Zhongmin Baihui - real or false demand?

Published May 25, 2011

By R SIVANITHY

CHINA stocks listed here, or S-chips as they are popularly known, have had a rough ride over the past year, what with a well-publicised string of accounting and corporate governance failures that have hit many in the segment. As a result, most S-chips have suffered and their shares wallow deep in penny territory, trading well below 50 cents, and in many cases, below 20 cents.

Yet there is one S-chip which stands out, not just because of its jaw-dropping performance this year - which makes it by far the local stock market's best performer - but also because its stock price appreciation defies logical explanation.

We're referring here to Zhongmin Baihui Retail group, a Fujian-based department store operator which listed on Catalist in January, offering 30 million shares which were all placed out at 30 cents each.

For the year ended Dec 31, 2010, Zhongmin's losses widened from 6 million yuan in 2009 to 9 million yuan, yet incredibly, the company's shares have rocketed more than 500 per cent since listing, yesterday adding a stunning 25 cents or 15 per cent to close at $1.97.

This gravity-defying feat has come without the company making any significant announcements other than lease agreements for department stores and routine matters relating to the company's annual general meeting.

The stock's massive outperformance hasn't gone unnoticed by regulators. After the company's results were released on Feb 28, its shares, which had climbed to 40 cents at that date, continued to soar. This prompted an April 26 query by the Singapore Exchange (SGX), by which time Zhongmin's shares had hit $1, more than triple their offer price.

The company's reply to SGX was that it had no knowledge of any reason for the interest in its shares. Since then, in little under a month, Zhongmin's shares have almost doubled.

So what's going on? According to Bloomberg's financial service there are no analysts that cover Zhongmin, so it's unlikely that the shares have benefited from a sudden burst of interest from the research community.

And it's not as if the market as a whole has performed well since the start of the year - since Zhongmin was listed on Jan 19, the FT ST China index has dropped 10 per cent while the Catalist Index has lost some 11 per cent.

Of course, it is possible that there exists a logical reason for Zhongmin's spectacular outperformance. The company could be a takeover target, for instance. Or parties which have as yet not been identified could be accumulating the stock in advance of a big announcement - although in view of the company's April 26 reply, this latter possibility is admittedly remote.

There is, of course, the less-than-palatable explanation that something funny is going on, especially since the IPO involved a relatively small number of shares that were all placed out. Readers with memories that extend back to 1998 will recall the case of Mid-Continent, whose shares were placed out to only a handful of parties, resulting in its price going ballistic soon after listing. Needless to say, this came to a painful end soon after the authorities intervened.

Then there was the case of the loss-making property and construction counter Leong Hin, whose shares quadrupled after listing some 10 years ago despite the company reporting widening losses. That stock was later found to have been cornered and manipulated and the parties subsequently dealt with.

Let's hope that history isn't repeating itself.