Tuesday, October 22, 2013

The designated trio saga -- Asiasons, Blumont, LionGold

On 21st October 2013, SGX lifted the curb on the 3 designated stocks (Asiasons, Blumont and LionGold) after the trio were placed under designated since 7th October 2013.  That move has more or less shattered the Singapore stock market in particular those penny stocks.  The stock prices of the trio plunged like nobody business after the curb.  In the process news of people being bankrupted by the crash has surfaced.  Whether that is true or not, it is time to re-look at the issue seriously. 

Blumont hit a low of $0.11 on 18th October 2013 from a peak of $2.54 on 1st October 2013, Asiasons hit a low of $0.09 on 9th October 2013 from a peak of $2.91 on 19th September 2013 and LionGold low of $0.135 on 18th October 2013 from a peak of $1.755 on 27th August 2013.  Finger pointing of what caused the collapse could be found on Straits Times Forum without doubt but the collapse should be fault on a combination of factors and not just one.

1. Question was raised whether SGX was too slow to react after the trio stock prices rocket from penny status to having a market cap of even more than blue chips like NOL and SMRT within a space of 1 year.  SGX's replied was it did queried the company on the rising stock prices couple of times but each time the reply from the companies were those standard template type of either unaware or could be due to positive news being released from the company regarding acquisitions.  From fundamental perspective, the sky high stock prices of the trio is way way over-run their respective fundamental despite all the acquisitions and that is when SGX decided to step in on 7th October to place the trio as designated. 

The possibility of SGX being slow to response is there and could not run away with it.  Though SGX did the job in query the company about the irrational of the stock prices in the past but if the stock prices were cornered by syndicate what can the company do ?  SGX as a regulator has the authority to look at the profile of each of the individual who transacted in the stock to conduct any relevant investigation if it suspects the stock is being cornered and why SGX has to take such a long time after the stock prices ran up so much then it started to act to place the 3 under designation ?

2. The trio has been on a trading curb list on one of Singapore largest local brokering house even before SGX designated them and one of the management of the trio company cited that as the possible reason for the plunge in prices.  How true was that claim ? It is not something new that brokering house implemented trading curb on certain stocks when they deemed they are too risky for their clients.  This has happened even in the 2007 before the US sub-prime crisis.  The good of the trading curb is that should the price collapse, the loss is manageable while the bad was based past records, normally after the trading curb was implemented, the stock prices will start to soften down and this trading curb was not normally publicly announced and hence for those who was not aware of that would have bought in at the wrong price and for those who has first hand information on that would have gain by planting short position on it.

Brokering house's trading curb should not be totally blame for the collapse and neither can they be escaped as one of the reason for the collapse.  What's important is should such a curb being implemented it should be industry wise, reported to the regulator and apply to all the brokering house and should be publicly announced.  The good is such a move can help to protect those innocent retail investors and at the same time should the stock being cornered by syndicate they would have no way to gain from it further.  The downside of course will be affecting the revenue by the brokering houses and maybe even SGX.

3. The contra trading system was another reason being blamed for the collapse of the trio.  Currently, only SGX and KLSE have contra trading system as compared to global bourses.  What this contra system does is to allow a buyer to buy a stock without upfront paying up and will be given a period of T+3 (or even T+5 as most of the brokering houses are offering) to settle for the payment.  Should the buyer sell off within the T+3 days, the buyer need no pay up fully for the purchase and instead will get/pay the offset (if there is a gain or loss).  Such a system will normally allow one to leverage or even highly leverage (imagine if one does not have a capital of $100k but is given a trading limit of few hundred thousand).  The leverage and contra basis allows one to make profit easier (imagine buying 1,000 share of $10 stock and 10,000 shares of $10 stock and without any doubt, the 10,000 shares will be easier to make a profit than the 1,000 share when price moves up) and also allows one to lose money easier and faster.  Of course there is rebut that the contra system is not to be blamed for the trio collapse and it is of no surprise the rebut is made from remisier/broker.  This is because if Singapore stock market does away with the contra system, it will affect the liquidity and hence the revenue of the exchange, brokering houses and the brokers.  Is it really true the contra system is not at total fault ?

For those in the stock market long enough would have known that in the 90s there was a high profile case in which a popular female actress being bankrupted by contra and leverage trading in the stock market.  Take another scenario on how easily a syndicate can use the contra and leverage system to manipulate and control the stock price.  The syndicate can employ a dozen of people with each of them have highly leverage trading limit and each day doing "A buy sell to B, B buy sell to C, C buy sell to D, D buy sell back to A" to create the high volume to give a false impression that the stock is in high demand.  Each of these individual as they can operate using the contra system and with high trading limit practically can either mob up the price or throw down the price of the stock to eventually control the movement of the price.  At the end of the day, they need not pay the full sum of their purchase as the contra system allow them just paying the difference and they could easily use the contra gain to offset the contra loss.  They did not do a wash sale in stock market (ie buy and sell no change of ownership) and hence did not violate the regulation and create an offence.  So is the contra system really not at fault in jacking up and collapsing in the price ?  Another issue which the remisier/broker rebut was contra system brings in liquidity.  Unfortunately, this is totally not true.  HSI, S&P500, Nasdaq, Nikkei, etc all these bourses do not have contra system do they lack of liquidity ? Whether there is liquidity is depended on the quality of the companies being listed.  Those companies listed in SGX today are not of quality stocks ? Singtel, the biggest telco in Southeast Asia, Kep Corp and SembMar the number 1 and number 2 rig builders, DBS, the largest lender in Southeast Asia, Capitaland, the largest developer in Southeast Asia, SIA, the globally prestige airliner, HPH Trust, HK billionaire Li Ka Shing's business trust, and the list goes on.  All these are not quality stocks that could attract international funds ?  The contra system cannot be escape the responsibility of causing the price of the trio to collapse.

4. This point probably no one mentioned that could contribute to the collapse of the price of the trio but in reality they played a part.  If one noticed when the stock prices of the trio rocketed up for past 1 year majority of the analysts did not sound the alarm that the fundamental does not warrant such a sky high stock prices.  Should the analysts did their duty and responsible to issue a warning or report, perhaps the collapse could be avoided.  Perhaps it is time for the regulator to re-look at the role and responsibility of the licensed analysts.

5.  Companies' directors pledging their shares to bank would be also another possible cause.  The stocks of the trio held by directors were being forced sold by banks as the stock prices collapse and with that large quantity needed to sell off, this further piled up the selling pressure and accelerate the fall.  Companies' directors pledging their share to banks is not something new and in fact past few years, couple of the S-chips were caught that the pledging shares being forced sold, collapsing the stock prices and some of these S-chips eventually went into problem, being suspended by the exchange.  While there is no stopping these directors from pledging their shares to banks but should it not make it mandatory for such an action to be announced publicly so that investors know what's going on.  Perhaps it is time the regulator need to enforce such a rule to safe guard investors' interest.

All the possible factors that contributing to the collapse of the stock prices of the trio more or less were listed.  It is not right to specifically pinpoint one of it as the main cause but the combination of all those that eventually led to the plunge cannot be totally ignored.  It is time the regulator to really seriously look at this saga and improve on any weakness in the listing and trading system so that it not only able to safe guard the interest of investors but also established itself as one of the top finance market in the world.

For retail investors, for those who were victim of this saga, learn from the mistake and for those who managed to escape being burnt, also learn from the mistake.  What a retail investor can do is to only invest or trading in stock in which you know what's the company business is.  How the company generate its revenue, the more simple the business model to understand the lower risk it is.  For those complex and sophisticated business model, a very sexy growth story might be painted on it but it always come with high risk.

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