Sunday, 4 May 2008

The Ghost Stocks of the Gulf

The Merriam-Webster dictionary defines the word ghost as "a faint shadowy trace” which brings to mind several stocks that are apparently listed on the Gulf stock markets. There are two kinds of ghost stocks in the Gulf, those that are actually listed but whose equity is so tightly controlled by a single family or two therefore are rarely traded if ever and those that are heavily traded but have a faint shadowy presence in real life.

DFM Blues

Of the 61 stocks with a listing on the Dubai Financial Market (on March 4th) 40 of them did not have a single transaction. That works out to be an enormous 65% of the stock market listings that remains dormant. If one looks at the remaining 35% of the market, many of them have one or two digit trades, and that’s in a good day. The question that one needs to ask is, why bother listing these stocks in the first place? According to the resourceful web portal Zawya.com, one major trade-starved bank listed on the DFM, has a 10% share free float, hence it is controlled and managed by one single prominent family. This share does not trade and it oddly didn’t decline in the 2005 UAE stock market crash unlike almost every other stock.

A strange phenomenon has to be that of GCC cross border listings. On this day for example, Gulf Finance House which is listed in Kuwait, Bahrain and Dubai with the promise of an upcoming listing in London (see Gulf News November 2006) didn’t have a single trade. It seems that the hopes of the bank’s CEO of becoming “one of the proactive companies in the DFM[1]” vanished sometime ago.

Another abnormal occurrence must be those firms that most people have never heard of such as the “Aerated Concrete Industries” company (zero trades), one simply known as “Shop” (apparently they have malls, also zero trades) as well as the interestingly named “United Kaipara Dairies” (you guessed it, zero trades). Pundits can recall the UAE Ministry of Economy’s ultimatum concerning the listing of all public joint stock companies two years ago, but couldn’t that be coupled with a minimum amount of shares being held by non founders?

Some companies in Saudi Arabia present the second type of ghost shares as there are several well publicized cases of companies that exist on paper but not much else. A case in point would be a firm known as Bishah Agricultural Development Company which was suspended from trading in early 2007. According to Tadawul, the official Saudi stock market website, Bishah whose nominal value was 10 Riyals was trading at eight times its multiple and millions of Riyals in value just one day prior to its suspension. One could ask what were these poor unfortunate investors, estimated at 10,000 people[2], buying and selling other than empty promises.

Keep in mind that this is a firm that was valued by investors at $120 Million the day before its suspension and had nothing to its name except three derelict pieces of land “in a good location”. Please read the following line carefully, as the herd mentality of the region manifests itself fully. In February 2006, Bishah, which reported impressive profits to the tune of 206,000 Riyals ($55,000) and turnover of One Million Saudi Riyals in 2005, was valued by investors at a staggering 489 Riyal per share giving this grand daddy of all fiascos an astronomical value of 2.5 Billion Saudi Riyals ($650 Million)[3]. Fortunately, the Saudi Arabian Capital Market Authority was quick to react and intervened only one year later to suspend the stock’s trading[4]. These fantastical figures translate into a PE ratio of 13,000 (plus or minus one thousand) meaning that should you be a lucky investor in Bishah you will be able to recoup your hard earned cash in the year 15,000 AD or so; a great stock for those of us looking for long term investment opportunities.

What must be done is some form of fine tuning with regards to the regulations to at least maintain a façade of tackling the issue of equity, market and index manipulation. Illiquid stocks should not be featured in the primary market, nor should they be used in the calculation of the index. Regulators should also be more proactive and react quicker against firms such as Bishah to protect investor’s interest. Introducing market reforms such as the above two will provide investors with a more realistic picture of the available investment opportunities in terms of both, the liquidity and the quality of the listed equities.



[1] http://www.zawya.com/story.cfm/sidZAWYA20060515042331

[2] http://www.zawya.com/story.cfm/sidZAWYA20070115031611

[3] http://www.tadawul.com.sa/Resources/fsPdf/6080_2005_Y.pdf

[4] http://www.zawya.com/story.cfm/sidZAWYA20070113095919

1 comment:

Anonymous said...

well let me start by saying caveat emptor to all investors (speculators?) as they are required to do their own homework and should not expect handholding from the markets.

next i wanted to make a couple of comments:

GFH has in fact been listed in London for a while now and seems to have benefited greatly through increased valuation but that doesn't relate to liquidity on Dubai and/or other markets.

Aerated Concrete is actually a well managed and pioneering company in fast construction and real estate development out of Kuwait and working in the UAE. A more dependable investment than many others.

And that bring me to the phenomenon of Kuwaiti stocks on DFM that for some reason don't seem to attract anything near the liquidity they get on the KSE that is one of the most active markets in the region with possibly the highest proportion of active to dormant stocks. I guess one explanation would be that they have not done enough to promote themselves in the other markets as in their home country and the other could be that people trade DFM exclusively for Dubai based stocks and choose the more liquid Kuwait market otherwise.

This is an area that requires more focus I think but with the growing pan regional interest things should improve.