China Tianrui Group Cement Co., a prominent cement producer, recently reported a significant drop in its stock prices, which precipitated a margin call on a major shareholder. The company disclosed that on April 9, due to an unexpected severe drop in its stock price, about 4.53% of its total shares were compulsorily sold in the open market. This event involved the sale of 133.1 million shares that were held in margin accounts by Yu Kuo Co., a company with indirect ownership by Li Liufa, a non-executive director of Tianrui, and his spouse. This sell-off was triggered by the sudden price drop, which necessitated meeting the margin requirements set by lenders.
On the day of the massive sell-off, the forceful selling of these shares contributed significantly to the market's activities. Tianrui’s stock experienced a catastrophic drop of 99%, reducing its value to merely HK$0.05 per share. This sharp decline accounted for nearly half of all market transactions for Tianrui on that day. Moreover, a substantial portion of the company’s free float—about a third—was exchanged during this tumultuous session, with over 80 million shares changing hands in the last few minutes alone. The initial trigger for this drastic market reaction, which led to the margin call and subsequent stock sell-off, is still not fully understood.
The dramatic decrease in Tianrui's share price illustrates the inherent risks associated with Chinese firms that have highly concentrated ownership, especially when such ownership is tied into the margin trading accounts of the owners. This vulnerability is further emphasized by the current economic environment, where Tianrui operates within an unprofitable sector amidst an unprecedented real estate downturn in China. This broader market crisis is exerting additional pressure on companies like Tianrui, which rely heavily on the construction and real estate sectors for their business.
Tianrui has reassured stakeholders that its operational activities are continuing without disruption, despite the turmoil in the stock market. However, the company has temporarily halted trading of its shares as the board seeks additional clarity on several matters. This includes confirmation from Yu Kuo Co. regarding whether an additional execution of 10 million shares occurred due to further margin calls. This suspension is intended to allow the company and its stakeholders to stabilize the situation and ensure accurate reporting and compliance with financial regulations.
In response to the forced sale of shares, Yu Kuo Co. is now seeking legal counsel to ascertain whether the transactions were conducted in accordance with applicable laws and the terms agreed upon in relevant contracts. Depending on the legal advice received, Yu Kuo may take additional steps to address any issues arising from this incident, ensuring compliance and potentially seeking remediation for any irregularities or contractual breaches.
Previously, Li Liufa and his spouse were noted as among the wealthiest individuals in Henan province, reflecting their substantial financial interests in Tianrui. They were listed as the 168th richest in China in the 2010 Hurun Report, with a combined net worth estimated at 6.8 billion yuan ($940 million). Despite past financial successes, Tianrui has recently reported a shift from profitability to significant losses, underscoring the challenges facing the sector. The company reported a loss of 634 million yuan last year, a stark contrast to a profit of 449 million yuan the previous year, amid stiff competition and a sector-wide downturn.
The situation faced by Tianrui is not unique within the Hong Kong stock market. Other relatively unknown companies have also encountered dramatic losses this month. For example, shares of Xinji Shaxi Group, another penny stock, plunged by as much as 87%. Analysts from Bloomberg Intelligence have warned that many firms with high ownership concentration and pledged shares are potentially at risk of facing similar margin calls in the near future.
These developments have sparked discussions on the need for more stringent regulations in Hong Kong, particularly concerning the disclosure of pledged shares. Current regulations only mandate disclosures of substantial shareholders' pledged positions if they relate directly to the issuer’s financing, leaving those tied to personal debts undisclosed, which may contribute to market instability. Moreover, mechanisms in place to mitigate severe fluctuations in stock prices cover less than 2% of small cap firms, highlighting a gap in market protections for smaller companies.
18.04.2024
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