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HBP# HK1293

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XU LI
RAMEE LIU

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ARTGO SHARES: A 98% ONE-DAY DROP
雅高控股有限公司 [ArtGo Holdings Limited] (HKSE:03313) was listed on the Hong Kong
Stock Exchange’s main board. The company mined marble in mainland China. It had incurred
losses four of the six years since it had been listed.1 In July, after MSCI, the index company,
announced it would include the stock in the MSCI China All Shares Index, the share price shot

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up from around HKD2.0 to a high of HKD14.96 in November.2,3 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 [see Exhibit 1 for the share price fluctuation of
ArtGo].

ArtGo’s former executive director, Leung Ka-kit, resigned on 11 October, one month before
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the stock collapsed. 4 Leung’s wife, Wu Jing, continued to act as Chairman and Executive
Director of ArtGo. Both Leung and Wu owned about 17.33% of the shares through a company
named Maswin International (Hong Kong) Co. Limited (Maswin).5 Stockbrokers had lent funds
to Maswin and received shares of ArtGo as collateral.

The sharp fall of the share price on 21 and 22 November was largely caused by certain
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stockbrokers’ forced sale under prior stock financing arrangements with Maswin. When the
announcement by MSCI led to a sharp decrease in share price, it triggered a margin call.

1 ArtGo, 2013, 2014, 2015, 2016, 2017 and 2018 annual reports,
http://www.artgo.cn/upfiles/financial/1409196880425.pdf
http://www.artgo.cn/upfiles/financial/1430214627336.pdf
http://www.artgo.cn/upfiles/financial/1443086522479.pdf
https://www1.hkexnews.hk/listedco/listconews/sehk/2017/0427/ltn201704272345.pdf,
No

https://www1.hkexnews.hk/listedco/listconews/sehk/2018/0427/ltn201804272742.pdf,
https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0429/ltn201904292804.pdf, accessed 17 January 2020.
2
Since the mid-1980s, the value of the Hong Kong dollar has been pegged at HKD7.8 = USD1 through the currency board
system, with a trading band of HKD7.75–7.85.
3 Daniel Shane and Hudson Lockett, “Hong Kong Stock Wipeouts Highlight Governance Gaps,” Financial Times, 17 December

2019, https://www.ft.com/content/dd23a57e-1be2-11ea-97df-cc63de1d73f4, accessed 31 December 2019.

4 Artgo announcement on 11 October 2019, https://www1.hkexnews.hk/listedco/listconews/sehk/2019/1011/ltn20191011315.pdf,

accessed 22 January 2020.

5 Artgo announcement at 9 p.m. on 21 November 2019,

https://www1.hkexnews.hk/listedco/listconews/sehk/2019/1121/ltn20191121009.pdf, accessed 22 January 2020.

Ramée Liu prepared this case under the supervision of Dr. Xu Li for class discussion. This case is not intended to show effective
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or ineffective handling of decision or business processes. The authors might have disguised certain information to protect
confidentiality. Cases are written in the past tense, this is not meant to imply that all practices, organizations, people, places or
fact mentioned in the case no longer occur, exist or apply.

© 2020 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be digitized, photocopied
or otherwise reproduced, posted or transmitted in any form or by any means without the permission of The University of Hong
Kong.
Ref. 20/662C

Last edited: 5 May 2020

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[email protected] or 617.783.7860
 20/662C Artgo Shares: A 98% One Day Drop

Shareholders had to repay the loan immediately or stockbrokers would have the right to sell all

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the shares owned by Maswin.

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On the morning of 21 November, Maswin, as the majority shareholder of ArtGo, sold 150.8
million shares, representing approximately 4.87% of the total outstanding shares of the
company. On 22 November, stock trading resumed, and Maswin sold a further 385.5 million
shares, 12.46% of total shares.6 By the end of 22 November, all ArtGo shares that Maswin
owned were sold in the stock market.

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Without substantial changes in its business or economic outlook, the stock price of ArtGo fell
drastically in one day. This was not the first time such a situation had occurred in Hong Kong.
Was this market speculation, stock manipulation by majority shareholders or stockbrokers?
What could an individual minority ArtGo shareholder do in response to this drop in value and
what lessons could be drawn from this experience?

ArtGo

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ArtGo’s main business was the sale of marble products including marble blocks, one-side-
polished slabs, and cut-to-size slabs. It had marble mining permits to operate at Yunnan,
Guizhou, Jiangxi, and Hubei provinces as of 30 June 2019.7 Some of the permits were under
negotiation with local governments for extension. Business activities were based in Shanghai
and other cities in mainland China. The company was listed in Hong Kong, where its share
price was denominated in Hong Kong dollars. For accounting reporting purposes, it used CNY
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as its reporting currency. As of 30 June 2019, the total number of full-time employees of the
company was 110.

