Understanding the Market | Hong Kong Stocks Plunge to Zero at the Close, What Happened to China Tianrui Cement?

Today's Hong Kong stock trading was relatively calm throughout the day, but in the last 10 minutes before the close, three stocks suddenly plummeted together as if they had planned it. These three stocks are: China Tianrui Cement (01252), Haosen Financial Technology (03848), and Shengneng Group (02459).

Among them, China Tianrui Cement suffered the deepest decline, plummeting by as much as 99.04%, while Haosen Financial Technology and Shengneng Group fell by 90.96% and 49.88% respectively.

What does a 99% decline mean? It means that the stock would need to increase by 10,000% to recover its pre-decline price. This is an extremely challenging task. For a stock to plummet to this extent, it is likely that its only way forward is delisting.

The simultaneous sharp decline of the three stocks felt like a severe earthquake had struck. What could be the reasons behind this?

1. Epicenter: Tianrui Cement

Looking at the data, Tianrui Cement had a trading volume of HKD 24.38 million today, while the company's market value before the crash was around HKD 14.1 billion (now reduced to only HKD 1.41 billion), indicating that it was not a very small stock.

It is rare to see a stock with a market cap of over HKD 14 billion being hammered down by 99% with a trading volume of just over HKD 20 million. The reasons are nothing but two: first, the disappearance of buying interest, where the buyers couldn't even organize over HKD 20 million in funds and allowed the stock to free fall to zero. Second, a high degree of concentration of ownership, where the interests of shareholders are highly aligned, leading to a sell-off by one party and others having no choice but to follow suit, resulting in a stampede.

Therefore, we need to examine who was actively selling off with this trading volume of over HKD 20 million. At the same time, where there are sellers, there are buyers, so we also need to see who was buying. The data is clear: within the trading volume of over HKD 24 million, the main sellers were Zhongwei Financial, accounting for over HKD 20 million, while the main buyers were Futu, accounting for over HKD 22 million.

Futu is a brokerage firm whose users are mainly retail investors, so these over HKD 22 million in buying volume should mainly be retail investors bottom fishing. Indeed, with a stock dropping by 99%, can't it rebound by 50% tomorrow? Therefore, the retail investors who have been battered in the Hong Kong stock market have gathered here, betting on this stock to clarify tonight and rebound by 50% tomorrow, as if their whole life depended on it!

The irrational behavior of retail investors can be understood, but from an analytical perspective, we are curious about two things: firstly, what exactly did Tianrui Cement do to deserve such a fate of being wiped out by 99% in a day? What is the fundamental situation of this stock? Secondly, we are even more curious about who this "Zhongwei" is, who actively sold over HKD 20 million to almost zero out this HKD 14 billion stock.

Let's first talk about Tianrui Cement.

Tianrui Cement is a cement production company located in Ruzhou City, Pingdingshan, Henan Province, with its chairman named Li Liufa. Over the past 5 years, the company's average revenue has been around RMB 10 billion, reaching a peak of RMB 12 billion in 2021, followed by a continuous decline over the next two years, with revenue in 2023 amounting to RMB 7.9 billion From a profit perspective, profits have plummeted sharply since 2020. Shareholders' net profit was 1.86 billion yuan in 2020, but by 2023, it had turned into a loss of 630 million yuan. As a cement company, despite no significant deterioration in revenue from 2021 to the present, profits have shrunk dramatically to a loss.

Taking a non-conspiratorial view, the sluggish real estate market in recent years combined with the impact of the pandemic has led to a contraction in cement demand and price declines, which are the surface reasons. The hidden reasons behind it, even if they exist, are unknown to us.

In any case, if we consider the data for 2022 with a net profit of 450 million yuan, applying a 6x PE ratio would give us a market value of 3 billion yuan. Considering the loss in 2023 and the weak liquidity nature of the Hong Kong stock market, halving that value would still be around 1.5 billion yuan. It shouldn't plummet to 140 million overnight.

There must be a reason behind the anomaly. Next, let's take a look at the identity of "Zhongwei," who used a 20 million sell order to drive down the price of Tianrui Cement by 99%.

2 Ambush: Zhongwei Financial

"Zhongwei" is short for Zhongwei Financial Group, a Hong Kong-listed company with the code 00245.HK. This is a comprehensive financial group, specifically a securities firm. While it may not be the securities firm itself trading Tianrui Cement stocks, we have reason to believe that Zhongwei Financial is the tool used by its shareholders to trade financial assets.

Firstly, the entry barrier for the Hong Kong financial market is low. By obtaining a license and hiring a Responsible Officer, one can engage in stock brokerage. Therefore, there are many small securities firms. However, the proportion of securities firms actually conducting business is relatively low, with most of them facilitating stock trading for their shareholders or related parties.

There are two advantages to this setup. Firstly, it reduces costs because they do not handle client business, so apart from legal or government fees, other expenses can be avoided. Since large stock trading amounts are common, the remaining costs are still reasonable. Secondly, and more importantly, it helps major shareholders conceal their identities. By hiding behind a securities firm, they can remain anonymous to ordinary investors, making it difficult to track or analyze them.

Returning to Zhongwei Financial.

