An Unfounded Conspiracy Theory on HKD
And why shorting Chinese stocks could be a very dangerous move right now.
July 29, 2022
We all just witnessed one of the most insane IPO debuts in recent memory, with AMTD Digital (HKD) going on a tear from pricing at $7.80 on July 14th, 2022, debuting at $13.00 the following day, and proceeding to hit a high of $485 on July 29th, 2022. That’s a 3,630% gain in basically two weeks: enough to turn $1,000 into $37k had you played the debut at $13 and held all the way to the top.
For those of us who regularly trade these low-float, typically Chinese IPOs, we’re used to extreme volatility: IPOs that price at $4-5 typically debut anywhere from $15-40, and we’ve seen a handful of them run up over $50 within a day or two of the debut. I’ve referred to them as “Stealth IPOs”, and have made a small fortune trading them. I even managed to identify HKD as a Stealth IPO, and bought in on the debut at $13 – though I took quick profits at $15 and only regret not having held into the $20s (there’s no way I stay in this one past $50 even in my wildest dreams). But looking back at the setup, perhaps it should have been more obvious that this one was poised for a massive runup, given the premise that I believe is behind these seemingly irrational runners.
To put things into perspective, this is not the first Chinese company’s IPO to rip from single digit IPO pricing to triple digits in a short time frame: WNW was the first one to really catch my attention, but looking backwards from there, I’ve found instances of similar setups going back to 2017. WNW snuck onto the IPO calendar in December 2020 and debuted at $7… three days later it peaked at $160.68 and currently trades at $0.68. I had just started trading IPOs, and was miffed at how I had missed this one, and even more confused when I began researching it and found out it was simply a Chinese traditional medicine vendor. Things didn’t make sense.
A few more passed, and I started setting up alerts to catch all IPO pricing events, and began picking up on some consistent elements of these deals: primarily the underwriters, and the fact that they’d debut with little to no press releases: uncommon for IPOs where drumming up investor interest in presumably a desirable objective. Even more uncommon was the nature of these businesses: insurance firms (TIRX), music labels (CPOP), even an actual house cleaning company (EJH) – once I got the hang of it, I nailed a few of them for inumaginable gains on companies I had never heard of knowing their stocks were worth $1 at best. This was not investing, this was trading on the back of something I only had a suspision about what it was about.
The best hypothesis I could come up with, was that this was simply money laundering – as I explained in The Stealth IPO article (link above) – simply put, wealthy Chinese who want to get their money out of China open accounts outside of China, assign IPO shares to those accounts, and then buy back those shares at ridiculous prices from their Chinese accounts to effectively transfer money out of China. Once they’ve reached their goals, they sell off the rest, likely shorting along the way, and we see moves like TIRX: going from a high of $97.92 on April 12, 2021 to a low of $12.15 the same day on no news catalyst whatsoever. It currently trades at $0.71. On the same day HKD touched $485, another recent Stealth IPO – VRAX, made it’s all time high at $29.00 after pricing at $5.00 a week earlier, only to close the day at $5.40 – an 81% drop.
Chinese Social and Political Unrest
If you’re paying attention to the political and social events in China, you’re probably already aware of the crackdown by the PRC on wealthy Chinese entrepreneurs: Jack Ma (CEO of Alibaba), was promptly smacked down after proclaiming that the Chinese government should be more progressive in its economic policies – the result was a forced withdrawl of Ant Financial’s IPO, and just today Ma announced he ceded control of Ant Group entirely.
Didi Global, after shunning Chinese exchanges against the wishes of the governemnt, debuted it’s IPO on the NYSE on June 30, 2021, only to be hit with a severe crackdown on it’s mobile app by the PRC, presumably for violating privacy laws, and was subsequently de-listed from the NYSE and is now planning to attempt a primary listing on the Hong Kong Exchange.
On to of all that, there is social turmoil brewing in response to a scandal over frozen Chinese bank account, unreset over COVID lockdowns, and ongoing disparity between the rich and poor. Enough to make any wealthy Chinese eager to expatriate whatever fortune they’ve amassed over the previous decade to non-Chinese controled institutions.
Oh, and one more thing – there may be an imminent war to reclaim Taiwan.
Back to the Stock Market
So what does all that have to do with AMTD Digital (HKD) stock?
Most of the Stealth IPOs we’ve seen come to market have contained a float of around 5M shares. HKD’s IPO brought 16M shares to issue – yet only 15k shares traded on the opening debut trade. Artificially constraining the float is a great way to force the price up – the higher the price goes, the easier it is to launder money through the market. The fewer outside buyers jump into trades on the target stock, the more efficient the process becomes. Who’s buying HKD over $100 except for insiders intentionally ‘losing’ money in the process of handing over funds from one of their accounts to the other (and presumably shorts getting squeezed along the way)? No one is, it’s all an inside game at that point.
So Where is HKD headed?
Well, if history repeats itself, this stock with eventually trade well below its $7.80 IPO price. So why not just short this thing and wait out whatever dip is just around the corner?
Well, for one, the insiders who are controlling this trade can hold out for as long as they like, and even drive the price up even further. Additionally, the borrow rate for shorting HKD is presumably quite high, and here’s where we could see the ultimate trap.
With the possibiity of a war between China and Taiwan brewing, and tensions heating up over the Taiwan straight, taking a short position on any Chinese stock could be a nightmare for investors – take a look at what’s happened with Russian stocks, such as CIAN, which have been halted since the Russian invasion of Ukraine on February 24, 2022. If you shorted it up over $9 on February 16, 2022 at $9.17, you made a great call: it closed at $3.31 on February 24 … if you didn’t close your position on February 24, then you are still stuck in the trade, as it has been halted since then. The issue here is that the borrow fees you’re paying have likely eaten up any profits you may have taken on the trade.
So shorting Chinese stocks, espcialy HKD, could be a disaster if war breaks out and forces them into never-ending halts.
Is it possible that AMTD shareholders know of something on the near-term horizon that could invoke such a situation? Ok, I know, flat out conspiracy theory, and I truly hope I’m way off base here, but stranger things have happened.
China’s “Lucky” Number – 88
So just to get completely wild with this – China is incredibly superstitious about numbers, with the number “8” being highly auspicious, and double 8’s being considered very lucky (the number 8 is pronounced “ba” which phonetically sounds like the word “fa” which means to make a fortune. In this line of thinking, August 8th would be 8-8, and perhaps would be a good time for China to reclaim Taiwan.
Ok, not gonna put too much weight on that, but let’s at least recognize that wealthy Chinese are likely feeling growing pressure to get their funds out of China, and the longer they wait, the more likely they are going to possibly be forced to relinquish or otherwise have their funds sequestered by the government.
Will There be Another HKD?
Yes, I believe there will be several coming up. I’ve traded, or watched nearly every Stealth IPO that has come to market in the past 2 years and have made a small fortune anticipating their moves. In the upcoming weeks, I will analyze and report my findings in the IPO Warriors Premium Newsletter, as well as host live-trading of these IPOs in Private YouTube streams.
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