From 2016 to the end of 2018, the company had traded commodities in addition to its marble
business. Commodities trading contributed a lower profit margin ratio from 0.9% to 4% than
the sale of marble products. During the period from FY2016 to FY2018, there was a large
increase in revenue from commodities trading and a drop in the sales of marble products. The
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gross margin dropped during this period [see Table 1].

Table 1: Sales by Product Categories (CNY in thousands)

Jan to Dec Jan to Dec Jan to Dec Jan to Jan to

2016 2017 2018 June 2018 June 2019
No

12 months 12 months 12 months 6 months 6 months

Marble blocks 57,805 51,565 14,806 12,084 21,047

One-side-polished
31,750 83,797 61,293 26,979 24,303
slabs
Cut-to-size slabs 27,645 15,115 10,017 2,887 2,560
Total marble products 117,200 150,477 86,116 41,950 47,910
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Logistics services 0 933 1,241 55,142 39

6 Artgo announcement on 24 November 2019,

https://www1.hkexnews.hk/listedco/listconews/sehk/2019/1121/ltn20191121009.pdf, accessed 22 January 2020.
7 ArtGo, 2019 1H interim report, https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0830/ltn201908301180.pdf, accessed

17 January 2020.

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 20/662C Artgo Shares: A 98% One Day Drop

Commodity trading 942,257 1,119,648 449,435 780 0

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Total 1,059,457 1,271,058 536,792 97,872 47,949

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Gross margin of
2.9% 1.2% 0.9% 4.0% n/a
commodity trading

Source: ArtGo, 2016, 2017, and 2018 annual reports, and 2019 1H interim report,

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https://www1.hkexnews.hk/listedco/listconews/sehk/2017/0427/ltn201704272345.pdf,
https://www1.hkexnews.hk/listedco/listconews/sehk/2018/0427/ltn201804272742.pdf,
https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0429/ltn201904292804.pdf,
https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0830/ltn201908301180.pdf, accessed 10
January 2020.
Between June and August 2019, the company purchased two additional investment properties
at CNY121m in mainland China. It financed the purchase by issuing new shares. ArtGo’s

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management stated that they expected a boom in the property market. Furthermore, ArtGo
acquired a new business at CNY45m, also funded by issuing new shares. The new business was
in the manufacturing and sale of calcium carbonate that was mainly produced from marble
residue. This acquisition was aimed to diversify from stone mining into the stone application
business, according to ArtGo’s management. No strategies to improve their revenue or profits
in their core marble mining business were announced in 2019.

Financial Results, FY2018 vs. FY2017

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Revenue, including both the sale of marble products and commodities trading, was at
CNY536.8m in FY2018, down from CNY1.3bn in FY2017 [see Exhibit 2 for a financial
summary]. Revenue from the sale of marble products (excluding commodities trading) was
CNY86.1m in FY2018, down from CNY150.5m in FY2017 [see Table 1]. ArtGo’s loss was
CNY649m in FY2018, compared to a profit of CNY7.8m in FY2017. This loss in FY2018
included a nonrecurring loss of CNY517.9m from the revaluation of intangible assets. The
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intangible assets written off were the mining rights of the Weishi and Guiguan mines. The
Guiyang county government had not renewed the licenses of these mines. According to ArtGo’s
2018 annual report, the reasons were the Guiyang county government’s “strengthening of
environment protection,” “effective and proper utilization of natural resources,” and
“development planning.” This write-off had a significant impact on the financial performance
of ArtGo, representing 22% of the net asset value of the company.

Financial Results, FY2019 1H vs. FY2018 1H

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ArtGo generated revenue of approximately CNY47.9m from the sale of marble products
(excluding commodities trading) in the first six months of 2019 compared to CNY41.9m during
the same period in FY2018. It continued to operate in a loss position in the first six months of
2019. The loss was CNY29.0m in 1H2019 compared to CNY41.1m in 1H2018. ArtGo’s net
asset value was CNY1.7bn, and its market capitalization was HKD5.7bn as of 30 June 2019.

Shares Traded on Hong Kong Stock Exchange

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Role of Securities and Futures Commission (SFC)

The Securities and Futures Commission was the regulatory board and issued Securities and
Futures Ordinance (SFO) to monitor equity securities and other financial instruments trading
in Hong Kong. There were fines and penalties for offenders, as well as criminal charges if
applicable.