According to the latest data, the company's revenue in 2023 was 114 million Hong Kong dollars, with the highest annual revenue in the past five years occurring in 2020 at only 318 million Hong Kong dollars. The current market value of the company is 1.6 billion Hong Kong dollars, which is not the revenue and market value scale of a securities firm engaged in stock brokerage. Therefore, we have reason to believe that this "Zhongwei Financial" is simply a tool securities firm for facilitating stock trading for its shareholders.

Next, we need to investigate who the shareholders behind Zhongwei Financial are and why they decided to drive down Tianrui Cement's price According to public information, in the latter half of March, Zhongwei Financial completed a personnel adjustment. Former Chairman Lin Le and her husband Lin Zhihong signed an agreement with Zhuhai Dahengqin Group. According to the agreement, the Lin couple, who hold shares in Rose Holding, will sell 10.043 billion shares of Zhongwei Financial to Zhuhai Dahengqin Group, accounting for 28.93% of the total share capital, with a total transaction price of approximately HKD 899 million.

Established in April 2009, Zhuhai Dahengqin Group is a state-owned enterprise directly under the Zhuhai State-owned Assets Supervision and Administration Commission. The group is dedicated to promoting moderate diversification of the Macau economy and deepening cooperation between Guangdong and Macau.

The personnel changes for executive directors and independent directors were completed on March 22. The change of the Chairman of the Board of Directors was also completed yesterday (April 8), with Lin Le being replaced by Huang Jinyuan.

"Zhongwei Financial" is the new company name after changing its name in July 2020. Its predecessor, "China Seven Star Shopping Limited Company," was registered in Hong Kong, a British territory, on August 11, 1972, and later renamed as China Seven Star Holdings Group.

In December 2015, the company changed its name from "China Seven Star Holdings" to "China Minsheng Financial Holdings." The company is located on the 22nd floor of China Taiping Building, 8 Sunning Road, Causeway Bay.

It is worth noting that Lin Zhihong, the husband of former Chairman Lin Le of Zhongwei Financial, worked at China Minsheng Bank for 15 years from 2000 to 2015, holding positions such as General Manager of the International Business Department of Dalian Branch and Deputy General Manager of Dalian Branch; Secretary of the Party Committee and President of the Trade Finance Department of the Head Office; Member of the Party Committee and President of the Hong Kong Branch of the Head Office. From 2015 to 2016, Lin Zhihong served as the President of Hengfeng Bank. He later became the Chairman and General Manager of Zhongwei Financial Group until the recent personnel changes at Zhongwei Financial.

On the day following the completion of the Chairman's personnel change, Zhongwei Financial launched a sudden attack on Tianrui Cement in the closing session, with a turnover of over 20 million causing the market value of 14.1 billion to plummet to 141 million.

The scales are flying in the sky, as if the Jade Dragon is fighting. The stock market is just a stage, reflecting the complex game of money, power, and people behind it. The sharp drop of Tianrui Cement at the end of today is a partial result of the complex game involving many companies and individuals.

Aftermath

As for the other two companies that plummeted at the same time, one is Haosen Financial Technology and the other is Shengneng Group.

Haosen, formerly known as Fudao Financial Leasing, is owned by Hong Kong businessman Lu Weihao, with the company located in Qianhai, Shenzhen. Shengneng Group is a photovoltaic enterprise, with the largest shareholder being Helmores Wealth Trust from New Zealand, and the company's boss is Australian Peter Brendon Wyllie.

From the shareholding relationships and personnel, there doesn't seem to be any connection between these two companies and Tianrui Cement. As for the reasons for their sharp decline, if we speculate a bit, it may be that these two companies have some business dealings with Tianrui Cement. Outsiders are unaware of these connections, but related parties are aware. Therefore, upon seeing Tianrui Cement being targeted, they hurriedly sold off their chips out of fear Before the sharp decline, Haosen Financial had a market value of HKD 800 million, close to a shell stock. On the other hand, Ascend Group had a market value of HKD 4.2 billion before the sharp decline, with a relatively small market value. In addition, Ascend Group was a new stock that just landed on the Hong Kong stock market at the beginning of last year. By the end of last year, the highest stock price was HKD 10.2, with a market value of HKD 10 billion at that time.

Summary

The sharp decline of three stocks at the end of today's trading session was not significant and did not attract much attention. However, due to the prevalent culture of scams in the Hong Kong stock market over the years, many seemingly unrelated stocks actually have some kind of connection. Once one of these related stocks encounters a problem, it will affect a large number of stocks, leading to a chain reaction.

This phenomenon of chain reaction declines has existed as early as 1992 when the Hong Kong drama "The Greed of Man" was filmed and aired, depicting this accurately through the character Fang Zhanbo's chain reaction of stock declines.

In June 2017, the Hong Kong Securities and Futures Commission ordered the suspension of trading for some scam stocks, leading to a collective sharp decline of these stocks, resembling an epic and magnificent scene. At that time, David Webb, known as the "Stock Market Long Hair," summarized the "50 Hong Kong stocks that should not be touched," with most of the declining stocks being part of the "David Webb 50."

Now, with the improvement of the delisting system and the introduction of new listing rules, the Hong Kong stock market has been cleaned up to a large extent, and scam stocks have been largely cleared out. The occurrence of collective sharp declines is becoming less common, and the investment value of the Hong Kong stock market is gradually increasing. However, the sudden sharp decline of three stocks led by Tianrui Cement at the end of today still serves as a reminder to investors to be cautious, stay rational, and avoid touching investment targets beyond their cognitive scope