Although the overall Hong Kong stock market has been sluggish, there is still no shortage of suspected "magic stocks" that have surged more than 10 times in a short period of time since last year. These companies generally share some common characteristics: recently listed stocks, small market capitalization, and high concentration of shareholding.

Securities Times reporters found through investigations that behind such stocks, there is often a professional trading team manipulating the market. After continuously releasing positive news and artificially pushing up the stock prices for a period of time, they entice retail investors to believe that there is a lot of potential and rush to enter the market. Especially for stocks that need to be included in various indices of the Hong Kong market and the Stock Connect program, once they are included, major shareholders quickly sell off their shares and exit the market to cash out.

Hong Kong stock investment institutions suggest that besides ensuring the quality of newly listed stocks in Hong Kong, for southbound funds, it is also important to understand the tactics used by market manipulators in order to avoid falling into traps and enhance investors' ability to protect themselves.

Professional trading teams manipulating the market

Take the recent sharp decline of Ascendance Group as an example. The company was listed on the Hong Kong Stock Exchange on January 17, 2023, and is a global manufacturer of ultra-high-power graphite electrodes. In August of this year, it was successively included in the Hang Seng Composite Index and the MSCI Hong Kong Small Cap Index. As a result of the positive news, Ascendance Group's stock price reached a record high of 23.1 Hong Kong dollars on August 30, a more than 10.7-fold increase from the low of 1.97 Hong Kong dollars in April, with a total market capitalization exceeding 23 billion Hong Kong dollars. However, on September 3, Ascendance Group's stock price suddenly collapsed, plummeting by over 98%, and the total market capitalization evaporated by over 20 billion Hong Kong dollars.

According to data from the Securities Times Data Center, in the past two years, companies such as MOG Digitech, Kingkey Financial International, and Haichang Holdings, which were included in the Stock Connect program, have experienced sharp declines in their stock prices within one year of inclusion.

As early as August of this year, the Hong Kong Securities and Futures Commission issued a warning that Ascendance Group had a high concentration of shareholding, with Otautahi Capital Inc holding most of Ascendance Group's equity. Furthermore, there are 25 shareholders who also hold equity in Ascendance Group (it is currently unknown if they are acting in concert), together accounting for 85.32% of Ascendance Group's equity at that time.

With the sharp rise in the stock price of Shengneng Group, Otautahi Capital has also reduced its holdings several times. iFind data from Hithink RoyalFlush Information Network shows that from April 30 to June 20, Otautahi Capital reduced its holdings of the company's shares three times, with a total reduction of 0.1565 billion shares and total cash proceeds of approximately 0.601 billion Hong Kong dollars. Otautahi Capital's shareholding ratio decreased from 73.17% to 57.67%.

"The company is obviously 'cornering the market' to be included in the index. After the plunge, trading volume expands, and it can be seen that the stock price rebounds slightly in the two trading days following the crash. This may also be a good time for the market manipulators to offload their shares." A local brokerage trader familiar with the trading rules of the Hong Kong market revealed, "After being named by the Hong Kong Securities and Futures Commission this time, the stock plummeted before being included in the Stock Connect. It can be said to be a failed attempt at market manipulation, but it does not mean that manipulators will not continue to trade back and forth in the future."

It is worth noting that today, the Hang Seng Index company announced that China Xiangtai Food Group will not be included in the relevant index in the quarterly index adjustment to take effect on September 10th due to its high concentration of ownership listed by the Securities and Futures Surveillance Commission.

Securities Times reporters found out through investigation that there are some so-called 'trading teams' in the Hong Kong stock market, specializing in boosting trading volume, manipulating stock prices, aiming to be included in the index and further included in the Stock Connect category. The sources of funds behind this vary: including local Hong Kong family funds, mainland funds, Middle East, Southeast Asia, South America, and other foreign funds. With the continuous sluggish performance of the Hong Kong stock market in recent years, the liquidity of many Hong Kong stocks is poor. Some new stocks or recent IPOs have the need to enter the Stock Connect, thus giving rise to a series of common operating routines.

Raise awareness of risks and be vigilant against becoming the bag holder.

