Recently, I took a moment to revisit the stock market and was struck to see that Hainengda's share price had plummeted to a new low for the past two months, dipping to 14.37 yuanThis decline represents a staggering 54% drop from its peak of 31.02 yuanLong-time followers of this stock are likely familiar with my previous articles discussing this trajectory, but witnessing this decline in real-time is still disheartening, especially for uninformed retail investors who are often the most adversely affected.

IHainengda: Riding the Waves to Prosperity

Hainengda has been the talk of the town in the stock market lately, and one could argue it's among the most prominent stocks drawing attentionOver the span of just over a month and a half, its share price skyrocketed from a mere 3.52 yuan to 31.02 yuan—an increase of nearly eightfold, making it one of the best-performing stocks in the A-share market, second only to Airong Software on the Beijing Stock Exchange.

The catalyst for this remarkable rally was the BP machine explosion in Lebanon on September 17, which allegedly triggered orders worth up to $20 billion for manufacturing in East China, with the stipulation that no third-party components be included

This rumor fired up the internet and ignited excitement among Chinese investors, propelling the stock market to new heights.

As the largest producer of two-way radios in China, Hainengda quickly became perceived as the prime beneficiary of these rumored contractsOn September 19, Hainengda's shares hit the daily limit-up threshold—this uptick continued with six consecutive days of limit-up tradingFollowing a significant monetary policy announcement by the central bank on September 24, the stock's momentum intensified, and prices kept breaking records.

Every bullish market invariably gives birth to a few 'super stocks.' However, the rise of such stocks is rarely random; they are generally supported by some underlying logicFor Hainengda, that logic stemmed from the buzz surrounding the $20 billion orders, further fueled by anecdotal reports of bustling activity at the company’s production facilities.

Not every retail investor gets the chance to verify the reality on the ground

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However, public companies are required to disclose pertinent information, especially concerning significant ordersDespite this requirement, Hainengda didn't officially confirm the existence of the purported Middle Eastern contractIt wasn't until late October that the company finally denied having any substantial contracts and refuted claims of significant changes to its existing orders.

This announcement effectively quashed the rumors surrounding the alleged $20 billion contracts from the Middle EastEven if such deals did exist, it was clear they weren’t benefiting Hainengda directlyFollowing the announcement, the stock's fortunes reversed dramatically—it opened at the daily limit-up price only to plummet straight to its limit-down threshold in the afternoon trading session.

II

The Fate of 'Super Stocks': A Return to Value

Seasoned stock traders know that Hainengda had inadvertently stepped into the realm of speculative stocks, priced far above its intrinsic value, as various market forces took turns driving its share price upWith the removal of its supporting logic, a peak in stock prices was only to be expected, which set the stage for a lengthy regression back to valueInitial drops were approximately 30%, and the following decline could head toward 50%.

In the weeks following the peak, encouraged by lingering enthusiasm for Hainengda, retail speculators attempted to capitalize on a further rise, only to see shares retrace around 40% before experiencing a few days of significant gainsMany retail investors hopped on this bandwagon, hoping for a second wave of excitement, blissfully unaware of the substantial sell-off that awaited them just over the horizon.

The third limit-up was quickly breached, marking the end of the second speculative surge

After a peak, every recovery provides an escape opportunity—a lesson seemingly lost on retail investors, who tend to view these spikes as paths to profit rather than chances to minimize lossesConsequently, many retail players found themselves in an unfortunate position of being reinvested at high prices yet again.

As the initial rebound faded, Hainengda's stock price dropped to a new low point of 16 yuanWithin a month, a second wave of speculative activity emerged, though this time the resurgence proved far weaker, achieving just a single limit-up before fizzling outThe previously hot stock started to resemble a floundering chicken, losing the confidence of shareholders, especially after experiencing repeated disappointments.

Hainengda now appears poised to enter its third phase of decline, with its share price down 54% from its zenithWhile this year's performance indicators show signs of recovery, a dynamic price-to-earnings ratio still hovers around a staggering 83 times, whereas the industry average is a mere 24. This disparity signifies that Hainengda's stock remains vastly overvalued compared to its peers.

From its earlier low of 3.5 yuan to a current valuation of approximately 14.7 yuan reflects an increase of over three times

Yet, this increase demands exceptional performance to justify itEven under an optimistic estimate of a 40 times evaluation, the company would require a net profit of 700 million yuan to support its stock price, while projections for this year suggest a net profit of only around 330 million yuan, drastically short of the needed figure to sustain such valuation levels.

IIIRetail Investors: The Biggest Victims

A significant uncertainty faced by Hainengda’s earnings arises from an ongoing legal battle with Motorola over patent issuesSince being sued in 2019, Hainengda has experienced severe sales declines, and their performance has struggled to recoverThis persistent issue has impeded the company’s fortunes for over four years, with no resolution in sight

The U.Scourt has even issued a global injunction against sales, albeit temporarily.

Hainengda attempted to counteract U.Slegal challenges through China's legal system by filing a suit in a Shenzhen court, but eventually withdrew under external pressure and opted to continue litigation against Motorola in the U.SThe company’s net profit excluding special items has reached its best level since 2019, suggesting the impact of the patent dispute is easingStill, the potential fallout remains an ongoing threat until a settlement with Motorola is reached, with litigation costs escalating to an alarming 4 billion yuan.

In this latest market cycle, the real beneficiaries were those speculative investors actively involved in manipulating the stockThey astutely seized the moment, capitalizing on exaggerated rumors about significant orders following the Lebanese explosion and ensnaring unwitting retail investors chasing quick profits, who ended up as the primary victims—left holding the bag as the stock climbed to unsustainable highs.

In this zero-sum game, the winnings of larger investors came directly from the losses of smaller retail investors, transforming wealth distribution

Yet, perceptive investors weren’t entirely absentAccording to shareholder data from the end of the third quarter, one such investor—Su Yanxiang—entered as one of the top ten shareholders, acquiring approximately 6.3 million shares, representing 0.49% of the circulating stock.

With the stock price around 7 yuan at the end of the third quarter, Su Yanxiang’s initial investment approached 24 to 40 million yuanThe stock reached a peak of 31 yuan, valuing his holdings at around 1.8 billion yuan, and with current valuations near 14.7 yuan, his market value remains close to 1 billionThis constitutes a significant profit.

Indeed, the stock market is fraught with risks, and investing necessitates careful considerationHowever, speculative stocks pose particularly acute risks to retail investors, who are often outplayed from the startThe momentum driving speculative stocks cannot be initiated by retail investors, who typically follow trends without leading them