Concentrated Risk in Hong Kong’s Markets: A Warning Unheeded

Hong Kong’s securities regulator has been flagging a worrying trend of concentrated shareholdings among small- and mid-cap stocks. Despite ominous warnings, investors are showing little concern. As of this year, 13 companies have been cited for high concentration levels – an uptick from just 15 cases last year.

The latest batch includes Desun Real Estate Investment Services Group, a Sichuan-based property management firm where the controlling shareholder and 18 other shareholders collectively hold 99.53% of total issued shares. This is not an isolated incident but rather part of a broader problem that has been brewing in Hong Kong’s markets for some time.

Market analysts have long pointed to A+H listings – companies with dual listings on both the Hong Kong exchange and mainland China – as a prime example of concentrated shareholdings. These firms often trade with little liquidity, making them susceptible to sharp price swings even when the overall market is calm. The regulator’s warning serves as a reminder that investors’ attention has been skewed towards high-growth sectors at the expense of traditional industries.

The lack of public float in small- and mid-cap stocks poses a significant risk to the entire market. Concentrated ownership among a few shareholders can trigger drastic price movements, leaving ordinary investors caught off guard. It’s a ticking time bomb waiting to unleash chaos on unsuspecting investors who fail to heed warning signs.

Regulators have been citing numerous cases this year, but investor attention remains fixated on high-growth sectors like biotech and tech companies. As managing director Andrew Lam of audit firm BDO points out, these sectors command a disproportionate amount of market funds and investor attention, leaving old-economy stocks to fend for themselves.

This concentrated shareholding issue is not unique to Hong Kong’s markets. In the aftermath of the global financial crisis, regulators around the world began scrutinizing companies with high levels of insider ownership, citing concerns over governance and market stability. The lessons of history are there to be learned – but will they be heeded in time?

Concentrated shareholdings can lead to a situation where even small trades have the potential to send shockwaves through the market, leaving many ordinary investors out of pocket. Regulators need to take concrete steps to address this issue before it spirals further out of control. This may involve imposing stricter disclosure requirements on companies with high concentration levels or introducing new regulations to promote greater transparency in share ownership.

Whatever the solution, one thing is clear: Hong Kong’s markets are at a crossroads. It’s time for investors and regulators to pay attention. In the coming months, we can expect more scrutiny of these companies as they face increased regulatory pressure to address their concentrated shareholdings.