China Tianrui Group Cement Co said a sudden drop in its stock last week triggered a margin call involving a major shareholder, explaining the dynamic behind a dramatic plunge that wiped out nearly all of its market value.

On April 9, about 133.1 million shares held in the margin accounts of the controlling shareholder - Yu Kuo Co, which is owned by Tianrui non-executive director Li Liufa and his spouse - “were forcibly sold in the open market due to the unusual price drop,” according to a company filing on Wednesday. The shares represented about 4.53% of the total.

That would also mean that around half of the selloff on the day was due to the margin call. Tianrui’s stock plunged 99% to about HK$0.05 (three sen) as about 281 million shares, or a third of its free float, changed hands, according to Bloomberg-compiled data. Of that amount, more than 80 million shares were traded during the final few minutes of the session. 

The sudden and steep fall of its shares underscores the risks associated with Chinese companies that have a high shareholding concentration and are involved in owners’ margin accounts. The trading halt for the unprofitable building materials company also coincides with an unprecedented property crisis in the country that has caused stress among developers. 

Tianrui said in the statement that its business operations remain normal. But share trading will remain halted while the board seeks to clarify more information, including confirmation from Yu Kuo on whether there was an execution of another 10 million shares of margin calls.

Yu Kuo is “seeking legal advice as to whether the forced sale was in compliance with all applicable laws as well as the terms of the relevant contracts,” according to the statement. “Yu Kuo will take further action as appropriate and necessary.”

The Li couple was once one of the richest people in Henan province, jointly ranking 168 on the Hurun Report of China’s richest people in 2010 with a net worth of 6.8 billion yuan for their ownership in Tianrui. 

The company swung to a net loss of 634 million yuan last year, from a profit of 449 million yuan in 2022, citing the sector downturn and competition. 

Other obscure companies have had to deal with dramatic plunges this month, including the shares of penny stock Xinji Shaxi Group that plummeted as much as 87%. More than a dozen firms with high ownership concentration could face near term margin calls, Bloomberg Intelligence estimated. 

Hong Kong securities regulators only require substantial shareholders to disclose pledged positions if they’re related to an issuer’s financing, while those tied to personal debts can remain undisclosed, according to Bloomberg Intelligence’s note. 

Meanwhile, small-cap firms with pledged shares are more vulnerable to sudden price plunges as a mechanism in the city used to smooth out extremely volatile trading covers less than 2% of small cap firms’ fall. 
 

  - Bloomberg