The S&P/HKEX GEM Index has plunged 35 per cent this year to the lowest since it was established in November 1999. The 47-member gauge, which covers about 75 per cent of the market capitalisation, has crashed 99 per cent from its peak in January 2001, during the US dotcom meltdown.
To compound the misery, nine in 10 stocks in the GEM universe are trading at less than HK$1 per share, according to Bloomberg data. Average daily turnover was HK$129 million in August, according to stock exchange data, some 60 per cent below the average volume in 2021.
“No one cares about these companies these years” after the dotcom bubble burst, said Dickie Wong, executive director at Kingston Securities in Hong Kong. “The market is just not performing. It’s a failure.”
The dire situation reflects the malaise in the broader market. China’s sluggish economic recovery and concerns about higher-for-longer rates have prompted global funds to flee. More than US$428 billion has been erased from the Hong Kong market this year as the Hang Seng Index ranked as the worst performer among major equity benchmarks.
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Hong Kong Exchanges and Clearing (HKEX), the bourse operator, cited Covid-19 as one of reasons for the market decline. China’s move to open the Beijing Stock Exchange in November 2021 for fledgling mainland Chinese companies has lured listing candidates away from the local market, it added.This has prompted HKEX to consider shaking up the market as its positioning and viability as an alternative to the Main Board came under scrutiny. Several listing reforms, including a new eligibility test, may be imminent as the exchange awaits feedback to a consultation paper published last month.HKEX teams up with Beijing bourse, Ningbo government in bid to lure start-ups
“The turnover on the GEM board is low that this market is easy to manipulate, leading to high volatility,” said Kenny Wen, head of investment strategy at KGI Asia. “Also, when the broder market in Hong Kong is weak, no one would want to touch these small caps.”
The GEM market has 329 listed companies with a total capitalisation of HK$91 billion, or just 0.2 per cent of the city’s market size. It has not had an IPO since Grand Power Logistics raised HK$55.5 million in January 2021, and the stock has since slumped 73 per cent to HK$0.20.
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None surpassed Hatcher Group, a local financial services provider, whose shares have crashed 92 per cent to HK$0.07 since its IPO in 2017. Worldgate Global Logistics and waste water treatment company China Tianyf Holdings both came close with losses of more than 80 per cent.
Vision International topped the table among 148 gainers this year, with a 1,400 per cent surge. Royal Group soared 832 per cent while Unitas Holdings advanced 643 per cent.
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“We engaged with a broad range of stakeholders, including SMEs and their representatives, to hear their views regarding GEM and its development,” Katherine Ng, head of listings, said in a podcast. “Our proposed reforms aim to broaden GEM’s appeal to issuers” while maintaining market confidence and investor protection.
One of the sore points for issuers is the cost of listing and maintaining that status, according to a study by HKEX. Companies listed on GEM in 2019 or later collected only 48 per cent of the funds raised. On average, 52 per cent of the proceeds was spent on fees for IPO sponsors, bankers, lawyers, accountants and other listing expenses.
The impending reform could be helpful in some ways, Wong at Kingston Securities said.
“It will not bring upside to the index,” he said. “Good companies have left for the main board, and those left on the GEM board are mostly inactive, unprofitable ones.”
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