Shareholders Decline; Overheated Mkt Sentiment.

Sungen Group (02459) saw its share price plummet by over 99% during trading yesterday, reaching a low of HKD 0.14 per share. At 14:50 yesterday, the trading of Sungen Group was abruptly halted, with a drop of 98.4% before the suspension, leaving a market capitalization of only HKD 328 million. The market value shrank by over HKD 20 billion in a single day.

In today's morning session, the stock resumed trading with a 47% increase. As of the time of writing, the gain stands at 40%, quoted at HKD 0.455 per share, with a trading volume exceeding HKD 290 million.

In terms of news, yesterday the company announced that the Securities and Futures Commission of Hong Kong (SFC) had pointed out that its shareholdings were overly concentrated. This morning, the company announced that some of the major shareholder's holdings had been forcibly liquidated.

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Margin Call

This morning, Sungen Group announced that the major shareholder, Otautahi Capital Inc, had a total of 370 million shares (representing approximately 36.64% of the company's total issued share capital as of the date of this announcement) forcibly sold by securities firms in the open market through margin securities accounts on September 3rd.

Following the completion of the forced sale and as of the date of this announcement, the number of shares held by Otautahi Capital Inc is 212.3 million shares, representing 21.02% of the company's issued share capital. The board of directors confirmed that the group maintains normal business operations, and there have been no significant changes in the group's business operations and financial conditions.

Yesterday, Sungen Group traded 1.5072 billion shares with a transaction value of HKD 494 million, of which 370 million shares belonged to the major shareholder's forced liquidation. From the trading range of yesterday, the heavy trading volume occurred after the sharp decline. It can be inferred that the significant drop in the stock price led to the forced liquidation of the major shareholder's margin account.

Looking at past trends, Sungen Group is a "speculative stock": on April 9th, the company's stock price fell by 49.88% in a single day, closing at HKD 2.1 per share, with a turnover rate of 0.1%. After this significant drop, the company's stock price began to steadily rise, reaching a high of HKD 21.30 per share on August 30th, becoming a 10-bagger stock.

Reduction in Holdings

Data shows that from April 30th to June 20th, the major shareholder Otautahi Capital Inc reduced its holdings in the company three times, with a total reduction of 156.5 million shares, cashing out approximately HKD 601 million, and reducing its shareholding ratio from 73.17% to 57.67%.At the same time, the company's performance has turned rapidly. The company went public in January 2023, with operating revenues of $109 million and $116 million in 2021 and 2022, respectively; net profits attributable to the parent company were $4.388 million and $7.496 million, respectively.

After going public, in 2023 and the first half of 2024, the company achieved operating revenues of $72 million and $32 million, respectively, down 37.42% and 26.52% year-on-year; net losses attributable to the parent company were $15 million and $14 million, respectively.

In the financial report for the first half of 2024, Rising Energy Group stated that the decline in the company's performance was mainly due to the downward trend in the price of graphite electrodes, inventory provisions, and the development of the graphite anode material business, among other factors.

Before the IPO, Hou Haolong held 90.624% of the equity of Rising Energy Group through the family trust Otautahi Trust; Hou Haolong's brother-in-law owned 79.2% of Henan Sanli Carbon Group Co., Ltd., and an independent third party owned 20.8%.

Hou Haolong

Rising Energy Group produces ultra-high power graphite electrodes used in electric arc furnace steel manufacturing, etc. The associated company of Rising Energy Group, Henan Sanli Carbon Products Co., Ltd., has been listed as a dishonest executor by the court on multiple occasions.

In 2002, Hou Haolong graduated from Golden Gate University in the United States with a Master's degree in Procurement and Supply Chain Management. From January 2003 to January 2013, Hou Haolong was at Sanli Carbon, responsible for project implementation, including the production of large-diameter ultra-high power graphite electrodes for electric arc furnace steel manufacturing.

On January 24, 2014, Hou Haolong, the former legal representative and chairman of Sanli Carbon, resigned from the aforementioned positions and was succeeded by the company's senior manager, Niu Ping. The reason was that Hou Haolong needed to devote a lot of energy to business negotiations abroad and to carry out an international strategic layout.

In April 2012, Sanli Carbon had raised 5 million yuan from private lending, with a monthly interest rate of 2%, for a term of less than one month, guaranteed by Hou Haolong. In April 2013, Sanli Carbon repaid the principal of 4 million yuan, but the remaining 1 million yuan principal and 1.24 million yuan interest were not paid for a long time.

As a result, in June of this year, the private lender filed a lawsuit against Sanli Carbon and Hou Haolong. Sanli Carbon's overdue financial institution loans began to appear in the fourth quarter of 2013. In October 2012, Sanli Carbon borrowed 6 million yuan from Zhujiang Rural Commercial Bank in Huixian City, with a term of one year and a loan monthly interest rate of 1%. After the loan expired, Sanli Carbon was unable to repay the loan due to economic difficulties.Hou Haolong was born in 1978 and is currently 46 years old, holding the nationality of Vanuatu. Sheng Neng Group is located in Xinxiang, Henan, but the nationalities of its four executive directors are diverse, with the other three being from the United States, South Africa, and China, respectively.

Equity Concentration

Recently, Sheng Neng Group has been named by the Hong Kong Securities and Futures Commission (SFC) for having a highly concentrated equity structure.

The results show that as of August 19th of this year, the company had 25 shareholders who collectively held 279 million shares, equivalent to 27.65% of the issued capital. Together with a controlling shareholder's 582.5 million shares (accounting for 57.67% of the issued capital), and approximately 49.3095 million shares (representing 4.88% of the issued capital) that are not held in the Central Clearing and Settlement System or registered in the Hong Kong shareholder register, the total already represents 90.2% of Sheng Neng Group's issued capital. Consequently, only 98.9416 million shares (representing 9.80% of the issued capital) are held by other shareholders.

The SFC has previously disclosed high equity concentration in several companies, such as revealing that the equity concentration of Michael Group reached 99.04%; as of June 21st, Le Cang Logistics had 18 shareholders who collectively held 126 million shares of the company, equivalent to 44.11% of the issued capital. The aforementioned shareholders, along with the company's three controlling shareholders who held 159 million shares (representing 55.39% of the issued shares), accounted for 99.5% of the company's issued capital. Additionally, only 1.69% of the shares of Chang Jiu Shares are held by other shareholders, with 98.31% of the shares concentrated among a few shareholders.

Regarding the issue of highly concentrated equity, Sheng Neng Group explained that there are no shares held in the Central Clearing System, nor are there any shares registered in the company's Hong Kong shareholder register. According to their understanding, it refers to the shares held in the Cayman Islands Stock Transfer Registry.

Starting from April 2023, the company's independent director Sun Qing, executive director Adriaan Johannes Basson, executive director and CEO Wei-Ming Shen, and executive director Yan Haiting have successively resigned. In July 2023, the company's appointed auditing firm, Ernst & Young, also announced its resignation due to the failure to reach an agreement on audit fees.