Hong Kong | Shareholders lose 99pct as rights offerings go wrong

No one can fault the managers of Eminence Enterprise Ltd. for lacking chutzpah.

After saddling investors with a 99.99 percent loss over the past five years, the Hong Kong-listed property firm is asking shareholders to plow fresh capital into the business for the eighth time in five years. Eminence plans to raise at least HKD478.2 million (USD61.7 million) in a rights offering next month, twice as much as its current market value.

It’s a scenario that often ends badly for Hong Kong investors, who stumped up more than $16 billion for rights offerings by the city’s smaller companies over the past five years, only to watch the median stock drop 36 percent in a rising market. Now, as China gives its citizens greater access to Hong Kong small-caps through a new cross-border exchange link, the city’s repeat rights issuers are coming under increased scrutiny.

Chinese authorities have warned investors to be wary of such companies, even as offerings like the one proposed by Eminence remain legal in the former British colony. Beijing’s concerns highlight the potential for friction as the exchange link blurs the lines between a high-touch regulatory regime in China and the more laissez faire system in Hong Kong.

“Individual investors from the mainland get burned when they blindly apply their small-cap knowledge to Hong Kong stocks,” said Dai Ming, a money manager at Hengsheng Asset Management Co. in Shanghai. “The mainland regulator sees small investors as the market foundation and offers them meticulous parenting. As Hong Kong seeks to boost trading by luring mainland investors, it must step up protection.”

For those who do their homework, Hong Kong offers all the information needed to avoid companies with a history of rights offerings that end poorly for shareholders.

The city operates a disclosure-based regulatory regime instead of trying to weed out bad actors ahead of time, Charles Li, the chief executive officer of Hong Kong Exchanges & Clearing Ltd., wrote in a blog post in September. The bourse’s rules offer protections for small investors, including the need for independent stockholder approval on large rights offerings, an exchange spokeswoman said in response to questions from Bloomberg News. Hong Kong’s Securities & Futures Commission didn’t reply to requests for comment.

For David Webb, a shareholder activist and former board member of Hong Kong’s exchange, the city needs to do more to protect its reputation as a major financial hub.

“We are starting to look like the cowboy exchange to China, while they are starting to look like the grown-up and a better regulated market,” Webb said. MDT/Bloomberg