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 20/662C Artgo Shares: A 98% One Day Drop

Major shareholders and senior management were required to give notices to SFC, the Stock

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Exchange of Hong Kong, and the listed company according to “SFO Part XV - Disclosure of

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Interests,” if the following events occurred:

Substantial shareholders - individuals and corporations who are interested in

5% or more of any class of voting shares in a listed corporation, must disclose
their interests, and short positions, in voting shares of the listed corporation;

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and

Directors and chief executives of a listed corporation must disclose their

interests, and short positions, in any shares in a listed corporation (or any of
its associated corporations) and their interests in any debentures of the listed
corporation (or any of its associated corporations).8

This information was disclosed, but in most cases, the public was not notified once the

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transaction took place.

However, corporate insiders’ stock financing arrangements were not required to be disclosed
according to the SFO. SFC issued a guidance on stock financing for the stock lenders, the
Guidance Note for Short Selling Reporting and Stock Lending Record Keeping Requirements
in August 2000.9 The guidance required stock lenders to maintain stock transaction records and
to keep each record for at least one year from the day the record was made.
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Hong Kong Exchange and Clearance Ltd. (HKEx) and the Stock Exchange of
Hong Kong Ltd. (SEHK)
Hong Kong Exchanges and Clearing Ltd. was the holding company of the Stock Exchange of
Hong Kong Ltd.10 SEHK operated different exchanges but mainly in equity securities in the
form of ordinary shares for the listed companies in Hong Kong, namely the main board and
GEM 11 board. It was the exchange for 2,449 listed companies with HKD38.2tn of market
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capitalization as of 31 December 2019. In 6 of 10 years, from 2010 to 2019, SEHK was ranked
number one globally in initial public offerings (IPO).

Alibaba, the mainland China e-commerce giant, raised more than USD11bn in November
2019.12 However, there were many small to medium-sized companies listed on the main board,
like ArtGo, with net asset values of only HKD1.7bn. According to SEHK, a minimum of 25%
of shares was required to be held by the public at IPO listing and after listing. Short-selling of
listed shares was illegal according to the regulation. Companies listed on the SEHK applied
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Hong Kong Financial Reporting Standards (HKFRS) and other international accounting
standards, compared to the Shanghai and Shenzhen stock exchanges that followed the Chinese
GAAP.

8 SFC, SFO Part XV - Disclosure of Interests, https://www.sfc.hk/web/EN/rules-and-standards/sfo-part-xv-disclosure-of-

interests/, accessed 5 February 2020.
9
SFC, The Guidance Note on Short Selling Reporting and Stock Lending Record Keeping Requirements,
https://www.sfc.hk/web/EN/assets/components/codes/files-current/web//guidance-note-on-short-selling-reporting-and-stock-
lending-record-keeping-requirements/guidance-note-on-short-selling-reporting-and-stock-lending-record-keeping-
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requirements.pdf, accessed 7 January 2020.

10 HKEx, About HKEx, https://www.hkexgroup.com/about-hkex/company-information/about-hkex?sc_lang=en, accessed 5

February 2020.
11 GEM Board is a market for small to midsized companies operated by Hong Kong Exchanges and Clearing Limited. It has

separate listing committee and listing rules from the main board. See more details in
https://www.hkgem.com/root/e_default.aspx.
12 Alexandra Stevenson, “Plunge in 3 Hong Kong Stocks Offers a Cautionary Tale,” New York Times, 1 December 2019,

https://www.nytimes.com/2019/12/01/business/dealbook/hong-kong-stocks.html, accessed 22 January 2020.

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[email protected] or 617.783.7860
 20/662C Artgo Shares: A 98% One Day Drop

Regulations and Ordinance

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SEHK had issued “Rules Governing the Listing of Securities on the Stock Exchange” (Listing

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Rules) to regulate the activities of companies listed on the exchange.13 Corporate insiders were
required to disclose share trading activities and the number of shares held in the listed
companies’ interim report and annual reports. They were not required to notify the SEHK and
SFC of each transaction. Corporate insiders could not trade their company’s securities when
they had unpublished inside information of the company or during the blackout period.

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When the shareholders or directors of the company entered a stock financing agreement with a
stockbroker, financial institution, or others, SEHK did not require any disclosure except in
specific circumstances. These events were not considered transactions that required notification
of the public. 14 Public investors would have no knowledge of these stock financing
arrangements until the shares held as collateral were sold by the corporate insiders, stockbroker,
financial institution, or others in the stock market, and such transactions were directly related
to questions raised by the regulator.

