WE take a look at several factors that could have contributed to the Oct 4 sell-off:
Short-selling
Our tabulation of Singapore Exchange (SGX) data shows that from Aug 19 to Oct 4, investors short-sold about S$192 million, S$107 million and S$30 million in LionGold, Blumont and Asiasons shares respectively. The shorting intensified in the week preceding the collapseon Oct 4 for Blumont, where nearly S$16 million shares were short-sold on Oct 2, based on SGX reports.
But we do not believe that the short-selling of shares was the main cause of the collapse in share prices. After all, despite the short-selling, these stocks were well supported at their all-time highs before Oct 4.
Assuming the short-sellers held on to their positions from mid-August and closed them post-suspension, the 80% to 90% drop in share prices of Asiasons, Blumont and LionGold would have netted them a tidy profit.
Were substantial shareholders involved in short-selling?
Changes in holdings of major shareholders must be declared to SGX. Oddly, there were no major shareholding movements on Oct 4 as one might expect. This is where it gets interesting.
The Monetary Authority of Singapore’s Securities and Futures Act allows for substantial shareholders who are involved in securities lending transactions to be exempt from disclosing a change in shareholdings. This is provided that the shareholder retains all beneficial interests, is able to exercise any of his voting rights as a shareholder of those shares and can call back the shares as agreed in the lending arrangement.
A substantial shareholder looking to sell his stake under the radar without the market knowing could simply enter into a securities lending arrangement with another party, who could then short-sell the shares.
At the end of the arrangement, the short-seller simply buys back the stock and returns it to the substantial shareholder. Could substantial shareholders be behind the build-up in short-selling preceding the price collapse?
One has to remember that short-sellers must be able to borrow the shares from someone before short-selling. The best source for a pool of shares would be substantial shareholders.
Forced selling of rights
SGX filings on Oct 7 showed that Blumont executive chairman Neo Kim Hock had a total of 7.445 million “nil-paid” rights forced sold by an unnamed bank on Oct 2 and 3. This was in relation to Blumont’s one-for-two rights issue announced on July 29.
These rights commenced trading on Sept 26 and were due to cease trading on Oct 4, after which there would be no more value attached to the rights. It appears thatNeo had pledged these rights to a bank, which subsequently sold them off before they expired.
What ledNeo to pledge his rights in the first place, knowing that they would be worthless on Oct 4? Does it indicate that substantial shareholders were highly leveraged and had pledged most of, if not all, their shares to banks and brokerages?
Selling by an insider
On Oct 2, Ng Su Ling, an independent director of both Blumont and LionGold, sold one million Blumont shares for S$2.38 apiece. Two days later, she sold 335,333 LionGold shares for $1.17 apiece.Insider selling is always a red flag to others.
Market wised up to the risk
Charts 1, 2 and 3 show that the stock prices continued to surge even as the number of outstanding shares of the three companies increased substantially as they issued more and more “paper”.
In theory, a bigger number of shares will exert downward pressure on share prices. It is possible that some shareholders and their financiers wised up to the fact that the share price surge could not continue to defy gravity with all those shares circulating and decided to bail out.
Shares dumped on Oct 4
Based on Bloomberg data, there was an abnormal amount of shares traded on that day. In the one hour before trading was suspended, Blumont and LionGold experienced volumes that were respectively 66% and 50% of their daily average for the preceding 20 trading days.
Asiasons had 42% of its daily average volume transacted. It appears that investors in these three companies were aggressively unloading their holdings in a market where buyers were few and far between.
Asiasons’ share price slumped to S$1.04 from its Oct 3 closing of S$2.70 whereas Blumont and LionGold experienced falls of 56% and 42% respectively. Between 9.54am and 9.57am, all three counters were suspended by SGX.
The domino effect
Putting them all together, we theorise that the collapse in share prices was due to a sequence of events that resulted in all three stocks falling off the cliff.
Firstly, the build-up in short-selling activity preceding the collapse not only capped the share price but also absorbed most of the market’s buying interest in the three companies, especially after the huge gains seen in September.
Secondly, savvy investors might have noticed this and decided to either cash out or stay out of the game. It dawned on the market that the fundamentals of the three companies could not back up the astronomical gains. Were they also reminded of Olam International’s collapse from Muddy Waters’ short-selling last year?
Either way, the knock-out blow came when the stocks were aggressively sold down on Oct 4. Buyers were spooked and investors witnessing the value of their holdings rapidly diminish jumped on the bandwagon and rushed for the exits. Shareholders who had pledged their holdings to brokerage houses probably witnessed margin calls and forced liquidation. This triggered an avalanche of selling and liquidity simply dried up.
And the game was over when the referee (SGX) blew the whistle by suspending and then designating the three stocks.
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