MS Morgan Stanley

By Julie Steinberg and Alec Macfarlane 

HONG KONG--Two years ago, private-banking clients at Morgan Stanley bought into Tianhe Chemicals Group, one of the hottest initial public offerings in Hong Kong. Now some of them can't get out.

Tianhe, a Chinese chemicals firm, has traded for only about eight months since it went public with great fanfare in June 2014 in a $748 million IPO. The stock was suspended for more than a month in late 2014 when an anonymous group accused it of accounting fraud, an allegation the company denied. Trading was halted again at the company's request in March 2015, when Tianhe said it wouldn't be able to file 2014 earnings on time, and it has been suspended ever since.

Tianhe joins nearly 50 other Hong Kong-listed companies, with a collective market value worth an estimated HK$314.8 billion (US$40.55 billion), whose shares have been suspended for three months or more--the result of an unusual regulatory regime under which companies stay suspended longer than in other major markets.

Hong Kong doesn't have a specific delisting process for companies with accounting irregularities or those that are undergoing regulatory investigations. The process for other reasons, such as severe financial difficulties, can be lengthy and difficult, securities lawyers say.

In the U.S., the Securities and Exchange Commission can only suspend companies that trade on an exchange for up to 10 days before trading resumes automatically.

Hong Kong's system means investors can find their money frozen for months or even years, while companies and regulators work out problems, conduct investigations or go through the delisting process. The Hong Kong stock exchange does have the power to delist a company under certain circumstances.

Besides Tianhe, other high-profile companies whose shares have been suspended for the long term include former highflying solar firm Hanergy Thin Film Power Group Ltd., whose share surge early last year temporarily made the company's founder China's richest man, according to some estimates. The company requested a trading halt in May 2015 after its share price plunged 47% in minutes, and later became the subject of a regulatory probe.

Shares in another company, First Mobile Group, haven't traded since November 2009.

Hong Kong's securities regulator in July ordered Hanergy to stay suspended. A Hanergy spokesman said the company believes the trading halt has harmed innocent investors and thinks the regulator should let shares resume trading soon.

A spokeswoman for Tianhe said the company is "highly focused on fulfilling" conditions that would enable it to resume trading.

Global banks have responded by facilitating off-market buying and selling of frozen issues. But retail investors generally don't have access to such services, while institutional investors such as hedge funds say the frozen shares are tough to price.

There has been a "regulatory bias in favor of protecting those who don't own the shares rather than those who do," said David Webb, a shareholder activist in Hong Kong. "It would be fairer to retail investors...if the stock is allowed to trade even if it is on death's door."

A spokesman for Hong Kong Exchanges and Clearing Ltd., which operates the stock exchange, said it "always seeks to meet its obligation to maintain a fair, orderly and efficient securities market." The exchange said in March it would "conduct a holistic review of regulations" related to long-suspended companies. The exchange has also been deliberating an amendment to rules that would hasten the delisting process for certain companies, a person familiar with the situation said.

Traders familiar with the process of trading frozen stocks say banks match prospective buyers, such as hedge funds that have shorted the stock and are looking to cover their short positions, with sellers: funds that want the holding off their books because it is too hard to value or because it might not resume trading. The buyers and sellers tell their brokerages the price they are requesting or offering, generally a fraction of the last traded price, traders said.

One long-only fund sold seven million shares in Hanergy at 30 Hong Kong cents a share in March, a person familiar with the matter said. Hanergy was trading at HK$3.91 when it was halted.

U.S.- based firm Guggenheim Partners LLC was able to unload roughly 62 million shares in the third quarter of last year after trading in the company was suspended. The fund sold the shares mainly to short sellers in anticipation of the stock being removed from indexes compiled by MSCI Inc., a person familiar with the matter said.

Tianhe shares have meanwhile recently changed hands at 5 Hong Kong cents a share, one person familiar with the matter said. That compares with HK$1.17 when they were halted, HK$1.80 at the time of the IPO and as high as HK$2.49 at their peak in August 2014.

Tianhe's stock can't trade again until it publishes its outstanding results, a task made more difficult after the company's auditor, Deloitte Touche Tohmatsu Ltd., resigned in September. The company has a new auditor and said it is working to meet regulatory requirements that would allow it to continue trading.

Morgan Stanley, which was one of the lead banks on Tianhe's IPO, was also an early investor in the company through its private-equity arm. A spokesman declined to comment on how Morgan Stanley is valuing Tianhe, which has contributed to some accounting losses in the firm's Asia private-equity portfolio.

Write to Julie Steinberg at julie.steinberg@wsj.com

(END) Dow Jones Newswires

May 18, 2016 05:14 ET (09:14 GMT)

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