Business Standard

Spurious capital combustion

Real cost of Hong Kong mega-slump: under $3 bn

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John Foley
When three little-known companies lose $44 billion in market capitalisation in just two days, someone must be nursing serious losses. But maybe not as serious as all that. Even though the collapse of Hanergy Thin Film Power, Goldin Financial and Goldin Properties has left a big hole in their overall market values, real losses are probably no more than $3 billion, according to Breakingviews calculations.

The three stocks rose precipitously for no clear reason, and this week fell just as inexplicably. Hanergy's market capitalisation shrank by $18.8 billion in just a couple of hours before the shares were halted on May 20. The next day, as much as $25.6 billion disappeared from the value of the two Goldins.
 
Those numbers, though, mislead, because not all shareholders are losers. All three companies are controlled by billionaire entrepreneurs who largely hung onto their shares during the rally and the subsequent decline. The value of shares actually bought and sold was much smaller.

Take Hanergy. Since the share price was last at the HK$3.88-per-share level back in February, stock with a total value of $6.4 billion has changed hands, according to calculations based on Eikon data. Those shares are now worth $2.6 billion less than on the day they were bought. The situation at the Goldins is similar - in total, shareholders who bought into the rally lost less than $300 million in the subsequent collapse.

Granted, that number doesn't capture the full picture. Some shareholders got out at the top, while others bought at lower prices. But it's fair to say that in aggregate, the maximum notional losses for investors who joined the rally - during which only a fifth of Hanergy's shares traded - is far lower than the market capitalisation that has been wiped away. At the other companies, less than 5 percent of the shares were traded.

It's significant for two reasons. First, because the wider market can shrug off such movements in thinly traded stocks. Second, because many of China's biggest companies, from lender ICBC to internet giant Alibaba, also have gigantic market capitalisations based on only minority stakes that are actually traded. Investors should not assume that market signals that hold true for a small part apply to the whole.

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First Published: May 24 2015 | 9:21 PM IST

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