Small-cap Chinese stocks spark meme-like buzz

By James Rogers

Small-cap Chinese stocks have been attracting plenty of attention in recent days, according to Stocktwits

Small-cap Chinese stocks have been attracting plenty of attention in recent days, according to data from Stocktwits, a social platform for investors and traders.

"Regardless of what's happening in the broader market, there are communities of retail investors focused on trading stocks that larger players can't (or won't)," Tom Bruni, lead writer of the Daily Rip & Markets, Stocktwits's newsletter, told MarketWatch. "A good example of that is what's happening in many low-float Chinese stocks -- what began with a few familiar favorites like Huadi International Group Co. Ltd. (HUDI), Addentax Group Corp. (ATXG), and Magic Empire Global Ltd. (MEGL) has spread like wildfire over the past week."

Set against this backdrop, Hong Kong-based trading firm TOP Financial Group Ltd. (TOP)joined the list of meme stocks last week when its shares skyrocketed more than 890% after proving popular with the WallStreetBets group on Reddit. The stock ended Tuesday's session up 2.9%.

Related: After TOP Financial's surge, influential meme-stock trader looks for next big opportunity

The company, however, is relatively small, particularly when compared with meme-stock darlings AMC Entertainment Holdings Inc. (AMC) and GameStop Corp. (GME). In TOP's annual report filed with the Securities and Exchange Commission in August 2022, the company disclosed net income of $3.5 million for the year ending March 31, 2022, down from $5 million the year before. Revenue came to $7.8 million, down from $16.9 million.

"Once a relatively unknown stock experiences an outsized move, traders will seek out others that have similar characteristics in hopes of front-running the next big winner," Bruni told MarketWatch.

Addentax is a supply chain management consulting service focused on the textile and garment industry. The company, which has a market cap of $40.42 million, reported revenue of $2.1 million, in its recent fiscal third quarter, down from $2.8 million in the prior year's quarter.

Huadi, which manufactures industrial stainless steel pipes and tubes products, has a market cap of $80.45 million. Hong Kong-based financial services provider Magic Empire has a market cap of $50.64 million.

In addition to TOP Financial, Huadi, Addentax, and Magic Empire, some of the stocks currently being talked about and traded heavily include GD Culture Group Ltd. (GDC), Sentage Holdings Inc. (SNTG), JX Luxventure Ltd. (JXJT), Quhuo Ltd. (QH), MMTec Inc. (MTC), Hongli Group Inc. (HLP), China Jo-Jo Drugstores Inc. (CJJD), AMTD Digital Inc. (HKD), WeTrade Group Inc. (WETG), Powerbridge Technologies Co. Ltd. (PBTS), Leju Holdings Ltd. (LEJU), Tian Ruixiang Holdings Ltd. (TIRX), Wah Fu Education Group Ltd. (WAFU), and Baosheng Media Group Holdings Ltd. (BAOS), according to Stocktwits's Bruni.

Related: Meme stock TOP Financial Group soars more than 890%, spurred on by the Reddit crowd

"While these stocks span across industries, they all have a very small size and Chinese ties in common," Bruni said. "Even at their peak, most of these stocks only see their market caps reach tens of millions of dollars, which limits the playing field to smaller retail investors."

Retail traders are using social-media sites, like Stocktwits, to discover, research and act on trends in real time, according to Bruni. "As a result, many of these names have racked up thousands of watchers on Stocktwits over the past few weeks," he said.

However, Bruni notes that most of the stocks are in long-term downtrends, and their rallies are often short-lived.

To illustrate his point, Bruni pointed to TOP Financial, which is nearly 1,200% above its 52-week lows but is still down more than 80% from its 52-week highs.

"Traders flock to volatility," he added. "And when there's money to be made, they're taking their opportunity, no matter the underlying reason for or sustainability of a move."

-James Rogers

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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05-03-23 0814ET

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