On Wednesday, we reported on what was certainly the biggest market news of the week when in under one second, Chinese solar company Hanergy Thin Film crashed by nearly 50% due to what are still unknown reasons. As a reminder, before its crash and indefinite trading suspension, Hanergy’s market value was higher than all other listed Chinese solar companies combined and six times the value of First Solar, the biggest producer of thin-film solar panels.
Aside from the dramatic move, the reason why the wipeout of this tightly held stock was particularly memorable is because it took with it some $14 billion or nearly half of majority owner Li Hejun's $30 billion fortune, who as we reported previously, is China's richest man, having recently overtaken Alibaba's Jack Ma. Or rather was.
A quick tangent into how Li built up his stratospheric paper wealth on very short notice.
As noted above, the bulk of Li's fortune comes from his 80.8% stake in Hanergy, whose market cap had topped at approximately $40 billion, or greater than the market cap Sony and Twitter. Even more notable, is that the bulk of the appreciation in the stock took was a result of what appears to have been an aggressive buying campaign by none other than Li himself, who as Bloomberg recounts, was the single biggest buyer in the name as it soared since the start of January, becoming "wealthier" (on paper) by buying ever more stock, thus pushing his own net worth every higher!
From April 30, three weeks before the crash:
Hanergy Thin Film Power Group Ltd.’s executive chairman raised his stake in the Chinese solar equipment maker this month, buying 53.9 million shares as the company’s market value surged.
Li Hejun bought the shares in seven transactions at prices of HK$6.90 to about HK$6.95, with the latest purchase on April 23, according to transaction details filed in statements to the Hong Kong Stock Exchange. The company closed at a record HK$7.88 on April 23.
Hanergy has surged more than six-fold in the past year to a market value of about $39 billion amid questions about its valuation and revenue.
What is certainly peculiar is that even as Li was aggressively single-handedly pushing the price of the stock, thre were many questions about the company's operations. Of note, about 61% of the company’s revenue was sourced from sales it made to its own parent company Hanergy Group, and its affiliates.
The relationship was laid out by Bloomberg as follows: "The publicly traded entity makes factory equipment that produces thin-film solar panels. Closely held Hanergy Group makes the panels and installs them, though it has never disclosed its production output. Hanergy Thin Film also buys PV panels from its parent company to make into finished solar parks."
As the FT reported first 5 months ago, Hanergy "has been racking up enviable revenues largely through sales between its listed subsidiary, HTF, and itself." No wonder the company has been desperate to distract attention from its cooked books, and instead had focused on pure marketing, pitching itself as a company that promises to revolutionize solar power and to become the Apple of green energy.
Perversely, it was on January 28 when the Financial Times first raised questions about the incestuous relationship between the two entities: since then, the stock of Hanergy had risen 86%... until it crashed.
It wasn't just Apple: Hanergy needed more buzzwords and tried to be like that other famous "alternative energy" unicorn, Tesla: a whole lot of "story" fluff, much hype and no substance. Because lacking from its earnings report was an overall estimate for how much equipment it will ship or install this year, a figure that’s prominent in the reports of panel makers such as Trina Solar and Yingli Green Energy.
There were many other flashing red warnings: Hanergy Thin Film’s receivables surged 86 percent last year to HK$4.3 billion, with the parent company responsible for about half of the outstanding sum.
And another: a year ago, the Kowloon headquarters of Hanergy Thin Film housed a little-noticed subsidiary of Li’s Hanergy Holding, which initially was a hydroelectric-dam operator with more than 6 gigawatts of projects.
And another: not content with being a Tesla-clone, the company was also a Valeant-style "rollup": the company has been investing in thin-film technology since 2009. It’s bought four overseas companies since 2012 -- the U.S. producers Global Solar Energy Inc., Miasole Inc. and Alta Devices and the Solibro unit of Germany’s Q-Cells.
And another: when the FT wrote another story on March 25 showing that Hanergy’s shares listed in Hong Kong tend to rise in the final 30 minutes of the trading day, the company issued a statement dismissing the story as “innuendo.”
Not everyone was fooled by the epic lie: as Bloomberg also reports, on February 27, analysts Charles Yonts and Johnny Lau at CLSA Asia-Pacific Markets in Hong Kong issued a report saying the stock was wildly inflated. Jenny Chase, lead solar industry analyst at Bloomberg New Energy Finance, published a note on March 6 saying Hanergy is working with “unproven” technology and that it hasn’t detailed a level of installations that would help justify its valuation.
