Stock Connect pulls plug on Hanergy

Chinese solar equipment maker becomes the first listed firm to have its shares removed from the Shanghai-Hong Kong scheme due to a regulatory probe.

Hanergy Thin Film Power Group (HTF), the Chinese solar equipment manufacturer suspended from trading amid a probe by Hong Kong securities regulators, on Monday became the first stock to be removed from the Shanghai-Hong Kong Stock Connect scheme due to the investigation.

“From Monday, the HTF stock will be removed from the stock connect scheme. Investors will no longer be able to purchase Hanergy shares under the scheme, but will be able to sell shareholdings in the company [if HTF resumes trading],” according to a statement by the Shanghai Stock Exchange on Friday.

Market insiders said the removal of Hanergy from the mutual market access programme has dashed any hope that the Hong Kong-listed company will resume trading in the near future.

Dimming prospects

“It’s a very negative sign. I don’t think Hanergy will be able to resume trading any time soon,” a Hong Kong-based portfolio manager at a large Chinese asset management firm told FinanceAsia.

The Friday announcement came after the Hang Seng Index announced on July 16 that it would remove Hanergy from its China indexes and sub-indexes due to the prolonged suspension of the company's stock. The Hang Seng ban went into effect on Monday.

According to the rules of the stock connect scheme, eligible stocks on the southbound track (mainland investors buying Hong Kong stocks) must either be included in the Hang Seng indices or dual listed on the Hong Kong and Shanghai stock exchanges. Hang Seng’s decision on Hanergy had the immediate effect of disqualifying the Hong Kong-based company from inclusion in stock connect.

In addition, two other major stock indexes -- the FTSE and Dow Jones -- this month stated their intention to strike Hanergy from their indices.

Sunny days

Hanergy's fortunes changed with the launch of stock connect last November. The company, which started in 2009 in the inland province of Henan, began making headlines as its shares soared more than threefold from last November to May this year -- at one point making its chairman Li Hejun the richest man in China.

The stock was also one of the most popular Hong Kong-listed securities among mainland investors. According to the city’s stock exchange, Hanergy sat atop the ranking of the 10 most actively traded stocks on the southbound track through the stock connect programme in February and March.

Data from the Hong Kong Stock Exchange show that, as of July 27, mainland investors hold about 660 million shares in Hanergy through the stock connect scheme - a shareholding worth HK$2.6 billion at the time.

The aggregate mainlander interest accounts for 1.57% of the company’s total shares, which is larger than the 1.12% stake held by private equity firm Blackrock, the second largest shareholder after the firm's Beijing-based parent Hanergy Group on 72%.

Power outage

On May 20, Hanergy’s shares plunged 47% in less than half an hour, wiping $19 billion off the company’s market value. Trading was halted at the company’s request on the same day.

Almost two months later, on July 15, the Hong Kong Securities and Futures Commission (SFC) officially suspended shares in Hanergy, following an earlier announcement on May 28 of a probe into the company.

The regulator asked the company to disclose financial details of Hanergy Group and its chairman Li Hejun. Li is the majority shareholder of both entities.

Hanergy refused to comply, saying it cannot “compel” its parent and chairman to hand over such documents. It even suggested it might bring a legal action against the regulator.

“If necessary, the company will challenge the SFC’s decision in court,” the company said in a stock exchange filing on July 16.

According to HTF’s financial reports, most of its revenue since 2000 had come from the sale of solar equipment to its parent company and affiliates. HTF, in turn, buys solar panels from its parent.

Its reliance on sales to the parent group has fuelled criticism of its business model as well as raised questions about how best to regulate Chinese companies which operate in the country but are listed overseas.

Last week, Hanergy said it stopped purchasing panels from its parent, according to a stock statement on July 20, a move seen to weaken its previously close business relationship with the group and appease regulators.

The company has not received guidence on future panel purchase, a Beijing-based HTF employee told FinanceAsia. “I don’t know where to buy new solar panels now,” the employee said on the condition of anonymity. “The cancellation has hit our downstream businesses a lot. Who expected the ups and downs of the stock could hit the company’s real businesses that much?”

The SFC investigation is ongoing with the duration and outcome uncertain.

“It could take years before the investigation concludes,” a Hong Kong-based solicitor at a large international law firm with a compliance practice told FinanceAsia.

One of the SFC’s most complex probes -- an investigation into the Chinese refrigeration technology company Greencool for market misconduct -- took seven years to complete, he added.

In theory Hong Kong and mainland Chinese regulators can combine forces to “take action against Hanergy” on behalf of investors, the solicitor said. However, such a case would be the first of its kind and the lack of legal precedent might increase the complexity.

“Stock connect is new, so nobody knows exactly how the regulators [from the two sides] will enforce [the rules],” he said. “What happens next depends on what the SFC finds [for the time being].”

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