BCFC Ownership: Understanding the HKSE

Last week I wrote an article to demonstrate the convoluted nature of the ownership of Birmingham City Football Club, and also to show that what happens on the pitch doesn’t necessarily affect the amount of money the owners make off of it. In this follow-up piece I want to explain to people more about the Hong Kong stock listing and how Birmingham Sports Holdings is valued so highly.

Hong Kong Stock Exchange

You can read my “Spaghetti Junction” piece by clicking this link.

I should also add that while I am a shareholder in Birmingham Sports Holdings, my knowledge of how the listing works only comes from what I’ve read and learned myself. I’m going to include as many links as I can and I urge you to come to your own conclusions about this.

How have the major shareholders made so much paper profit on shares?

At the close of business on Thursday 14 January, shares in BSH were trading at HK$0.15. At that price of share, the stock market capitalisation value of BSH is roughly HK$2.79Bn, or roughly £263M.

That means that if you wanted to buy every share in the company, it would cost you £263M to do so.

That high share price means that the large shareholders of BSH – Paul Suen Cho Hung / Trillion Trophy Asia, Lei Sutong / Dragon Villa and Vong Pech / Ever Depot – have made massive paper profits on their shareholdings, despite the club performing comparatively badly.

Understandably, a lot of people don’t get how this has happened, because it doesn’t seem to make any kind of logical sense. To get an idea of how profits have been made, we need to look at how the stock has performed in the last two years.

Back in February 2019, BSH made an announcement to the HKSE that it was proposing to hold a rights issue. The company were offering current shareholders the chance to buy an additional share for every 2 they owned, at a heavily discounted price of HK$0.05.

As BSH did not know if enough shares would be sold, they also said that if the offer was undersubscribed, shareholders could apply to buy extra shares in addition to what they were entitled.

The money raised from this rights issue was then to be ploughed back into the company to keep it running and to pay off debts.

In April 2019, BSH announced the results of the issue. Paul Suen picked up an extra 1.6bn shares for HK$80million, Ever Depot got 1.62bn shares for HK$81million and Lei Sutong picked up 1.2bn shares for HK$60million.

Share price is normally dictated by supply and demand. The greater the number of shares available to be traded, the lower the price they can be bought for.

April 2019 BSH Share Price

As one would expect, in the time between the initial announcement and the completion, the price in shares dropped.

In the month immediately preceding the initial announcement, shares were around HK$0.085 each. By April, the price had plummeted to a low of HK$0.038 because the number of shares had increased by so many.

However, after the initial sell-off, over the summer prices gradually returned to around the HK$0.05 mark. The green bars at the bottom of the graph show how trading was mainly in “bullish” markets, where there are more buyers than sellers.

At the end of June, 246.66M shares were traded in a week as the shares peaked at HK$0.069, before another sell off brought them back down to HK$0.057. This meant the prices were now trading at around the rights issue price, as one would expect.

However, later in the summer, something weird happened to the share price.

On August 11, 2019, the share price was around HK$0.076.

By August 25, 2019 it had risen to HK$0.094, nearly double the rights issue price. It hovered around that mark for a week and then once again it climbed.

September 2019 share price

Within three weeks, the share price had more than doubled again, reaching a high of HK$0.203. Volume was quite large in comparison to the weeks around it at around 100-200M shares per week; however if you take into account that there were 17.7Bn shares available it means only 1% or so of shares available in the company were traded each week.

It’s possible to see from the graph that number is also far lower than the number sold after the rights issue in April.

This rapid rise would be understandable if something external was happening with the company or the club. That wasn’t the case though; not unless investors were that excited by Pep Clotet’s initial performance as temporary head coach.

Likewise, financially the company were in the same position it had been in for some time; there was no announcement of big deals or profits.

Share price is based on supply and demand and is a reflection of how much shareholders are willing to sell their shares in a particular company for. If lots of people are looking to dump their shares, then the price will be low. If everyone is holding on, then the price will be high.

This is demonstrated in what happened in the period after this dramatic rise. Over the following ten months, the share price gradually reduced to a low of HK$0.110 in July 2020. Volume was minimal with most days being marked by the odd sell-off of shares as small investors looked to bank profits.

From a wider perspective, this made sense.

The effects of the coronavirus pandemic were being felt and share prices around the world had sank as businesses scrambled to retain revenue. Football in particular was affected, and as such it’s understandable that the value of BSH shares dropped in that period.

August 2020 Share Price

In August 2020, once again BSH shares were on the move. The price rocketed to a high of HK$0.208 which was a rise about 50%, yet in that time only 123.5M shares were traded. Were HK investors really that excited by the arrival of Aitor Karanka at St Andrew’s?

Whatever reason there was for the increase, it didn’t last. After another brief peak, the price one again slowly started to fall to a more reasonable level.

Both of these periods of trading I have outlined had the same sequence of events.

Both periods began with an investor (or number of investors) spending a fair chunk of money to buy shares at a premium to the current trading price. While the monetary figures involved were in the HK$1-10M range, the number of shares involved were nowhere enough to be disclosable transactions.

As the price went up, more people jumped on looking to make a quick buck  on a rising stock. As the number of people buying shares increased, the rate of rise in price slowed with more shareholdings willing to sell at a profit. Eventually the market turned “bearish” (more sellers than buyers) and the price started to drop.

This kind of share movement could be seen as an indicator of a “pump and dump” scheme, which is more correctly known as stock manipulation. As stock manipulation is illegal, I have to stress that it is only my opinion that this movement could be stock manipulation, and I am in no way making that out to be a fact.