Paradoxically, the more public caution about Hanergy's parabolic, circular surge there was, the higher the stock traded... until the morning of May 20, when Li's was suspiciously absent from the company's annual meeting.
On that day, as the WSJ recalls, heavy trading in Hanergy’s stock began shortly before said annual general meeting began at 10 a.m. in Hong Kong on Wednesday. "At the time, trading in the stock was furious, with traders offering to buy and sell millions of shares at a time. Eventually, there were far more shares being offered for sale than there were buyers."
As the WSJ further reports, "at 10:17 a.m. and 23 seconds, a large 426,000 share sell order piled up at the current market price of HK$6.80. Two small trades were done at slightly lower prices, but then the price at which traders were willing to buy the shares fell to HK$3.45, 48% below the market’s price."
The instantaneous collapse at precisely 10:17:23 am in the Hanergy stock price can be seen on the following Nanex chart.
Such market microstructure airpockets are very familiar to frequent Zero Hedge readers, appearing periodically and unexpectedly in virtually all HFT-traded stocks, and occasionally, such as on May 6, 2010, in the entire market.
As Nanex' Eric Hunsader notes, "a large seller exhausted liquidity and tipped the market over.. boom."
This low bid showed that there weren't many buyers in the market, potentially setting the stage for a big share decline. Computer algorithms, which trade automatically based on current market data, likely detected the sudden shift and reacted by selling more or pulling out of the market altogether.
Nearly 16 hundredths of a second later, a series of smaller buy orders ranging from 8,000 to 30,000 shares trades were made at rapidly declining prices. The first buy order was priced at HK$6.69, and four tenths of a second later, a trade occurred at HK$6.10. Once that trade occurred, the next highest bid became HK$3.45 and over the next several hundredths of a second, the price that people were willing to sell shares fell to HK$4.50.
A trade occurred at HK$4.50, meaning the official market price had fallen by 26% in fractions of a second. Hanergy shares briefly recovered but then sold off again. They were trading at HK$3.91 when the shares were suspended at 10:40 after falling 47% and wiping out $20 billion worth of market value.
Cited by the WSJ, Hunsader said the collapse "could have been caused by high-speed traders pulling out of the market due to heavy selling by an investor looking to unload a large chunk of stock."
Because as it turns out, after accumulating a gargantuan position in the stock in order to diffuse speculation that his primary investment vehicles is a fraud, Mr. Li decided he had had enough. And decided to sell.
He did this at first by shorting several billions shares of the stock in which he had built up an 80% stake.
According to the WSJ, "on Friday in a filing with the Hong Kong Stock Exchange, Mr. Li disclosed he went short 759.7 million shares in Hanergy on Monday, two days before the annual meeting. This represented 1.9% of the company and about 5.3 times that day’s trading volume of Hanergy shares."
Bloomberg adds that Li "also increased his short position to 7.71 percent of Hanergy’s issued share capital from 5.81 percent on the same day."
The following Bloomberg screenshot reveals the original 5.81% short stake between China Geiko Investments and Hanergy Invest Ltd, both shell companies controlled by Li: an amount equal to about 2.4 billion shares. The problem: at the same moment he was also long some 30.6 billion shares.
Yet something must have provoked Li to switch his posture from a chronic buyer to an acute shorter/seller.
That something was a very fundamental factor, the most fundamental of all - the company had run out of money.
As Caixin reported, "the solar panel manufacturer whose listed subsidiary has suffered a sell-off of shares in Hong Kong failed to repay bank loans, sources close to the parent company say."
Worse, the selling avalanche and the subsequent suspension of trading means that all hell may be about to break loose according to Caixin, Hanergy had "used shares in its listed unit to take out bank loans, but has been unable to repay some of them. The share sales escalated after debtors made little progress in negotiations with the company over the defaults, those sources said."
Hanergy secured loans from Jinzhou Bank, in the northeastern province of Liaoning, in the second half of last year after the bank gave it an 8 billion yuan credit line, other people close to the firm said. In January last year, Hanergy reached a deal with China Minsheng Bank and a credit consortium the bank leads to provide the company with loans of no less than 20 billion yuan.
