Yesterday's plummet by 99%, today's trading halt! What exactly happened to China Tianrui Cement?

Source: Sinobo Research

1. Event: Plunged by 99%

At the end of trading on April 9th, China Tianrui Cement suddenly plunged, with its stock price dropping from HKD 4.92 per share to HKD 0.048 per share in just 25 minutes, marking a maximum intraday decline of 99.3%. By the close, the decline was still at 99.04%, at HKD 0.048 per share, with a total market value of only HKD 141 million remaining. The total market value evaporated by HKD 14.55 billion in a single day, with a total daily turnover of HKD 24.38 million.

The stock has low activity, with long-term trading being light. The daily trading volume has been in the tens of thousands for the past month, with 90,000 shares traded on April 8th. However, there was a surge in trading volume at the end of April 9th, with a total of 281.30 million shares traded throughout the day, indicating a significant anomaly.

Weak Fundamentals, Likely Due to Pledging and Other Behaviors

Tianrui Cement is the ninth largest cement manufacturer in China, with a national market share of around 1.84%, belonging to the central region cement enterprises.

In 2023, due to factors such as real estate, the cement industry's prosperity weakened, with the price of cement clinker in China ranging from 240 to 330 yuan per ton, nearly 100 yuan lower than in 2022, indicating a significant decline in cement prosperity.

Affected by industry factors, Tianrui Cement's performance was weak, with operating income of 7.951 billion in 2023, a year-on-year decrease of 29%, and a net loss of 634 million, a year-on-year decrease of 241%.

Compared to its peers, Tianrui Cement's performance is not the worst, with Jidong Cement directly losing 1.75 billion in 2023.

Although the performance was weaker than in 2022, it was not enough to cause a sudden collapse in stock price.

With the stock price plummeting by 99%, especially before the close, coupled with a large volume of trading, it is highly likely that the stock was pledged, and the brokerage demanded additional margin, but the pledger did not have enough collateral to meet the margin call, leading to a forced liquidation by the brokerage.

According to Securities Times reporters, through the CCASS system (the new generation of Hong Kong's Central Clearing and Settlement System), the proportion of China Tianrui Cement shares held in the CCASS system reached 94.22%, with the total holdings of the top 20 brokerage seats already at 77.12%, and the top 10 brokerage seats holding 62.03% of the shares, indicating a high degree of share concentration.

Of particular note, in December last year, 170 million shares of China Tianrui Cement were transferred from Guotai Junan (Hong Kong) to Huarong Securities, and on April 3rd, 25 million shares were rapidly transferred to China Merchants Securities (Hong Kong) From suddenly switching from one securities firm to another, and in such a large volume, the reason for such a move is expected to be the possibility of preferential financing costs and a higher financing ratio from the securities firm. For example, Guotai Junan can only finance 20%, while transferring to Huarong Securities can provide financing of 40%.

Therefore, the sharp drop in the stock price of China Tianrui Cement is most likely due to these securities firms liquidating positions due to additional margin requirements before the market closes.

How did it come to this?

Tianrui Cement, once a barbarian in the capital market, also used to be wealthy and powerful, and once had a strong presence. Why has it come to this today?

Looking back at the equity battle with Shanshui Cement, actions speak louder than words, coupled with the legendary color of physical confrontation, showing a wildness beyond the rules. With individual efforts, Shanshui Cement has also been in a sorry state in the capital market: We have studied this background, and the following information comes from the internet:

The struggle between Tianrui Cement and Shanshui Cement is a typical corporate equity battle. This struggle not only involves the management and shareholders of the two companies, but also external investors and regulatory authorities, making it quite rare in the history of Chinese enterprises in terms of complexity and influence.

The cause of the struggle: can be traced back to the equity structure of Shanshui Cement. Originally a state-owned enterprise restructured into a private enterprise, Shanshui Cement had a complex equity structure involving multiple interests. After its listing in Hong Kong in 2008, the ownership of Shanshui Cement became more dispersed, laying the groundwork for the subsequent struggle. In 2013, internal conflicts within Shanshui Cement began to surface, and the disagreements among the senior management gradually became public. After Zhang Bin, the son of Zhang Caikui, took over as the general manager, conflicts arose with the "veteran" senior executives, intensifying internal conflicts.