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Fluctuation in ArtGo’s Share Prices
ArtGo’s Share Prices 12 Months before Sharp Fall on 21 November 2019
According to ArtGo’s official filings to the SEHK, corporate insiders were selling without
purchasing any shares in the 12 months before November 2019. 15 The total number of shares
sold was 843,428,000, equivalent to 27.1% of total outstanding shares, for a total of HKD943m.
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Most of the shares were sold in the three months before 21 November 2019. On 21 November
2019, the Wall Street Journal reported that David Webb, an activist shareholder, suspected
insider trading of ArtGo’s shares:

Or some insiders exercised control over other parties to purchase shares. Or

the stockbrokers or the stock bankers. 16 In September, activist shareholder
David Webb issued a “bubble warning” about ArtGo and said he had written
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to the Securities and Futures Commission, the city's market regulator, calling
for a probe into its ownership. I believe the stock was being manipulated and
was closely held, but whether the SFC can prove that remains to be seen.17

July 2019 Announcement Including ArtGo in MSCI China All Shares Index
In July 2019, MSCI announced it would include ArtGo as a constituent in the MSCI China All
Shares Index, effective after the close of trade on 26 November 2019. Many ordinary investors
No

began to purchase shares of ArtGo because they widely followed the MSCI.

13 HKEx Listing Rules for main board, https://en-rules.hkex.com.hk/node/1932, accessed 12 February 2020.
14
HKEx Listing Rules, Chapter 14 Equity Securities, Notifiable transactions, https://www.hkex.com.hk/-/media/HKEX-
Market/Listing/Rules-and-Guidance/Other-Resources/Continuing-Obligations-and-Annual-Listing-Fees/Continuing-
Obligation-Fee/chapter_14.pdf?la=en, accessed 5 February 2020.
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15 “Don’t Ignore the Fact that this Insider Just Sold Some Shares in ArtGo Holdings Limited,” Simply Wall St., 28 November

2019, https://simplywall.st/stocks/hk/capital-goods/hkg-3313/artgo-holdings-shares/news/dont-ignore-the-fact-that-this-
insider-just-sold-some-shares-in-artgo-holdings-limited-hkg3313/, accessed 23 January 2020.
16 Stock Banker was the bank that was of the lender of funds to shareholders in stock financing agreement. Some banks in Hong

Kong would lend funds to certain shareholders for selective stocks, according to an industry insider.
17 Xie, Yu, “Investors Lose Their Marbles as MSCI U-Turn Spurs 98% Stock Plunge: After a near 40-fold increase this year,

Hong Kong-listed ArtGo was on the verge of inclusion in influential indexes,” Wall Street Journal online, 21 November 2019,
accessed 7 January 2020.

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 20/662C Artgo Shares: A 98% One Day Drop

MSCI China All Shares Index

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MSCI provided index-tracking funds, and investors or fund managers used its selection of

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stocks. It was the leader in providing research-based indexes and analysis. The MSCI China
All Shares Index focused on the market capitalization of the companies and whether the
business was based in China. 18 It included China large and mid-cap shares listed in Hong Kong,
Shanghai, Shenzhen, and outside of China.19

FTSE Russell Global Equity Index

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On 20 September 2019, ArtGo announced that the FTSE Russell had selected the company to
include in its index.20 FTSE Russell was the index arm of the London Stock Exchange Group
PLC. It added ArtGo to its FTSE Global Equity Index Series China index, effective on 20
September 2019. This news further added to outside investors’ confidence in purchasing more
shares.

Resignation of Director and Shareholder

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Leung resigned from the board as executive director, effective 11 October 2019. According to
the announcement of the company, Leung resigned to devote more time to his other
engagements. Moreover, Leung confirmed in this announcement that he had had no
disagreement with the board.

SEHK Raised Query on Unusual Price and Trading Volume Movements

On 8 November 2019, after the share prices surged further, ArtGo replied to the SEHK’s query
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on unusual price and trading volume movements: 21

The Board confirms that save as disclosed below, it is not aware of any reason
for such increase or of any information which must be announced to avoid a
false market in the Shares or of any inside information that needs to be
disclosed under the Inside Information Provisions (as defined in the Listing
Rules) under Part XIVA of the Securities and Futures Ordinance (Chapter 571
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of the Laws of Hong Kong) (the “Inside Information Provisions”).

ArtGo explained because of the MSCI inclusion, its share prices increased, and therefore it did
not involve insider trading that was required to be reported before the announcement.

MSCI Decided Not to Include ArtGo in Its Index

Stock prices collapsed on the morning of 21 November 2019 after MSCI announced that it
No

would not include ArtGo in its index. Analysts believed MSCI’s decision was the result of a
Wall Street Journal article published shortly before 21 November 2019.22 SEHK halted ArtGo’s
trading at 11:04 a.m. that same day. Then, that evening at 9:04 p.m., ArtGo announced the
forced sale of the shares by Maswin and explained the 98% drop in share prices. Early in the
morning of the same day, there was a sharp fall of the share price, which triggered a margin
18 MSCI website, MSCI China All Shares Index, https://www.msci.com/msci-china-all-shares, accessed 3 February 2020.
19
MSCI China All Shares Index fact sheet, https://www.msci.com/documents/10199/db0bcd1c-9f3b-4735-b30a-5e23b668ff86,
accessed 3 February 2020.
20 ArtGo announcement on 20 Sept 2019, https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0920/ltn20190920423.pdf,
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accessed 3 February 2020.

