The Controversy over the Suspension of 18A Biotech Company Bo Kang Shi Yun in the Hong Kong Stock Market: An “Exhibition of Manipulation” Before an IPO?
Hello, friends! I’m your financial analyst. Today, we’re talking about a company called Bo Kang Shi Yun (02592.HK), which has been in the spotlight recently. In short, just over a year after its listing on the Hong Kong stock market, the company’s shares were suddenly suspended because the Securities and Futures Commission (SFC) of Hong Kong suspects that they engaged in fraudulent activities before the listing to create an illusion of widespread interest from investors.
It’s like going to a newly opened restaurant with a long queue outside. You think the food must be delicious, but when you enter, you find out the queue was actually arranged by the owner’s employees. Now that the regulatory authorities are suspicious, they’ve locked the door to investigate who’s really behind the whole show.
Let me break down this situation in detail from five aspects to reveal the truth behind it.
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1. The Core Incident: Why Did the SFC Suddenly “Lock the Door”?
In plain language: The regulators believe that the “hype” around the company’s IPO was artificial.
On September 10th, the SFC officially stated that they suspected there were attempts to manipulate the stock price or create false demand during Bo Kang Shi Yun’s initial public offering (IPO).
What does this mean? Before a stock goes public, there’s usually a period of roadshows and subscriptions. If a company is very popular, investors will rush to buy its shares, which is called “over-subscription.” However, the SFC believes that the enthusiasm for Bo Kang Shi Yun’s shares might not have reflected real market demand but was rather artificially created by insiders, related parties, or market manipulators.
Why was the suspension imposed? Since the investigation is still ongoing, the SFC decided to suspend trading to prevent anyone from selling shares, manipulating prices, or destroying evidence. Although this is not a common move in the Hong Kong stock market, it shows the authorities’ determination to address such issues. The SFC’s message is clear: no one is allowed to trade this stock until the investigation is complete. This also serves as a reminder to all investors in the Hong Kong market that they have zero tolerance for such manipulative practices during IPOs.
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2. A Review of the IPO: The Oddities in the Numbers
In plain language: The situation doesn’t make sense—there’s supposed to be intense demand, but the numbers don’t add up.
Looking back at Bo Kang Shi Yun’s IPO in July last year, several suspicious details emerged:
1. Cold International Offerings, Hot Public Offerings: Normally, the international offering (for large institutions and funds) is a good indicator of a company’s potential. If these investors are not interested, the public offering should not be very successful. However, Bo Kang Shi Yun had insufficient interest from international investors, while the public offering in Hong Kong was heavily subscribed to.
- Question: If big investors are not buying, why are retail investors so eager to do so? This could suggest that their enthusiasm was orchestrated.
2. Few and Limited基石 Investors:基石 investors are typically well-known institutions that are long-term supporters of the company. Their participation can boost market confidence. But Bo Kang Shi Yun only attracted two基石 investors, Fuzhe Holdings and Rui Kai Group, with a total subscription of about HK$179 million.
- Question: For a company raising HK$612 million, the presence of only two cornerstone investors and their limited contribution indicates a lack of confidence from the mainstream market.
3. Mismatch Between Fundraising Amount and Interest: The total raised was HK$612 million, with a net amount of HK$522 million. This amount is not huge in the 18A (unprofitable biotech) sector of the Hong Kong stock market, but the level of interest seemed excessively high, raising suspicions of artificial manipulation.
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3. Stock Price Performance: From a Discount to a 50% Drop
In plain language: The stock price plummeted on the first day of trading and has since fallen by 88% in a year. Who’s bearing the loss?
Bo Kang Shi Yun’s stock performance is a stark lesson in risk management:
- On the first day of trading: The issue price was HK$10.1, but the closing price was 38.61% below the issue price, meaning early investors lost nearly 40%.
- Subsequent Trend: The stock continued to decline.
- Before the suspension (September 9th): The price had dropped to HK$1.19.
- Percentage Drop: The drop from HK$10.1 to HK$1.19 represents a 88% loss. If you bought at the issue price, you would only have 12% of your original investment left.
- Market Value Shrinkage: The company’s market value has shrunk from several hundred million Hong Kong dollars to just HK$1.1 billion.
Why such a sharp decline? Besides potential fundamental issues (which we’ll discuss later), the main reason is the loss of investor confidence. When the market realizes there might be problems with the IPO process and the company’s fundamentals don’t support the stock price, investors rush to sell. The current price of HK$1.19 likely reflects the market’s pessimistic views on both the company’s compliance risks and its business prospects.
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4. Analysis of the Fundamentals: Heavy Expenses with Products Still in the Laboratory
In plain language: The company is spending a lot of money before even starting to generate revenue, and its core product is still in the testing phase.
Bo Kang Shi Yun is a typical 18A biotech company, which faces high research and development costs, significant risks, long development cycles, and no revenue.
1. Zero Revenue: The company had zero revenue in the first half of this year because its core product is not yet on the market.
2. Huge Losses: It incurred a net loss of $47.947 million (about HK$370 million), compared to a profit in the same period last year.
3. Where’s the Money Going? The company explained that the increased losses were mainly due to:
- Compliance Costs: Higher auditing and regulatory requirements after listing.
- R&D Expenses: The core product is in the third phase of clinical trials, the most expensive stage, which has significantly increased expenses.
The Core Product: CBT-001
- What is it? A multi-kinase inhibitor designed to treat pterygium, a common eye condition.
- Goal: To become the world’s first drug for this condition.
- Risks: Despite its potential, the success rate of the third-phase trials is low, and failure could lead to financial problems. The market for pterygium is also relatively small, raising doubts about whether the company’s valuation is justified.
Key Question: With zero revenue and increasing losses, how much money does the company have left? If the third-phase trials fail or more funding is needed, could the company face delisting or bankruptcy?
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5. The deeper Impacts and Lessons for Investors: The Trust Crisis in the 18A Sector
In plain language: This incident is not just about Bo Kang Shi Yun; it could affect all unprofitable biotech companies listed in the Hong Kong stock market.
1. For Bo Kang Shi Yun: The suspension means zero liquidity for its shares, and investors can’t sell them until the investigation is over. If the company is found to have violated regulations, it could face heavy fines, legal actions, or even delisting. Even if the investigation clears it, its reputation will be damaged, making it very difficult to raise additional funds.
2. For the 18A Sector: This incident undermines investor confidence in the sector, which is already controversial due to its high valuations and lack of profitability. It may lead to stricter regulatory reviews for future IPOs, especially for companies with suspicious subscription patterns or a limited number of cornerstone investors.
3. Lessons for Investors:
- Don’t chase hype: If a company’s IPO attracts a lot of retail investor interest but lacks support from institutional investors, be cautious.
Understand the Fundamentals: For unprofitable biotech companies, assess the stage of their products, their competitors, and how long their cash reserves will last.
Pay Attention to Compliance: Compliance is crucial in the stock market. Any suspicion of fraud or manipulation is a major risk.
In Conclusion: The Bo Kang Shi Yun incident is a clear example of how weak fundamentals combined with compliance issues can lead to significant losses. It shows that market excitement doesn’t always equate to value, and a company’s listing doesn’t guarantee safety. For investors, it’s best to avoid companies with suspicious financial figures or overly promising but poorly supported fundamentals.
We will closely monitor the SFC’s investigation and Bo Kang Shi Yun’s response. Until then, it’s advisable to avoid investing in this stock.