Date: February 28, 2011
Some 14,000 minority shareholders are now dire straights over their investments in China Hongxing Sports (CHS) and Hongwei Technologies (HW) as both counters have been suspended from trading pursuant to appointment of special auditors due to accounting errors.
SIAS fears the worst for the innocent minority shareholders of CHS and HW who have had this unfortunate chain of events thrown upon them without any signals or warning signs.
As at annual report of 2009, CHS had 12,889 shareholders (as at 19 March 2010). Similarly, as at annual report of 2009, HW had 1,021 shareholders (as at 17 March 2010). That is indeed a significant number of shareholders, involving nearly 13,900 shareholders in total.
Like with the examples of many troubled S-chips shares formerly traded on SGX, the company initially seeks a trading halt, which is subsequently turned into trading suspension, In the case of the other companies, it went through subsequent months of deteriorating business performance, and eventually never returned to trading. We sincerely hope that these two counters will not face the same predicament.
In many of the cases below, there is a subsequent loss of confidence in the management, business model, and financial strength of the company due to the trading suspension of the securities. Subsequently, this may lead to the business turning insolvent, e.g. due to suppliers / customers avoiding to do business with company, and management resignations, cash flow and working capital problems, etc.
So in effect, in part due to the trading suspension of its securities, a host of other problems gets triggered subsequent to the trading suspension.
Some of the examples of such companies and the last traded prices of their shares prior to trading halt and subsequent suspension):
1) New Lake Side @ $0.02,
2) Oriental Century @ $0.155,
3) Celestial @ $0.17,
4) China Sun @ $ 0.055,
5) Fibre Chem @ $0.105,
6) KXD @ $0.01,
7) Sino Env @ $0.135,
8) Zhong Hui @ $0.01,
9) Beauty China @ $0.135,
10) FeroChina @ $0.545,
11) China Milk @ $ 0.24,
12) China Print & Dye @ $ 0.025
As you may empathize, many of the minority shareholders in all of the companies above and including CHS & HW, have invested in good faith.
Whilst we fully accept the fact that stock investments are risky, a trading suspension for an indefinite period of time is indeed very harsh for minority shareholders who get trapped into a stock without any possibility of an exit route due to the forced trading suspension. Every effort must, therefore, be taken by SGX and the Companies to expedite the investigations to allow the necessary inflow of information in the market place to enable the stocks to be traded.
Some affected shareholders have suggested that no matter how serious the problems of the company are, the SGX should allow the company’s shares to be traded on the Exchange. In order to allow undue and unwanted speculation in the securities, the SGX could consider imposing certain restrictions, e.g. as follows:
- The shares to trade on a designation “CASH” basis, i.e. only investors with cash upfront purchases. This would ensure no contra trading, margin, or leveraged trading. It also ensures that there is no credit risk to broking houses and the purchasers of securities are buying with the intention to fully pay for the securities upfront. This will encourage prudency, caution and informed decision making among investors who purchase the securities and are aware of all publicly available facts.
- Sales by shareholders with genuine shareholdings, and short selling not permitted. This shall ensure that only genuine shareholders participate in selling.
- The SGX, if considered necessary may also choose to place a ban on the management /controlling shareholders of the company from dealing in their shareholdings (if it deems that they are in the possession of price sensitive information, and may implement measures from blocking their shares from being sold).
In the view of these shareholders, these measures are relatively easy to implement as seen in cases before whereby SGX (and most broking houses) have imposed these measures before in the past. More measures can be considered and applied if necessary.
SIAS is aware that SGX has allowed designation of shares under certain circumstances only. Stocks like Midcontinental in 1990s, Dayern and Unifiber were designated. With respect to these two counters, there has to be a determination of how much money is lost and the subsequent impact on the stock. As far as SIAS is aware, suspension is allowed to remain by SGX as long as there is insufficient information for investors to trade.
According to the affected shareholders, if there are sufficient safeguards, undue speculation in the CHS & HW can be avoided, and orderly trading can be conducted. Price discovery can take place based on ongoing and future events that shape the fortunes of CHS & HW. New investors who invest in the company’s shares will be duly rewarded (or vice versa) depending on these events, and existing investors can exit the stock, if they so choose to do so. According to them, the approach suggested above can be a template approach for future such companies in such a predicament. It can be a comparable situation to the current arrangement of the Watch list of stocks listed on SGX, whereby the investors are aware of the risk of investing in those stocks.
SIAS can empathise with investor’s deep sense of frustrations and angst when each one of these companies episode happens. These investors deserve better treatment than being trapped into an investment and eventually face delisting. A significant number of shareholders have suffered been trapped in past S chips suspensions.
SIAS calls on all concerned not to allow CHHS and HW to go into a prolonged suspension, as it will further erode whatever confidence investors have in S-chip listings in Singapore. Timing is crucial and swift action is suggested.
Securities Investors Association (Singapore)