21 ArtGo announcement on 8 November 2019,

https://www1.hkexnews.hk/listedco/listconews/sehk/2019/1108/ltn20191108203.pdf, accessed 22 January 2020.

22 To King-see, “Second tier stock held for speculation lost over margin calls; market has many loopholes,” Hong Kong

Economic Times, 28 November 2019,

https://inews.hket.com/article/2508148/%E4%BA%8C%E7%B6%AB%E7%82%92%E8%82%A1%E9%A0%BB%E7%88%
86%E6%96%AC%E5%80%89%20%20%E5%B8%82%E5%A0%B4%E6%A9%9F%E5%88%B6%E6%BC%8F%E6%B4%
9E%E5%A4%9A, accessed 3 January 2020.

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 20/662C Artgo Shares: A 98% One Day Drop

call, as stipulated in the stock financing agreements between Maswin and its stockbrokers.

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Stockbrokers exercised their rights to sell the shares owned by Maswin that were held as

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collateral. A total of 4.87% of the total issued share capital or 150,750,000 shares of ArtGo was
sold. The average price sold was HKD3.81 that day, compared to a closing price of HKD0.305.
Stockbrokers of Maswin cashed out HKD576m as a result. The percentage of ArtGo shares
held by Maswin was reduced to approximately 12.46% of the total outstanding shares.

The shares resumed trading on the next day, 22 November 2019. On that day, Maswin was

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forced to sell its remaining shares in ArtGo. These shares were also under forced sale by certain
stockbrokers under the stock financing arrangement.

Stock Finance Agreement

Certain shareholders or directors entered stock finance arrangements with stockbrokers or other
financial lenders in which corporate insiders borrowed funds and loaned the shares to
stockbrokers to be held as collateral. Stockbrokers had the rights to sell and trade these shares
under certain circumstances as agreed. Under the agreements, if there was a sharp drop in share

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price, stockbrokers had the right to sell the shares upon margin call once loan borrowers could
not repay such loans or margin deposits immediately. Investors of listed companies only
realized shares were pledged as collateral after the shares were sold by stockbrokers or other
financial lenders. According to David Webb, rules and regulations kept the market less than
healthy.

Another Stock Finance Agreement—China First Capital Group

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In November 2019, Maswin was not the only listed company in Hong Kong that encountered a
sharp drop in share price partially caused by stock financing arrangements. China First Capital
Group Limited (FIRST CAP GP) (HKSE:1269) made shock absorbers and operated schools. It
was a constituent of many major stock indexes, such as MSCI, S&P, and FTSE. The company,
controlled by China First Capital’s chairman and executive director Wilson Sea, was forced to
sell shares of China First Capital that had been pledged as collateral. On 27 November 2019,
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China First Capital faced a similar situation as ArtGo, and its share price plunged by 78% after
a margin call. China First Capital shares resumed trading the following day.

China First Capital Group Pledged Shares of Partially Owned Company Virscend

In addition to China First Capital’s shares that stockbrokers held as collateral, the company
pledged shares of a partially held listed company, Virscend Education (HKSE:1565) in favor
of two stockbrokers in relation to separate stock financing arrangements. In China First
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Capital’s announcement on 10 January 2020, it disclosed a summary of these two stock finance
agreements [see Exhibit 3]. 23 Shares of Virscend plunged on the same day as China First
Capital after a margin call.
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23 China First Capital Group Limited announcement on 10 January 2020,

https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0110/2020011001103.pdf, accessed 20 January 2020.

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 20/662C Artgo Shares: A 98% One Day Drop

Shares of Kasen Wiped out in November 2019

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In addition to ArtGo and China First Capital, two other small-capital Hong Kong–listed
companies with core business operations in mainland China had their market capitalization
wiped out in November 2019 [see Exhibit 4]. Kasen International Holdings Ltd.’s
(HKSE:496) share price dropped on 21 November 2019, the same day as ArtGo. The share
price fell by 90% after the release of a report by a short-seller, Blue Orca Capital.24 There were
accusations that the senior management had disposed of a business in mainland China that

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benefited related parties of the chairman. There were also other corporate governance issues
raised by Blue Orca Capital. Kasen denied all allegations.

