Speculative Gamble from SHN Phenomenon

It is no longer strange to see a loss-making company’s shares advance strongly on the Vietnamese stock market. However, the extent of risk-ignoring speculative activities reached the zenith, even with near-bankrupt companies.

 

The sinking of DVD shares (Vien Dong Pharmaceutical Joint Stock Company), pulling more than 1,700 shareholders to the water, was thought to be a useful warning sign for all stock investors. However, it came as a surprise to a majority of investors when the case of SHN (Hanoi Investment General Corporation) was brought to light.

 

A few weeks ago, SHN Board of Directors Chairman Dinh Hong Long told the media that his company was on the verge of bankruptcy. This information was compared to a “bomb” on the market as SHN shares, despite low prices, were traded normally. After the chairman revealed that sensational information, investors found no other way than to run away.

 

However, the best scene of the SHN drama is exactly this time of crisis. After Mr Long’s statement, SHN shares were traded at floor prices in 11 consecutive sessions without any significant trade (Floor price is the daily lower limit of a share price, 7 percent from the reference price - the weighted price in the last 15 minutes in the preceding trading day, according to the Hanoi Stock Exchange where SHN is listed). Explanatory documents sent to the HNX contained no new information. All of a sudden, SHN snapped the 11-day losing streak with a surge to the ceiling price with more than 10.9 million shares changed hands. This was not only the record daily traded volume in SHN history, but also accounted for nearly one third of its floating shares.

 

The value amounted to VND32.5 billion on that day. SHN moved between gains and losses in the next five trading days but the liquidity waned. This phenomenon puzzled many investors. Was there any change in settling its bad debts? Why were some people willing to spend so much money on SHN?

 

Suspicion and greed once again attracted many investors into the gamble called SHN. They still did not know much about the company’s situation. In the latest three sessions, SHN plunged the floor prices and lost liquidity. Clearly a lot of investors have been trapped because of their avarice.

 

For any capable investor with basic knowledge of fundamental analysis, SHN is not a risky investment opportunity but a simple gamble. SHN is as obscure as DVD case which featured no bad values on the books. SHN was a little worse in theory, as it suffered a loss of VND238 billion (US$12 million). However, this loss was offset by a big “deceptive cake”: Hundreds of billions of Vietnamese dong of interest rates and related fines.

 

Its lending was accounted into short-term investments, with a maturity of three months. This method of accounting substantially increased its short-term assets and created a sense of financial security in the balance with short-term liabilities. In short, if you look at the books, SHN is still capable of settling short-term liabilities by using its short-term assets.

 

However, the problem is that the liquidity of short-term assets is almost zero simply because SHN is unable to instantly take back its loan of US$238 billion plus related penalties. This loan is embroiled in a legal mess and liability disclaimer. There is a very high likelihood that the company will suffer a dead loss. What SHN has is the shares mortgaged as the security without the clear value plus interests in some property markets. Bank loans, personal loans, salary delays, social insurance liabilities, tax liabilities and working capital shortage are the current status of SHN.

 

It is difficult to make any different conjecture about SHN president’s active statement on bankruptcy risks other than to produce some more pressure debtors. SHN has filed lawsuits against its partners and called upon the Defence Ministry for help. Another problem is that many key members of SHN not only hold very few shares but also take good advantage to sell their shares previously. Even, the president himself also secretly sold his shares ahead of registration time and he was fined vnd40 million.

 

On April 11, seven days after the record trading, SHN was excluded from the list of stocks qualified for margin trading. Since 2010, SHN was a favourite speculative stock with millions of shares traded a day and a huge volume of this stock was mortgaged. When the stock was traded at floor prices with millions of shares outstanding, all were quickly absorbed by the buy-side. It is likely that insiders made collusive transactions to create unreal demand to stir up the greed of outside investors to cut their holdings. Given the current situation plus margin lifting and stop-loss forces, the volume of shares offered for sale can easily blow away the money spent on this risky trunk stock.