Perched below the Ritz-Carlton in Hong Kong, inside the city’s tallest skyscraper, is one of the biggest mysteries of the investing world.
There, on the 66th floor of the International Commerce Center, lies the headquarters of an obscure company that, at first glance, looks like a wild success. Its stock has bested everything in its class with a staggering five-year run: 8,563 per cent.
But ask local market veterans about China Ding Yi Feng Holdings Ltd., and they’ll tell you the rally makes little sense. The investment-holding company has lost money for seven of the past eight years; its stock trades at one of highest valuations worldwide; and DYF’s chairman, a Taoist scholar who boasts investing skills on par with those of Warren Buffett and George Soros, has recently been the subject of several critical reports in Chinese media.
“Fundamentals do not support the stock’s rally at all,’’ said Li Yuanrong, managing director of Shenzhen-based venture capital firm 20VC.
DYF’s curious surge adds to a long list of extreme, unexplained stock swings that have threatened to dent Hong Kong’s reputation as one of the world’s premier financial markets. It also shows how, thanks to the growing popularity of passive investment strategies, such episodes increasingly involve global money. Multibillion-dollar funds run by BlackRock Inc., Vanguard Group Inc. and Northern Trust Corp. have all been buyers of DYF’s stock since November, after it became big and liquid enough for inclusion in MSCI Inc. indexes that the funds are required to mimic.
DYF didn’t respond to multiple requests for comment. A receptionist at the company’s office in Hong Kong directed Bloomberg to Chairman Sui Guangyi’s assistant, who didn’t reply to emailed questions.
Hong Kong’s stock exchange and the city’s Securities and Futures Commission declined to comment, as did BlackRock, Vanguard and Northern Trust. MSCI said it uses quantitative criteria such as market value, free float, and liquidity when choosing companies for its indexes and doesn’t make judgments about profitability, growth prospects or “any other subjective” metrics.
DYF, which has a market value of HK$31.2 billion (US$4 billion), is what’s classified in Hong Kong as a Chapter 21 investment company. Instead of operating their own businesses, Chapter 21 companies take minority stakes in other listed and unlisted firms. They’re similar to closed-end funds and their success depends in large part on the investing prowess of their management teams.
Sui, who is described as a “legendary figure” and “influential scholar” in DYF’s promotional materials, began building a major stake in the company in early 2015, when it was called China Investment Fund Co. After becoming chairman later that year, Sui replaced the management team and has twice changed the company’s name. His stake in DYF, which amounts to about 16 per cent of shares outstanding, is now worth about US$600 million.
Sui’s backstory, as detailed in DYF’s promotional materials, is remarkable. Born to a rural family in northeast China in the 1960s, his early career path included stints as an engineer, a “successful multi-millionaire entrepreneur” and a government official. According to DYF, Sui then transitioned into the world of investing:
Aside from his extremely lucrative bet on DYF, evidence of Sui’s investing prowess is hard to find. In fact, since he became DYF’s chairman, the company has been caught up in some of Hong Kong’s biggest stock crashes.
According to regulatory filings, its money-losing investments in 2016 included stakes in Tech Pro Technology Development Ltd., which sank 90 per cent after a critical report from short-seller Glaucus Research, and Kingbo Strike Ltd., which tumbled 82 per cent. Zhidao International Holdings Ltd., one of DYF’s biggest positions at the end of the second quarter, has dropped 86 per cent since June 30.
DYF, meanwhile, has kept climbing from one all-time high to another, thanks in part to demand from funds that track MSCI’s global large-cap indexes.
The stock has gained 202 per cent in the past year alone, the best performance among 2,700-plus members of the MSCI All-Country World Index. Valued at 95 times net assets, it’s one of the most expensive listed companies on Earth. (The stock is also ineligible for short selling, which may help explain why it hasn’t faced more downward pressure. It slipped 1.6 per cent on Friday.)
“Why would anyone buy an investment company at 90 times NAV?” said David Webb, an independent investor and former Hong Kong Exchanges & Clearing Ltd. board member who has made a fortune buying small-cap Hong Kong stocks over the past two decades. He said MSCI should leave DYF and other Chapter 21 companies out of its benchmark indexes.
“One of the risks MSCI faces in Asia’s equity markets, where rules can be relaxed and enforcement patchy, is you see a lot of firms included in indexes that wouldn’t pass the smell test,” said Melissa Brown, partner at Hong Kong-based advisory firm Daobridge Capital and former member of the Hong Kong stock exchange’s listing committee, speaking generally.
Around the time DYF entered MSCI’s large-cap gauges last year, critical reports on Sui’s fundraising practices and the unusual move in DYF’s shares began appearing in the Chinese press.
In an emailed response to questions from Bloomberg, the Asset Management Association of China said it was aware of media reports that a unit of Ding Yi Feng Group (a Chinese company that also counts Sui as chairman) had offered individual savers guaranteed monthly returns of 2.5 per cent on an investment and that the unit had failed to register multiple fund products with the association.
AMAC said private fund managers in China can’t guarantee principal and minimum returns and that it will report and deliver any unlawful cases to the China Securities Regulatory Commission and other authorities. The CSRC didn’t reply to a faxed request for comment.
— With assistance by Evelyn Yu, Benjamin Robertson, Jeanette Rodrigues, and Matt Turner