Share Value of Tibet Water Fell by Two-thirds in November 2019

Tibet Water Resources Ltd. (HKSE:1115), a bottled mineral water supplier operating in
mainland China, lost two-thirds of its market capitalization in November 2019 as well [see

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Exhibit 4]. In its announcement on 4 November 2019, Tibet Water said it was unaware of
anything that caused the decrease in share price and increase in trading volume of the shares
that needed to be disclosed under Part XIVA of SFO.25 Following its share price collapse,
Tibet Water sued a Hong Kong stockbroker. It claimed the stockbroker had “unlawfully
misappropriated” 200 million of its shares.
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The Way Forward
The high volatility in these small-capital Hong Kong–listed companies raised international
concerns about their corporate governance practices. The stock financing arrangement that
ArtGo and China First Capital engaged in caused a domino effect once the margin call took
place, which affected related companies, such as Virscend. 26 In most cases, the existing
regulations did not require disclosures when a company entered a stock financing agreement.
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Investors did not have the opportunity to re-evaluate their investment in these businesses until
the shares were sold.

Stockbrokers holding shares under stock financing agreements could trade shares without the
consent of stock lenders. Were their actions in the best interests of the listed company and its
investors? Why would shareholders or directors enter into these agreements when they knew
the risks involved? ArtGo’s stocks continued to trade the following day after the crash and halt
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on 21 November 2019. Did the SEHK and SFC perform their duties diligently to protect the
interests of small investors? Should MSCI and other index companies have paid more attention
to the fundamentals of individual companies and determine if their high multiple ratios were
justified? Should the index companies have been regulated because passive investment funds
and investors relied on their index to include stocks in their investment portfolio?
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24 Kasen announcement on 22 November 2019,

https://www1.hkexnews.hk/listedco/listconews/sehk/2019/1122/2019112200015.pdf, accessed 7 February 2020.
25 Tibet Water Resources announcement on 4 November 2019,

https://www1.hkexnews.hk/listedco/listconews/sehk/2019/1104/ltn20191104515.pdf, accessed 20 January 2020.

26 Yusuf Khan,” A Hong Kong stock just plunged 76% in 30 minutes,” Markets Insider, 27 November 2019,

https://markets.businessinsider.com/news/stocks/china-first-capital-group-stock-plunges-76-half-hour-trading-2019-11-
1028720988, accessed 6 February 2020.

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 20/662C Artgo Shares: A 98% One Day Drop

EXHIBIT 1: SHARE PRICE OF ARTGO IN 2019 (IN HKD)

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Source: Daniel Shane and Hudson Lockett, “Hong Kong Stock Wipeouts Highlight Governance
Gaps,” Financial Times, 17 December 2019, https://www.ft.com/content/dd23a57e-1be2-11ea-
97df-cc63de1d73f4, accessed 31 December 2019.
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No
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 20/662C Artgo Shares: A 98% One Day Drop

EXHIBIT 2: ARTGO FINANCIAL SUMMARY (CNY THOUSANDS)

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31 31 31 30 30
Consolidated Statement of December December December June June
Profit and Loss 2016 2017 2018 2018 2019
12 12 12 6 6
months months months months months

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Revenue 1,059,457 1,271,058 536,792 97,872 47,949
less:
Cost of sales -961,235 1,195,094 -501,511 -75,614 -29,161
Gross profit 98,222 75,964 35,281 22,258 18,788

Other income and gains 15,695 25,139 9,192 4,505 4,659

Selling and distribution

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expenses -24,683 -11,835 -5,376 -3,259 -1,490
Administrative expenses -35,407 -46,155 -90,192 -42,565 -26,263
Other expenses -19,861 -7,052 -6,966 -45 -2,444
Impairment loss on
intangible assets 0 0 -517,954 0 0
Impairment loss on goodwill 0 0 -19,179 0 0
Impairment loss on trade
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receivables 0 -478 -9,667 0 0
Impairment loss on property
plant and equipment 0 0 -1,521 0 0
Impairment loss on
prepayments, other
receivables and other assets 0 0 -881 0 0
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Finance costs -24,317 -18,963 -39,865 -19,461 -21,857

Share of losses of associates 0 -151 -1,014 -152 -435
Total expenses -88,573 -59,495 -683,423 -60,977 -47,830

Profit/-Loss before tax 9,649 16,469 -648,142 -38,719 -29,042

less:
No

Income tax expense -10,195 -8,660 -997 -2,320 15

Net Profit/-Loss after tax -546 7,809 -649,139 -41,039 -29,027

Earnings/-Loss per share

(CNY) 0.00 0.004 -0.172 -0.01 -0.02
Do

10

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[email protected] or 617.783.7860
 20/662C Artgo Shares: A 98% One Day Drop

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31 31 31 30

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Consolidated Statement of December December December June
Financial Position 2016 2017 2018 2019
(CNY thousands)

