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How Does The HK Market Work

Views 3192022.11.09

Important events of HKEX-listed companies: private placements, rights issues, dividend

If you watchlist or hold a stock, you may find that the company announces events such as private placements, rights issues, dividend payments, suspensions, and delistings. What do these events refer to? And what are their impacts on the company? In this section, let's dive into special events in the Hong Kong stock market.

1、 Private placements

Private placements in the Hong Kong stock market are the issuance of new shares to specific investors. The process is more straightforward and flexible in the Hong Kong stock market. Private placements usually happen when a listed company needs further financing or when the original shareholders need to reduce their holdings.

There are two ways of private placements in the Hong Kong stock market: issuing new shares and placing existing shares, and you may also see their combinations. Placing existing shares refers to large shareholders selling their holdings to third-party investors, which does not increase the company's outstanding shares. The number of shares will increase when the company raises money by issuing new shares and selling them to specific investors.

In practice, top-up placing is the common way for private placements. Major shareholders sell the shares first, and then the company issues new shares to them. The advantage is that the top-up placing allows the placees to get the shares without any lock-up period.

How do private placements affect share price? It usually depends on the placing price. In most cases, the placing price is discounted based on the current market price. For example, placees can sell the shares immediately after purchasing in top-up placing without a lock-up period, thus earning a spread. Therefore, if there is a significant discount, the company's share price may fall in the short term after the subscription offering announcement.

For example, at noon on December 2, 2020, Xiaomi Group announced a subscription offering of 1 billion shares at HK$23.7 per share, a discount of 9.4%. In the afternoon session, Xiaomi shares instantly fell by more than 10%, reflecting the short-term pressure on the share price from the discounted subscription offering.

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Source: moomoo client.

2、Rights issue

A rights issue is one of the ways to raise funds for HKEX- listed companies. Unlike subscriptions offering, a rights issue is open to all shareholders. It allows shareholders to buy a corresponding number of stocks in proportion to their existing holdings at the subscription price. It is worth noting that in a rights issue, the subscription price is generally discounted, which means the stock price may drop after ex-right. Let's see an example:

Assume that Company A now has outstanding shares of 100 million at HK$1 per share (closing price before the ex-rights date). The company announces a rights issue based on one share for 10 shares at HK$0.1 per share, which means a 90% discount on the new shares, with a capital raising target of HK$100 million. Assuming all shareholders participate in the rights issue, the company's outstanding shares will increase from 100 million to 1.1 billion (100 million existing shares + 1 billion new shares) after the ex-rights date. Theoretically, the share price will be HK$0.182 after ex-rights, which is 82% lower than HK$1 before ex-rights. The calculation formula is as follows:

Ex-Rights Price= (HK$1 x 100 million shares + HK$0.1 x 1 billion shares) / 1.1 billion shares = HK$0.182

So how does a rights issue affect investors? Investors face three choices at this point.

Choice one: Participate in the rights issue. Buy new shares at the subscription price, equivalent to increasing holdings unintentionally.

Choice two: Keep the holdings without participating in the rights issue. The share price may plummet after ex-rights, which may also severely affect the value of their positions.

Choice three: If investors don't participate in the rights issue but do not want to bear the risk of a price plunge after ex-rights, they can sell shares or rights in advance. However, if too many investors want to sell simultaneously, affecting share price, investors may suffer losses.

3、Dividend payment

Private placements and rights issues in the Hong Kong stock market are, to some extent, listed companies raising money from the market, which investors may not favor. While dividend payments, which refer to corporate profits' distribution to shareholders, are more preferred by investors.

Another essential income source in stock investment, besides the difference between the selling and buying price, is dividends. Listed companies can decide to pay dividends or not, and the amount of dividends can be high or low. Dividend payment is related to the company's business conditions and dividend policy.

Dividend frequency is usually paid quarterly, semi-annually, or annually. However, suppose a company makes money through investments or other means outside its primary business. In that case, it can also deliver a dividend at any time, called a special dividend.

Dividend yield equals the annual dividends per share divided by the stock's price per share. Companies that pay dividends year-round and have high dividend yields are attractive to investors.

There are four dates to pay attention to regarding dividend payouts.

Declaration date: This is the day when the company announces the dividend, including the schedule, the amount of dividend, and the related terms.

Ex-dividend date: Those who hold the stock before this date will receive dividends; new buyers will not receive this dividend. For cash dividends, the day's opening price is subtracted from the amount of the dividend per share.

Record date: The company determines the list of shareholders who can receive the dividend on this date, usually two business days after the ex-dividend date.

Payment date: The company pays the dividend on this date.

4、Suspensions

The suspension of trading of companies listed on the HKEX is divided into voluntary and involuntary suspension. During a suspension, trading in the company's shares is halted, and investors must wait for the trading to resume.

Voluntary suspension refers to listed companies applying to the HKEX for suspension of trading mainly due to the announcement of news that may cause share price fluctuations. For example:

1. Information that will affect a company's share price is not disclosed on time, such as a rights issue or subscription offering.

2. A suspension application is made when a company receives a takeover bid and needs to discuss with its major shareholders whether to agree or not. The company also needs to announce the possible takeover agreement that is in discussion to the public.

3. Major transactions, such as a significant change in the company's business or control right, need disclosure. In that case, an announcement or the consent of shareholders is required, so a suspension will also be made.

4. When the company is going to file for bankruptcy, be taken over, be liquidated, or get involved in significant litigation or investigation.

Involuntary suspension of trading occurs when HKEX finds abnormal fluctuations in a company's share price or other irregularities. For example:

1. There are unreasonable and unusual fluctuations in the company's share price and volume, and the HKEX cannot reach the company's contact person to ensure that the company is unaware of the situation. If this occurs, the company will be ordered to suspend trading to protect the interests of investors.

2. Someone intentionally engages in market manipulation activities that result in abnormal price or volume fluctuations of the company's stock.

3. The company fails to maintain the minimum public float required by the HKEX.

4. The company's annual report was not disclosed by the deadline.

5. Delisitng

The delisting of the HKEX has a detailed procedure and arrangements. For companies listed on the Hong Kong Main Board, delisting has three stages, each lasting six months. If the company fails to submit a viable proposal to resume trading during this period, it will be delisted. So delisting is a lengthy process.

Suppose a listed company fails to comply with the Listing Rules, which may cause serious results, or the HKEX considers it has poor business operations or insufficient assets to maintain the continued listing. In that case, the Exchange will publish an announcement and give a deadline for remedy while suspending the company's trading. If the company can't make a remedy within the time limit, then the Exchange may delist it.

What if the stock you hold is delisted? You are likely to suffer large losses. Because most involuntary delisted stocks have serious problems, such as financial fraud and bankruptcy, investors need to choose stocks carefully and avoid those that may be delisted.

That's all for this section on some crucial events of HKEX-listed companies. In the following section, we will introduce some practical investment tips for Hong Kong stocks.

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