Currently, the liquidity in the Hong Kong stock market is scarce, and the incremental Southbound funds referred to as 'Northbound funds' in the Hong Kong capital markets have been consistently showing a net inflow trend. Wind data shows that as of August 30th, since August, the Southbound funds have accumulated a net inflow of 41.876 billion Hong Kong dollars, with a total net inflow of 461.258 billion Hong Kong dollars this year.

Apart from A+H companies, Hong Kong listed companies need to become constituent stocks of the Hang Seng Composite Index before being included in the Stock Connect list.

A senior investment manager specializing in Hong Kong stock trading in Shenzhen told reporters that small and medium market cap companies in the Hong Kong market also aim to enter the Hang Seng Composite Index and MSCI Hong Kong Small Cap Index to attract passive institutional funds. These indices usually undergo regular adjustments every six months, which also becomes a time window for the mentioned trading teams to operate. They will deploy in advance, such as meeting market cap requirements and trading requirements.

In the Hong Kong stock market, major shareholders generally deposit their shares into brokerage accounts before significant shareholding actions, known as "position storage"; or transfer stocks stored elsewhere to the brokerage that will be used for selling, known as "stock transfer". The most famous stock transfer behaviors include Naspers, the major shareholder of Tencent, which had stock transfers and position storage before reducing its holdings, and Warren Buffett, who, before reducing BYD's holdings, stored his BYD shares in his Citibank Hong Kong account.

Regardless of the size of the company, they can predict shareholding through this operation. According to sources from Hong Kong brokerages, it can be inferred from the trading seats that the peak periods of stock transfers and position storage for China Resources Power were at the end of last year and from June to the present year, indicating that the trading team was preparing in advance during these two periods.

The senior investment manager for the Hong Kong stock trade summarized that during different stages of a stock's rise, it will attract different types of investors: the first wave includes investors who notice abnormal stock price movements and attempt to follow the trend; the second wave often involves attracting passive index funds after inclusion in the index; the third wave involves bulk buyers or shareholders who have pledged their stock rights at high prices; the fourth wave consists of investors who originally intended to reduce holdings at low prices, and, after a sharp drop in high prices, take advantage of the subsequent rebound to actually sell. "For example, after China Resources Power's sharp drop, trading volume significantly increased, and the stock rebounded by 78% and 34% respectively over the following two trading days, which was also a good timing for the market maker to sell." He said that for retail investors participating in the Hong Kong stock market through the Southbound Stock Connect, they should be particularly vigilant against being harvested.

Industry professionals are calling for stronger regulation.

It is worth noting that the Hong Kong regulatory authorities have recently taken action against market disruptions such as "pumping and dumping". Ashley Alder, CEO of the Hong Kong Securities and Futures Commission, has stated that while the stocks involved in the ongoing investigation into "pumping and dumping" cases only represent a small part of the market, these scams may shake investor confidence, thus undermining the liquidity and valuation of small cap sectors.

Hong Hao, chief economist at Smartkarma, stated that stock manipulation by companies with highly concentrated equity has been a long-standing phenomenon in the Hong Kong market, which has persistently escaped restrictions. Only by cracking down on such behavior severely can the regulatory authorities have a certain effect.

Wen Tianna, CEO of Huge Capital International, also suggested: firstly, regulatory authorities should pay extra attention to listed companies with highly concentrated equity and should strengthen penalties for actual violations, bursting the bubble; secondly, the listing quality of new stocks in Hong Kong should be improved, raising the threshold from the source in terms of the sustainability of the company's performance, the health of its business, the volume and activity of its equity, the participation of institutional investors, and the analysis by ratings agencies, amongst other standards.

There are also fund managers with Hong Kong and Chinese backgrounds who have stated that when the market undergoes adjustments, overvalued stock prices are unsustainable, especially after being named by regulatory authorities, investors will definitely shy away from such stocks, leading to situations where shareholders, brokerages, and third parties begin to cut positions, accelerating the sharp decline in stock prices. For the Southbound funds, understanding the methods of market makers can help investors avoid pitfalls and enhance their ability to avoid risks in investment.

Editor/Emily