Non-Current Assets
Property, plant, and equipment 60,866 130,599 235,105 265,524

rP
Investment properties 98,401 94,334 90,267 174,369
Prepaid land lease payments 13,271 358,956 350,017 0
Right-of-use assets 0 0 0 356,041
Intangible assets 1,022,719 1,010,669 657,823 655,578
Prepayments, other receivables
and other assets 14,168 13,141 13,280 12,624
Goodwill 0 19,179 0 0

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Interest in associates 0 375,399 376,046 375,611
Payments in advance 480,561 156,666 90,237 145,256
Deferred tax assets 9,537 9,737 9,499 10,675
Restricted deposits 2,455 2,560 2,524 914
Total non-current assets 1,701,978 2,171,240 1,824,798 1,996,592

Current Assets
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Inventories 179,361 129,203 54,019 39,525
Trade receivables 23,159 433,109 276,663 207,090
Prepayments, other receivables
and other assets 218,813 68,933 45,154 45,197
Pledged deposits 94,226 1,129 0 0
Cash and bank balances 60,896 29,356 100,176 82,280
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Total current assets 576,455 661,730 476,012 374,092

Total Assets 2,278,433 2,832,970 2,300,810 2,370,684

Current Liabilities
Trade and bills payable 153,150 196,291 82,648 91,940
No

Lease liabilities 0 0 0 1,026

Contract liabilities 0 0 5,925 969
Other payables and accruals 80,363 111,428 112,648 71,786
Tax payables 24,636 30,970 31,811 18,625
Interest-bearing bank and other
borrowings 197,682 174,403 223,388 172,266
Total Current Liabilities 455,831 513,092 456,420 356,612

Non-Current Liabilities
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Interest-bearing bank and other

borrowings 5,000 224,500 184,250 299,985
Deferred tax liabilities 2,229 12,226 11,874 13,007
Deferred income 5,480 5,270 5,060 4,955
Provision for rehabilitation 13,323 17,100 15,143 15,635

11

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 20/662C Artgo Shares: A 98% One Day Drop

Lease liabilities 0 0 0 89

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Total non-Current Liabilities 26,032 259,096 216,327 333,671

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Total Liabilities 481,863 772,188 672,747 690,283

Shareholders’ Equity
Equity attributable to owners of

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the Company
Issued capital 15,482 18,349 22,768 23,817
Reserves 1,463,033 1,725,019 1,507,568 1,562,784
Subtotal 1,478,515 1,743,368 1,530,336 1,586,601
Non-controlling interests 318,055 317,414 97,727 93,800
Total Shareholders’ Equity 1,796,570 2,060,782 1,628,063 1,680,401

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Total Liabilities & Shareholders’
Equity 2,278,433 2,832,970 2,300,810 2,370,684

31 31 31 30
December December December June
Consolidated Statement of Cash Flow 2016 2017 2018 2019
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12 12 12 6
(CNY thousands) months months months months

Profit/(loss) before tax 9,649 16,469 -648,142 -29,042

add: Adjustments -31,718 -247,232 733,634 40,313
Net cash flow from operating
activities -22,069 -230,763 85,492 11,271
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Net cash flow from investing activities -273,644 -231,562 -51,431 -103,280
Net cash flow from financing
activities 70,082 429,442 36,946 74,113
Net increase/(decrease) in cash and
cash equivalents -225,631 -32,883 71,007 -17,896
No

Cash and cash equivalents at

beginning of the year 289,896 60,896 29,356 100,176
Effect of foreign exchange rate
changes, net -3,369 1,343 -187 -
Cash and cash equivalents at end of
the year 60,896 29,356 100,176 82,280

Source: ArtGo 2016, 2017, and 2018 annual reports, and 2019 1H interim report,
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https://www1.hkexnews.hk/listedco/listconews/sehk/2017/0427/ltn201704272345.pdf,
https://www1.hkexnews.hk/listedco/listconews/sehk/2018/0427/ltn201804272742.pdf,
https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0429/ltn201904292804.pdf,
https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0830/ltn201908301180.pdf, accessed 10
January 2020.

12

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 20/662C Artgo Shares: A 98% One Day Drop

EXHIBIT 3: SUMMARY OF STOCK FINANCE ARRANGEMENTS BETWEEN CHINA FIRST

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CAPITAL GROUP AND STOCKBROKERS ON VIRSCEND’S SHARES

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China First Capital Group’s announcement on 10 January 2020, “Supplemental Announcement
on Disclosable Transaction and Profit Warning,” described the summary of two stock finance
agreements with the respective securities companies, GF Securities and Central China
Securities. The shares of Virscend were used as collateral for these two stock finance
agreements.

rP
GF Securities

The Company entered a margin financing arrangement with GF Securities by opening and
maintaining a margin securities account with GF Securities in September 2017, pursuant to
which GF Securities granted a margin facility to the Company. The margin facility is repayable
on demand; the interest rate was 8.375% per annum as of 27 November 2019. The financing
arrangement has no expiry date considering its nature as a margin securities account. The

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Company undertook to maintain adequate margin at all times in relation to its indebtedness to
GF Securities, failure of which would constitute an event of default on part of the Company
resulting that GF Securities is entitled to dispose of any of the securities owned by the Company
without prior notification. Proceeds of such transaction would be applied to reduce any
liabilities.