Escalation of the struggle: In 2015, Tianrui Group began to purchase a large number of shares of Shanshui Cement in the secondary market, rapidly increasing its shareholding percentage and eventually becoming the largest shareholder of Shanshui Cement. This move directly triggered the outbreak of the equity battle. Tianrui Group subsequently proposed to restructure the board of directors, intending to take control of Shanshui Cement. After several extraordinary general meetings of shareholders, Tianrui Group finally successfully restructured the board of directors at the end of 2015 and took over the actual operation of Shanshui Cement in early 2016.

Impact of the struggle: is multifaceted. Firstly, this struggle severely affected the operational stability and market reputation of Shanshui Cement. During the struggle, the financial condition of Shanshui Cement deteriorated, leading to bond defaults. Secondly, the struggle also attracted high attention from the market and regulatory authorities, affecting the competitive landscape of the entire cement industry. Additionally, the struggle sparked deep reflections on the equity structure and management mechanisms of state-owned enterprises after restructuring.

End of the struggle: Gradually moving towards reconciliation with efforts from all sides. With the entry of Jinnan Chanfa into the board of directors, a new turning point was reached in the control battle of Shanshui Cement. After a series of complex legal litigations and negotiations, the two parties finally reached a certain consensus, and the struggle gradually subsided.

However, the thrilling events during this period can be seen from the police report in 2016, showing that the entire incident was filled with violence: Looking back, Tianrui was once the king of grabbing land. The cement production and sales radius is very fixed, with strong regional attributes, which determines that its market is relatively stable. Tianrui's attack on Shanshui can be seen as its offensive in the Shandong market, impacting a portion of market share, but the means may be too aggressive.

Often in high-end business battles, it presents such a simple appearance, fiercely throwing blood on the face of the masses.

The bullet shot 8 years ago finally hit Tianrui today. Is it the cycle of heaven, or the decline of the cement industry itself, it is difficult to judge. However, from the current perspectives, we can deduce several conclusions:

First, the shockwave of real estate is still in the secondary stage. Local real estate in Henan, such as Jianye, is also in the mud. The overall decline in the regional cement market follows the overall trend. The overall resilience is weak, for example, Conch Cement relies on the Yangtze River Delta region to resist stronger.

Second, Tianrui's own cash flow has been stretched to the extreme, so it has sought various financing methods such as equity pledge. However, as the deadlines approach, the cash flow has not improved, and it has been forced to trigger possible disposals.

The situation may not be complicated, but the game during the period and the final outcome are unexpected to the parties involved. Purely from an operational perspective, Tianrui should not be so vulnerable, after all, the regional attributes and production capacity of cement still have certain value.

As for the subsequent game, we may see several possibilities:

1. The current sharp decline is due to the lack of buying power after the volume, rather than pricing Tianrui's fundamentals. Therefore, after the sharp decline, a sharp rise is likely to follow, and even the original shareholders can intervene at a low cost if they still have the will to survive. Sharp rises and falls are perhaps the magical aspects of the Hong Kong stock market.

2. The tightness in funding is a manifestation, the core issue is that the fundamentals are not very solid, especially in the current background variables, Tianrui's overall debt may be on the risk edge, so its subsequent disposal remains tricky.

The core is the trend variable of cement, the ability to generate cash flow is weakening. In addition, the signal of sharp decline will intensify its credit contraction, and various factors such as upstream and downstream customers, banks, etc., will exacerbate its deterioration. The market needs an explanation, giving it a window of time.

3. Licking blood on the edge of a knife for high returns means that some things are not something ordinary institutions can afford to play. Whether Tianrui is ultimately wealthy or a potential deep pit, both may be powerful, whether destructive or supportive. Private enterprises are difficult to speak of corporate governance, with too many uncertainties and too many lawless areas, not every analysis has a template to follow. The previous fights are a vivid portrayal.