AMTD Digital market cap drops from $1 billion to $400 billion: What’s it and who’s behind it?

What in the world is AMTD Digital, and who is behind it?

That’s the question many investors are asking themselves after an unknown Hong Kong company managed to join the ranks of global megacaps worth around half a trillion dollars on Tuesday.

It started when the American Depositary Share (ADS) with the ticker code HKD gapped at the open, vaulting 25% over the previous closing price just as trading began before going on to an intraday high at $2,555.

It tripled in value at its peak and reached a market cap of over $450 billion, more than Facebook Meta’s parent or Chinese online retail giant Alibaba.

And it did so on a daily volume of 350,500 shares, according to data from Yahoo Financials, the lowest level since the ADS began trading and well below the 1.2 million traded on average.

Even if it lost a quarter of its value on Wednesday, it is still worth about $240 billion, making it more valuable than Toyota, NikeMcDonald’s or Walt’s Disney.

Needless to say, this was an impressive performance for a company that sold 16 million shares at $7.80 each in mid-July, giving it a market cap of about $1 billion.

What’s behind the boom?

There seems to be no justification for that kind of market cap.

Total income generating assets on its balance sheet barely broke the $400 million mark in March according to SEC filingselite in the world of high finance. Fortune tried to contact the company, but e-mails and calls were not immediately answered.

Look at a website reveals little of its business model. Its brief one-minute corporate presentation video markets the firm as “Asia’s one-stop digital solutions platform and fusion reactor for the best entrepreneurs and ideas of the digital age” using specific phrases Star wars– like an aesthetic.

A deeper look at the prospectus filed with the SEC reveals what that means.

AMTD Digital essentially sells a kind of club membership to its “SpiderNet Ecosystems Solutions,” which it claims benefits by connecting businesses to each other. This is the vast majority of its $25 million in annual revenue generated in the fiscal year ending in April 2021.

Unusually, its pre-tax profits over the past three years have been consistently higher than its top line thanks to fair value accounting gains on its economic interests in companies such as Appier, DayDayCook, WeDoctor, and five Asian fine technologies.

The company’s parent is AMTD Group, a Hong Kong conglomerate that lists investment banking, hotel services, world-class education, and media and entertainment as core competencies. It also has another subsidiary, AMTD IDEA, which is also listed on the New York Stock Exchange, although this is only worth $14 billion.

“significant volatility”

It is not clear why exactly AMTD Digital is listed in the United States, as it immediately warned investors in its share sale prospectus that it could eventually be forced to delist under SEC rules.

That’s because red tape imposed by Beijing currently prevents its Chinese auditor from being audited by the US Public Company Accounting Oversight Board established under the Sarbanes-Oxley Act.

This is a constant source of frustration for investors in many Chinese stocks. If the US and China fail to reach an agreement, some 261 US-listed Chinese companies with a total market value of $1.3 trillion will face delisting.

Chairman and CEO of the Parents AMTD Group, Calvin Choihe left his position as managing director at UBS to take up work.

His capitalist background and reputation as a Young Global Leader with the World Economic Forum do not deter him extolling the virtues of the Chinese Communist party on the mainlandor to celebrate the “glory and dream of the Great Renewal of the Chinese nation” one hundred years after its founding.

Despite boasting an executive vice-chairman with a record of tackling corruption and ties to Carrie Lam—Beijing’s proconsul in Hong Kong—Choi himself, however, is reportedly targeting a two-year ban on the industry by the city’s securities regulator after investor China Minsheng Investment Group accused Choi of wrongdoing.

“Some projects [undertaken with funds from CMIG] it actually made money, but it didn’t give us the profits,” a senior executive of the company said China Caixin back in October 2020. “Some had losses, but we don’t know if he invested or wasted the money.”

Seismic anomaly

In the world of fundamental analysis, where companies are valued based on their future cash flows, AMTD Digital’s eye-popping market cap is the kind of seismic anomaly in the financial system that should only be talked about statistically once every century.

Even AMTD Digital seems to be at a loss as to why it’s so valuable now. Using a letter of thanks to his newly reshuffled shareholders as an opportunity, he claimed that his stock’s performance was also bothering him.

“During the period since our initial public offering, the Company has observed significant volatility in our ADS price and has also observed some very active trading,” he wrote on Tuesday. “To our knowledge, there are no material circumstances, events or any other matter relating to the business and operating activities of our Company since the date of the IPO.”

With that kind of jump, it’s no wonder that permabears came out of their slumber. Short seller Jim Chanos asked “are we all going to ignore the 400 billion meme stock in the room” and Nate Anderson of Hindenburg Research called its controlling owner AMTD Group “sketchy”.

Coincidentally, the same day Gary Gensler, the Chairman of the Securities and Exchange Commission, proposed the 20th anniversary of the Sarbanes-Oxley act, which was meant to restore confidence in America’s capital markets after accounting fraud scandals that had investors in Enron and WorldCom.

The run up triggered painful memories of Robinhood’s fateful decision to remove the ability retail investors to place purchase orders on the GameStop retail chainseen as a decision to protect a handful of hedge funds deeply submerged in the stock meme.

“So why hasn’t the buy button been removed for HKD?? Because there was no retail behind it?” replied one Twitter user to Gensler on Tuesday. “A real fraudulent stock market. You are useless.”

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