ArtGo Holdings Limited (HKSE:03313) was listed on the Hong Kong Stock Exchange’s main board. The company mined marble in mainland China. In July, after MSCI, the index company, announced it would include the stock in the MSCI China All Shares Index, the share price shot up from around HKD2.0 to a high of HKD14.96 in November. Inclusion was expected to result in significant demand for this stock by passive investors. When MSCI announced it would not include ArtGo in its index after all, the share price dropped to HKD0.305 before share trading was halted on the morning of 21 November. Almost HKD46bn, equivalent to 98% of the shareholders’ wealth, had been wiped out
Stocks listed on the Hong Kong Stock Exchange, one of the world’s largest, are famous for their volatility. Without substantial changes in its business or economic outlook, stock prices have been known to go up multiple times. At the same time, it is not unheard of for a stock to lose most of its value within a single day.
This case addresses a few interesting and important questions about stock valuation on the Hong Kong Stock Exchange. Stock financing agreements between substantial shareholders and lenders can have a significant effect on the value of listed companies in Hong Kong. The same goes for market news and rumours. How can (minority) shareholders can avoid this kind of tail risk, and what are the problematic risk indicators in such cases? Does the regulator do enough to protect the interest of minority shareholders?
The author used this case in Financial Statement Analysis and Enterprise Valuation and Financial Accounting courses. Below are some of the key discussion points:
1. How market news and rumours can affect the value of a listed company.
2. How stock financing agreement between substantial shareholders and lenders (stockbrokers) can impact the value of a company.
3. Why small investors should be more cautious when investing and focus on the company fundamentals.