Another $10 Billion Hong Kong Stock Market Mystery

Hong Kong’s stock market is minting another overnight billionaire. Unfortunately, it is once again a curious sort of tale.

The market capitalization of little-known mainland Chinese property developer Fullshare Holdings
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has surged 237-fold since its backdoor listing in December 2013, from $40 million to a nearly $10 billion—passing the likes of Goodyear Tire Rubber
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and Gap Inc.,
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companies with many times its sales and assets.

Fullshare’s chairman, Ji Changqun, got most of the approximately 64% of the company he owns from converting convertible bonds issued to him during that backdoor listing. The conversion price was only 1% of current share price, meaning his profit, at least on paper, exceeds $5 billion.

The company says it is reaching beyond property development with the aim of becoming a world leader in health-care and environmental services. But the actual performance doesn’t justify the ballooning of value. The stock trades at 27 times revenue and 10 times book value.

The company has aggressively issued new shares in the past two years and has made multiple related-party acquisitions in stocks and property, in which Mr. Ji was the seller. One of Fullshare’s biggest paper gains comes from its 8% stake in a company called Zall Group, whose share price has tripled since Fullshare bought the stake from Mr. Ji last October.

Because of its huge size, Fullshare has been added to FTSE indexes, which has attracted investors such as Vanguard, owner of 1% of the company after building up positions over the past year, according to FactSet. Fullshare’s size also makes it eligible for a trading link between the Hong Kong and Shanghai stock exchanges, with the result that investors from mainland China now own 3.7% of the company, or more than 10% of its float.

It’s not entirely clear what’s keeping Fullshare afloat.
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Despite its frothy valuations, though, Fullshare hasn’t attracted the corrective forces of short sellers, because of Hong Kong’s overly protective rules allowing shorting only of shares whose annual trading turnover exceeds 60% of the company’s market value. Fullshare’s ratio is about 22%, and because the share price keeps rising on thin trading volume, the 60% threshold keeps receding.

Fullshare is the latest in a pattern of other hard-to-explain Hong Kong highfliers. It joins Hanergy Thin Film Power, a solar company whose inexplicable rise briefly made founder Li Hejun China’s richest man, and Goldin Financial
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and Goldin Properties, which created billions for Chairman Pan Sutong as their share prices went ballistic.

Those three stocks, which unlike Fullshare were shortable, have fallen sharply from their peaks. Trading in Hanergy’s shares has been suspended for 16 months as Hong Kong’s regulator investigates the company.

Fullshare came into the spotlight last week with plans to acquire China High Speed Transmission, a maker of wind-power equipment. The deal, which values the target at $2.3 billion, would be paid for entirely with new Fullshare shares. Mr. Ji already owns 9% of CHST and will keep his stake after the deal.

Compared with Fullshare, CHST is a well-known company, covered by analysts of major banks. No analyst covers Fullshare, according to FactSet. Though the Fullshare offer comes at a 47% premium, CHST’s shareholders should be careful what they are swapping their shares for.

Write to Jacky Wong at Jacky.Wong@wsj.com

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