Other events of default which may lead to force sale of pledged shares listed in the terms of the
relevant financing arrangement (the “Terms”), among others, include:
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(a) failure to pay and/or provide when due any payment, security or value whatsoever;

(b) bankruptcy, winding up or other analogous proceedings against the Company;

(c) any attachment or enforcement against any of the charged securities;

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(d) default in the due performance or observance of the Terms;

(e) any consent, authorisation, approval, licence or board resolution required revoked,
suspended, terminated or ceasing to remain in full force and effect; and/or

(f) untrue representation or warranty.

No

As at 27 November 2019, the Company has pledged 140,300,000 Virscend Edu Shares in
favour of GF Securities in relation to the financing arrangement. The amount of financing
obtained through such financing arrangement amounts to HK$40,295,844.51 as at 27
November 2019. On 27 November 2019, since the price of Virscend Edu Share dropped by
more than 30% and touched the relevant force sale threshold, GF Securities made a margin call
at very short notice then forced sold 67,660,000 Virscend Edu Shares without further
notification. As at the date of this announcement, the abovementioned margin facility has been
settled in full by the relevant force sale by GF Securities and part of the proceeds from the
voluntary sale of Virscend Edu Shares the Company conducted on 27 November 2019.
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Central China Securities

The Company entered a margin financing arrangement with Central China by opening and
maintaining a margin securities account with Central China since May 2017. The margin
facility is repayable on demand, the interest rate was 8% per annum as at the date of 27

13

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[email protected] or 617.783.7860
 20/662C Artgo Shares: A 98% One Day Drop

November 2019. The financing arrangement has no expiry date considering its nature as a

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margin securities account. The Company’s margin account for purchased securities or make

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good delivery of sold securities against payment to Central China. Should the Company fail to
do so, Central China is entitled to (i) in case of a purchase or subscription of securities, sell or
transfer the securities concerned and/or sell or transfer any other securities in any account of
the Company with Central China to satisfy the Company’s settlement obligations; or (ii) in case
of a sale of securities, to borrow and/or purchase securities equivalent to the securities
concerned in order to satisfy the Company’s settlement obligations, at a price which Central

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China believes to be reasonable.

Other events of default that may lead to force sale of pledged shares listed in the financing
arrangement, among others, include:

(a) insolvency or bankruptcy;

(b) breach of any material terms;

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(c) defaults in performing obligations or liabilities;

(d) untrue representation or warranty; and/or

(e) any warrant or order of attachment or distress or equivalent or analogous order is issued, or
any judgment is levied, enforced or executed, against any of the Company’s assets or
account maintained with Central China.
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Central China is also entitled to recourse to its rights of combination and set-off or any other
rights under the margin financing arrangement.

As at 27 November 2019, the Company has pledged 18,834,000 Virscend Edu Shares in favour
of Central China in relation to the financing arrangement. The amount of financing obtained
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through such financing arrangement amounts to HK$13,475,632.23 as at 27 November 2019.

On 27 November 2019, since the sharp price fall of Virscend Edu Share, the margin ratio was
over 120% and touched the relevant force sale threshold, and thus, Central China forced sold
14,354,000 Virscend Edu Shares without prior notification. As at the date of this announcement,
the abovementioned margin facility has been settled in full by the relevant force sale by Central
China on 27 November 2019.

Source: China First Capital Group announcement on 10 January 2020,

No

https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0110/2020011001103.pdf, accessed 20
January 2020.
Do

14

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 20/662C Artgo Shares: A 98% One Day Drop

EXHIBIT 4: SINGLE-DAY LOSSES OF HONG KONG STOCKS IN NOVEMBER 2019 (USD

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BILLIONS)

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rP
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Source: Daniel Shane and Hudson Lockett, “Hong Kong Stock Wipeouts Highlight Governance
Gaps,” Financial Times, 17 December 2019, https://www.ft.com/content/dd23a57e-1be2-11ea-
97df-cc63de1d73f4, accessed 31 December 2019.
tC
No
Do

15

This document is authorized for educator review use only by Pinky Bahuguna, Chandigarh University until Jul 2025. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860