The sudden collapse of two former high-flying Chinese stocks last week underscore the perils of investing in little-known, fundamentally weak Chinese firms.
Shares of Chinese solar panel firm Hanergy Thin Film Power lost 47 percent of its value last Wednesday, May 20, before trading was halted by the Hong Kong Stock Exchange. As of Friday, Hanergy shares were still under suspension.
The share price of the company dropped from HK$7.37 to HK$3.91 last Wednesday, mostly during the last hour of trading. Hanergy’s precipitous fall wiped almost $19 billion of its market value, and its chairman, Li Hejun, who owned roughly 80 percent of the company’s stock, lost around $15 billion.
No announcement was made by the company or its parent, Beijing-based Hanergy Holding Group Ltd., thus far, further fueling speculation that foul play was involved in Hanergy’s crash. Reuters reported Friday that Hanergy is being investigated by Hong Kong’s securities regulator.
Hanergy shares had been soaring previously. At one point last month, Hanergy was worth more than $45 billion, several times bigger than First Solar Inc., the biggest U.S. solar panel company.
The solar panel manufacturer’s stock increased more than 600 percent the year prior to its stock crash, after being buoyed by the Shanghai-Hong Kong Stock Connect allowed mainland investors to trade Hong Kong-listed shares.
But its collapse happened much faster than the climb.
Li, who was one of China’s wealthiest people, failed to show up to Hanergy’s annual shareholders meeting on Wednesday. The event occurred just as the company’s shares were falling.
Caixin Online, a Beijing-based financial news website, cited people close to the company saying that Hanergy’s parent company used its shares to secure bank loans from Jinzhou Bank, some of which it was unable to repay recently. The parent was forced to dump shares in order to repay the loans.
According to Li, around 62 percent of Hanergy’s sales last year were transacted with the company’s Beijing-based parent, Caixin reported.
Li may have had some inkling of the stock’s downfall. The day before its stock collapsed, Li added to an existing short position he had in Hanergy, according to a Bloomberg report. This means that Li was betting against his own firm and stood to profit from any decline in its share price.
Nonetheless, as the company’s single biggest shareholder, Li’s personal fortune on paper also shrank dramatically.
Hanergy wasn’t the only Hong Kong stock to torpedo last week. Goldin Financial, a firm majority owned by billionaire Pan Sutong, also saw its shares plummet more than 40 percent last Thursday.
It’s not clear whether these stock crashes were interconnected. An agreement signed by Hanergy in February appointed Goldin Financial as its adviser on a business deal. According to regulatory filings from the Hong Kong Stock Exchange, Goldin had been appointed business adviser on several Hanergy deals, although Hanergy also has a host of other financial advisers including well-known firms such as HSBC and Deloitte.
Goldin Financial is a financial services company providing secured financing and loans to small to mid-cap companies.
While much more remains to be uncovered regarding Hanergy and Goldin, last week’s events serve as a reminder that the recent Chinese stock market surge is based more on speculation than economic fundamentals.