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Explosive Growth of SF Holdings Sparks Regulatory Concern

By Zhu Liangtao, Liu Caiping and Dong Tongjian

(Beijing) — Shares of SF Holdings continued to soar on Wednesday after several consecutive days of hitting the regulatory daily maximum 10% share-price increase — the aftermath of a backdoor listing last week that saw the firm become the most valuable company on the Shenzhen Stock Exchange.

However, the company’s high percentage of locked-in shares remains a cause for concern.

SF Holdings Group Co. Ltd.’s share price rose 4.79% to 70 yuan ($10.19) on Wednesday, for an increase of 75% over the past seven trading days. The staggering price hike was boosted by a preliminary statement of income that was released a day earlier showing a net profit of 4.2 billion yuan in 2016, up nearly 280% compared with a year earlier. The statement attributed the company’s strong business performance to the rapid growth across the entire courier industry in China.

A private fund manager told Caixin that part of the reason behind the jump in China’s largest express delivery company’s share price was its small percentage of tradable stocks — a factor that often attracts “hot money” that hypes up share prices as investors attempt to achieve the highest returns.

After its merger with Maanshan Dingtai Rare Earth & New Materials Co. through a complex transaction that involves asset swaps and new share issuance, SF Holdings currently has 4.18 billion shares in total, but only 132 million shares — a mere 3.17% of the total — are tradable.

The China Securities Regulatory Commission (CSRC) is intensifying efforts to prevent investors from making quick returns by speculating on the value of shell companies based on potential backdoor listings. Under the latest rules on asset restructuring of listed firms, in any significant assets reconstructing deal, the listed company’s original controlling shareholder, actual controller and their connected associates cannot transfer shares for 36 months. The lockup period for new shareholders is 24 months.

However, the small number of tradable shares, coupled with the company’s high market value and dramatic growth, has set off regulatory alarms. People who are familiar with the matter told Caixin that the Shenzhen Stock Exchange and other regulatory authorities have already placed a careful watch over the trading of SF Holding’s shares.

While many market observers see that short-term speculation could spark a leap in the company’s share price given the small percentage of tradable stocks, the fact that share prices continued to hit the daily limit several days in a row may be regarded by many as a tangible risk, especially if shareholders intend to pledge the stocks as a form of collateral to banks or securities brokerages to obtain loans.

As of the end of June, more than 900 billion yuan in shares had been pledged to obtain financing, according to data released by the stock exchanges in Shanghai and Shenzhen, and an asset manager in Beijing told Caixin that about 50% of pledged stocks were within the lock-in period, which means they could be impossible to sell even if lending repayment defaults occur.

“Once the shares lock-in period ends, share prices can easily drop rapidly, and the decline on the value of the pledged stocks would trigger a massive selloff,” one market watcher said.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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