If this could be illegal, why don’t the HKSE step in?

The regulatory bodies in Hong Kong such as the Securities and Futures Commission (SFC) do what they can to combat stock manipulation.

If share prices are rising rapidly they might ask the company involved if there is anything internal investors should know about which accounts for the change in price. The company would then confirm in an announcement if there is anything investors should know going on behind the scenes, which then generally calms the price change.

The SFC also might look into who owns shares in the company to see if there is a concentration of too many shares in too few hands. This is done if prices consistently increase over a longer period of time.

For example, following a dramatic increase in share price in a company called EEKA Fashion Holdings over a three month period, the SFC looked into who owned shares in that company. They discovered that only 7.23% of shares were in public hands, with just 20 people owning the rest. This concentration of stock in a small number of hands creates a bubble and ensures that a small transaction makes a massive price difference.

Because of this effect, the HKSE requires all companies to have at least 25% of shares in public hands, which is called the “float”. According to the listing rules, if the percentage of the float available drops below 15%, then trading in shares can be suspended until steps have been taken to restore the public float.

It’s possible to check which brokers have declared BSH shares held in portfolios with them using the CCASS database. From that database we can see that 22.76% of shares are held by a large variety of brokers, with HSBC holding the largest amount at 3.47%. This number of shares spread across this number of brokers suggests to me that BSH are broadly compliant with the public float requirements.

When prices have risen dramatically in the past, I have contacted the HKSE with my concerns. Their lack of response to my concerns shows me that they do not believe the changes in price to be significant enough to ask for BSH to make an announcement.

I think what that comes down to is that in relation to other issues on the exchange, BSH are small fry and not worth worrying about.

One reference source that I frequently use for HK data is Webb-site.com. This site is run by former banker and current stock investor David Webb, who has made it his mission to properly watch the Hong Kong markets and show the world which stocks shouldn’t be touched with a ten-foot bargepole.

In the course of his research, he has uncovered huge networks of linked listed companies, who own bits of each other and who work together to manipulate the prices of their listings.

In May 2017, Webb put together a report on something he had termed the “Enigma Network” – a spiders web of 50 companies who were tightly interwoven. If you thought the spaghetti junction diagram was convoluted, then his visualisation of this network will blow your mind.

This is firm proof to me that issues in the Hong Kong Stock Exchange are widespread; and is also proof to me why BSH are seemingly ignored.

Okay, so you’ve explained how it can happen. But surely people have to sell shares to realise profits?

Normal logic would dictate that one has to sell an asset to get the monetary value for it; and only when a sale is complete the profit on the purchase price is completely realised.

However, there are other ways to release value from an asset.

Consider a hypothetical person who has inherited a house. As an asset, the house has a value and when the house is sold the person will receive that value in cash. Until then, the value of the house could be considered a “paper” value.

Having that equity tied up is good for a portfolio, but means the profits of house value increases cannot be reinvested. Rather than sell the house, the person could use the house as collateral for a mortgage, which would give them money in the bank to reinvest elsewhere. That reinvestment can then create new profits, which can then be reinvested and so on and so forth.

While shareholdings are much more volatile assets than land, it’s possible to do something similar with a stock portfolio.

For example, back in the day Carson dealt with a broker called Polyanna Chu, who ran a firm called Kingston Securities. Some of the investors who held their shares with Kingston were able to use those shareholdings as collateral for loans which could be used for other things. The more a portfolio is worth, the more one could borrow.

I would think that if shareholdings were pledged as collateral then the lending broker would have to declare their financial interest in the shares to the stock exchange; and as we’ve not seen that happen with anyone who has large shareholdings in BSH  it’s easily possible none of them have done this.

However, it can be done intangibly too. Anyone who has tried to borrow money from a bank will know that the more money someone has, the more likely the bank are going to say yes. If someone has a large portfolio of assets which are demonstrably worth a large amount of money, then it’s more likely they’re going to be able to obtain unsecured loans and investment for their projects; in essence, money attracts money.

Thus it could be important for the large shareholders in BSH to continue to build wealth from their stock portfolio, as it would give them more credence to pursue other investments.

What does all this mean?

What I want to reinforce is that the listing is the thing of most importance.

The stock listing has an intrinsic value outside of the share price because for many companies investing in a shell company is an easier way onto the Stock Exchange than an initial public offering (IPO).

It’s also the easiest way for BSH to raise new money for projects without incurring more debt from borrowing..

As discussed above, the listing offers the possibility for larger shareholders to create paper profits to make themselves look richer; and in turn offers them tangible and intangible possibilities of obtaining more money, which can then be invested further.

Finally, the performance of the football club seems to have less bearing on the value of the listing than one would logically expect. While promotion to the Premier League would probably attract people to buy shares, it’s evident that the share price can move quickly without it.

With this in mind, I want to reiterate that the biggest vulnerability the owners of BSH have is the continued trading of the listing.

If trading in shares was suspended, then it would be impossible to force prices up to create new paper profits, and it would be incredibly difficult to create new rights issues to bring in more equity. Most of all, once trading in shares is suspended it is much more likely the HKSE will start asking difficult questions; answers to which generally only invites more difficult questions.

Carson Yeung was eventually forced out after trading in shares was suspended, which as we all know was caused by one drunken rant online.

While the fallout of a trading suspension would be pretty catastrophic financially for the club in the short term, it is also the most likely way that change will happen.