Jewellery-maker KTL International Holdings Group Ltd (KTL, 0442) is proposing to split its shares 2:1. Page 7 of the circular dated 6-Oct-2015 states:
"The Board believes that the Share Subdivision will decrease the trading spread as well as the volatility of the trading price of the Shares and thus result in the improved liquidity in trading of the Company's Subdivided Shares."
This statement of belief is unbelievable, given without reasons, and misleading. Far too often, listed companies do not actually give reasons in their documented "Reasons for the proposal" - they just state bald beliefs of the Board without giving any reasons to support those beliefs. KTL is newly-listed on 11-Mar-2015 and its compliance adviser, by the way, is Guotai Junan Capital Ltd.
The closing share price on the day before the circular was $8.80, so the minimum bid-offer spread on the SEHK spread table is $0.01, and the split should reduce the price to $4.40, at which point the minimum bid-offer spread will still be $0.01, so it will be twice as wide in percentage terms, which is what matters for liquidity. So the minimum spread, and the increment in the spread, will not decrease as stated, it will increase, and wider spreads tend to reduce liquidity, not improve it. KTL completely fails to inform shareholders of the effect of the spread table when seeking their approval at an EGM scheduled for 22-Oct-2015.
Secondly, there is no reason to believe that a lower absolute share price will reduce the volatility (the standard deviation of percentage share price movements over a chosen period). The board fails to give any reason for this belief. In fact, wider spreads (as in the case of KTL) tend to marginally increase volatility because the price oscillates either side of the minimum spread. For example if a stock is bid at $0.50 and last traded at that price, then a buyer who wants instant execution has to pay at least $0.51, causing a 2% movement in the share price.
We call on the Stock Exchange and SFC to require KTL to correct this misleading statement and to either send the updated information to shareholders before they vote, or withdraw the proposal.