HONG KONG (Nikkei Markets) -- Shares of some small-cap companies listed on the Hong Kong Stock Exchange that plunged on Thursday made a relatively modest recovery in Friday's trading after the companies said their operations were functioning normally, but analysts urged caution amid concerns over pledged insider holdings and a slowing mainland Chinese economy.
Mainland Chinese residential property developer Jiayuan International Group, the largest among those stocks by market capitalization, saw the sharpest moves. The stock, which plunged a record 81% after a rush of selling in Thursday afternoon trading, rallied about 75% to close at HK$4.40 on Friday. The stock is still down 66% from Wednesday's close. The rebound came after the company said it had repaid a $350 million bond that came due on Thursday.
Sunshine 100 China Holdings, another mainland developer, advanced 30% on Friday after expressing "full confidence" in its future development and saying that it intends to repurchase its shares. It had slumped 65% the previous day.
While the specific trigger for their declines on Thursday is not known, some analysts said caution toward illiquid stocks, tightened credit conditions and cooling economic growth in China likely had a role to play. Real estate companies may be especially vulnerable under these conditions, they said.
"Credit default risk of small developers is still quite high this year," said Ricky Huang, an analyst at Luk Fook Financial Services.
"Especially in the first quarter, we will see some weak developers unable to repay debt, because they have a less healthy balance sheet, and also because many pledged their shares to get funding during the tight refinancing environment last year," Huang said.
Pledged shares are those that are used as collateral for loans.
Of the 1.35 billion shares held in Jiayuan International by its chairman and controlling shareholder Shum Tin Ching -- about a 60.8% stake -- 600 million shares were pledged with CCB International Overseas, according to a filing by the company in June 2017. The company did not immediately respond to an emailed request to confirm the status of those shares.
The negative effect of margin calls -- or calls on borrowers by brokers to put up more collateral -- is amplified in illiquid stocks, Huang said.
"From past experience, we know that even repurchase plans by companies don't offer much help" under such conditions, he said, adding that a sustainable rebound "relies on the recovery in market confidence" toward the stock.
Other companies caught up in the roller-coaster week include Hong Kong-based Chiho Environmental Group, a metals recycling company, and Rentian Technology Holdings, also of Hong Kong, which provides technology services. Their shares climbed 17% and 38%, respectively, on Friday, after saying they did not know the reasons behind the drops in their shares on Thursday, when they fell 39% and 73%, respectively.
Edmond Hui, chief executive of Bright Smart Securities International (H.K.), said his brokerage has been tightfisted with margin lending since the second half of 2018 because of the Chinese economic slowdown and falling property prices in Hong Kong. The firm will continue to be mindful of risks this year as well, with signs of an economic slowdown appearing in the U.S., he said.
Hui sees companies where shareholders have pledged their holdings at multiple brokerages as a red flag.
"When most shares of a company are stored in the accounts of several brokerages that are famous for their margin lending businesses, we are highly alert," Hui said. "We are so cautious that any small-cap that sees share plunges in the future will certainly have no relationship with us."
-- Amy Lam and Benny Kung