of stock trading could cause significant fluctuations in the company's stock price. Shareholders and interested investors are advised to exercise caution when buying and selling stocks in the company.

It is worth noting that since its listing on January 9th, LongFor Group's stock price has continued to soar. On June 19th, LongFor Group's stock price closed at HKD105, up more than 16 times from the issue price of HKD5.95, with a market capitalization that once exceeded HKD21.2 billion. This not only makes LongFor Group the company with the highest increase in the Hong Kong stock market this year, but also the only stock with a price increase of more than ten times, demonstrating its outstanding performance.

As its stock price rose, LongFor Group was included in the MSCI China All Shares Small Cap Index on May 31, 2024. LongFor Group previously announced that the Board of Directors believes that the inclusion of the company in the MSCI China All Shares Small Cap Index represents the capital market's recognition of the company's value and performance, and is expected to enhance the company's visibility and increase the liquidity of its stock trading, thus realizing the company's investment value.

LongFor Group's acceptance in the capital market is widely expected, and investors expect the company to be included in the Hang Seng Stock Connect component in September. However, the China Securities Regulatory Commission's warning about the high concentration of equity in LongFor Group may well disrupt its expected short-term inclusion in Hang Seng Stock Connect. In this context, if LongFor Group wants to inject more liquidity into the market, one of the available options is undoubtedly to cash out at a high valuation.

According to the final issue price and placement notice released by LongFor Group on January 8th, the controlling shareholder of the company needed to lock in 150 million shares at the time of listing, accounting for 74.2% of the total share capital. The last day of the lock-up period is July 8th, 2024 (within the first six months), which is less than 10 trading days away from today.

The huge amount of unlocked shares, coupled with the Hong Kong Securities and Futures Commission's warning about high concentration of equity, poses a significant risk. Who will dare to stand under the wall of LongFor Group, a big winner in the stock market?

The growth ceiling of LongFor Group's main business is low.

From a fundamental perspective, LongFor Group's stock price has already shown signs of serious over-valuation, ascending to HKD108.2. As a stock valued at around HKD100, the company's P/E and P/B ratios both exceed 100 times, but its past performance has not matched with its high valuation growth.

LongFor Group provides pledged vehicle monitoring services and car dealer management and operation services in China. According to data from Zhushizixun, LongFor Group is the largest provider of pledged vehicle monitoring services in China's automobile circulation industry, with a 47.9% market share in terms of revenue in the pledged vehicle monitoring service market in 2022. The top five participants have a market share of 90.3%.

In terms of performance, in 2023, LongFor Group achieved a revenue of CNY642 million, an increase of 17.1% YoY. Among them, the revenue proportion of the pledged vehicle monitoring service business was 89.6%; during the same period, the company's equity shareholders' net income was CNY102 million, an increase of 6.72% YoY.

Compared with its past performance, LongFor Group's revenue scale has continued to expand since 2020, but its profit performance has been relatively unstable, with the company's net income in 2023 still below its 2020 level.

From a vertical comparison of the company's past performance, the competitive landscape of the pledged vehicle monitoring service market in China is clear but the growth ceiling is not high. According to data from Zhushizixun, the market size of the pledged vehicle monitoring service market in China's automobile dealers grew from CNY873 million in 2018 to CNY1.054 billion in 2022, with a compound annual growth rate of about 4.8%, and is expected to reach CNY1.452 billion in 2027, with a compound annual growth rate of 6.6% from 2022 to 2027.

The scale of the car dealers/auto retailers' operation management service market in China is even smaller. According to the Zhishi Consulting report, the market size in 2022 was only 48 million yuan, and the market size is expected to reach 90 million yuan in 2027, with a compound annual growth rate of 13.5% from 2022 to 2027.

Therefore, the warning by Hong Kong Securities and Futures Commission on the high concentration of equity risks in Changjiu Co. has alerted investors who are still in a "dream". When the starting gun is fired, there's no turning back.