NO one can fault the managers of Eminence Enterprise Ltd. for lacking chutzpah.

    After saddling investors with a 99.99 percent loss over the past five years, the Hong Kong-listed property firm is asking shareholders to plow fresh capital into the business for the eighth time in five years. Eminence plans to raise HK$478.2 million (US$61.7 million) in a rights offering next month, twice as much as its current market value.

    It’s a scenario that often ends badly for Hong Kong investors, who stumped up more than US$16 billion for rights offerings by smaller firms over the past five years, only to watch the median stock drop 36 percent in a rising market. Now, as the Central Government gives mainland investors greater access to Hong Kong small caps through a new cross-market stock trading link, the city’s repeat rights issuers are coming under increased scrutiny.

    Mainland regulators have warned investors to be wary of such companies, even as offerings like the one proposed by Eminence remain legal in Hong Kong. Mainland regulators’ concerns highlight the potential for friction as the exchange link blurs the lines between a high-touch regulatory regime on the mainland and the more laissez faire system in Hong Kong.

    “Individual investors from the mainland get burned when they blindly apply their small cap knowledge to Hong Kong stocks,” said Dai Ming, a money manager at Hengsheng Asset Management Co. in Shanghai. “Mainland regulators see small investors as the market foundation and offer them meticulous parenting. As Hong Kong seeks to boost trading by luring mainland investors, it must step up protection.”

    Rights issues, in which a company offers new shares to existing stockholders, are used by firms around the world to raise capital for any number of reasons, including paying off debt and funding expansion. While Hong Kong requires companies to disclose details of planned and completed offerings, critics of the city’s regulations say unsophisticated investors are vulnerable to firms who use repeated issuance to keep loss-making businesses afloat.

    Eminence’s proposed rights offering is subject to approval from independent shareholders, according to an exchange filing last month. The company, which also has a money-lending business, plans to use the funds for property investments and working capital, saying most of its HK$376 million in cash and cash equivalents at the end of October has been earmarked for other purposes.

    The firm has no comment, according to Betty So, who identified herself as assistant company secretary for Easyknit Group, to whom calls to Eminence were transferred. The two businesses have offices and some top managers in common, and Easyknit, also a property firm, is listed as a substantial shareholder of Eminence in the latter’s latest annual report.

    Eminence recorded net losses in seven of the past 10 years, including a loss of HK$69.3 million in the fiscal year ended March that the company attributed to declines in the fair value of investment properties in Hong Kong, exchange filings show. Shares have tumbled more than 80 percent in each of the past four years, a period when the Hang Seng Index rose 19 percent.

    Eminence is hardly unique. More than 290 companies in Hong Kong with market values below US$1 billion have conducted rights offerings since December 2011, raising about six times more than their counterparts on the mainland. The Hong Kong firms reported net losses totaling more than US$5 billion during the period, versus a combined profit of about US$2.5 billion for rights issuers on the mainland.

    Faced with a rights issue, individual investors can buy more stock, betting the new funds will spur growth, hold tight and watch their shareholding get diluted, unload their stake, or, in some cases, sell the rights to other investors. (SD-Agencies)