In other words, the stock price itself had become the collateral against which the company was borrowing cash. So once the long-overdue selling finally started, the margin calls become a self-sustaining feedback loop and would flood the company with demands for ever more cash, and lead to a prompt and painful collapse.
And nobody knew this better than the man who had orchestrated this entire Ponzi scheme: Mister Li himself.
In other words, having sunk billions in real cash to generate paper profits against which to take out loans, Li tried to cash out. The problem - and one which we warn day after day when we point out the ever declining volume of the market on the way up - is that while there was no shortage of willing sellers as the stock was rising, once he pushed the bid a little too aggressively to accelerate his exit, he found just one thing: a bidless vacuum.
What happened next? This.
Don't expect the company to rebound promptly when it reopens for trading. If it ever reopens, as by then the banks will have sent some of their less reputable "collection agents" to make sure they "collect" the money owed them by Mister Li, especially since they can't sell a halted stock which serves as collateral for their loans.
As for Li, all of this could have been avoided: he merely had to keep bidding a worthless stock to infinity. Sadly for him, unlike central banks, he does not have access to infinite cash with which to do so.
Incidentally, all of this should remind regular readers of an almost identical example on this side of the Pacific.
Remember CYNK: the illiquid stock of a company which did not even exist, and yet whose market cap rose to several billion, before a bout of selling wiped out all the equity holders, and forced the regulators to halt it and delist it, in the process wiping out its entire "value" built up courtesy of gullible idiots believing in "get rich quick" Ponzi schemes.
This is what we wrote last July, in a post titled "How The Market Is Like CYNK." In retrospect, our prediction is becoming painfully accurate, if only to billionaires willing to monetize their "paper" profits.
For all the drama and comedy surrounding the epic idiocy in which a bunch of "investors" took the price of non-existent company CYNK from essentially zero to a market cap of over $5 billion in under a week, most people missed the key message here: the stock is a harbinger of what is happening to the entire market. Because while those defending what is clear irrational exuberance, scratch that, irrational idiocy are quick to point out that CYNK's epic surge took place on less than 0.1% of its outstanding shares, these are the same people to say precisely the opposite about the S&P 500. "Ignore the collapsing volumes sending the stock market to all time high - it's perfectly normal" is an often repeated refrain by the permabullish crowd. Just not when it involves case studies in market insanity like CYNK apparently.
Perhaps ironically, it was the concurrent most recent crisis in Europe, that involving Portugal's cryptic Espirito Santo group, whose top-most HoldCo is largely shrouded in secrecy yet which somehow is not a deterrent to the sellside community to issue one after another "all is clear; don't pull your deposits please" note, that confirmed not only that nobody has any idea what the real situation of European banks is, but how the entire capital market has now become nothing more than one glorified CYNK penny-stock turning into a mid-cap.
Deutsche Bank's Jim Reid explains:
Whatever one feels about financials and the wider financial system, credit markets did arguably get a small glimpse of what things will be like when this cycle does actually end as the structurally impaired liquidity that exists in credit caused a small amount of panic yesterday morning before markets recovered in the European afternoon session. Liquidity is really poor in credit these days which doesn't matter when markets are in buy only mode as they have been for many quarters now, but it does matter on the days when you get a negative story.
In other words, just like the CEO of CYNK who promptly "made" a few billion in paper profits, it feels great to "make" money on virtually no volume. The problem arises when one tries to cash out of paper and into all too real profits.
And here is what happens when one does finally try to book profits: moments ago the OTC BB just announced that, finally, CYNK was finally halted.
Increasingly we are witnessing how this "market", if this rigged, illiquid, central-bank manipulated cesspool can be called a market, is precisely like CYNK.
And as of this moment, Mister Li and Javier Romero, the President, CEO and secretary, in fact the only employee, of CYNK certainly have much in common: they see what happens when you levitate a company to mindblowing extremes on no volume and when you own the bulk of the float... and what happens when you try to offload it.
Sadly, this is a lesson which the entire market, and all those who are buying on the way up, and confusing paper profits with actual wealth, will also learn the hard way.
Because between CYNK and now Hanergy, we have had a very clear glimpse of the endgame: and as of this moment nobody can say they were not warned about how this most manipulated of asset bubbles ever, ends.