24 February 2019
The China Securities Regulatory Commission has tightened its scrutiny of listing applications as well as listed firms. Photo: China Daily
The China Securities Regulatory Commission has tightened its scrutiny of listing applications as well as listed firms. Photo: China Daily

There’s a silver lining behind recent chaos in A-share market

Investors must have been stunned by recent stock exchange filings in the A-share market, including announcements of outlandish losses and a sudden reversal of earnings outlook.

Let’s take a look at some of the cases.

Leshi Internet Information & Technology Co. (300104.CN) projected a huge loss of 11.6 billion yuan (US$1.85 billion) for 2017, including 7.9 billion yuan from impairment losses in its film copyright, financial products and receivables.

The company’s shares hit the 10 percent down limit for six straight days as of Jan. 31.

Any listed firm will have to delisted if they suffer three consecutive years of losses, according to the rules of the GEM board of the Shenzhen Stock Exchange.

It is quite possible that Leshi was trying to book all potential impairment losses in 2017 so that it could have a better chance of reporting positive earnings this year and in 2019. That will prevent the company from getting delisted.

Company founder Jia Yueting had pledged his 25 percent stake in the firm to secure financing, and further declines in the stock price mean other parties such as financial institutions, restructuring firms or other shareholders might take control of the company.

Jiangsu Protruly Vision Technology Group (600074.CN), an internet firm engaged in video technology, has touched the 10 percent down limit for 24 days since Dec. 29. Its share price has slumped 70 percent, and the company has lost 18 billion yuan of its market value.

Zhuang Min, a major shareholder of the company, has reportedly embezzled 6.7 billion yuan of company assets and is nowhere to be found.

Mired in a swamp of problems, including excessive investments, credit crunch, falling capacity, customer loss and project halts, the company admitted that it had no idea how big last year’s loss would be.

In another case, Zhangzidao Group (002069.CN) said in a filing on Tuesday that “the inventory level of our scallops farmed in the sea appeared to be abnormal,” and the company might report a loss for 2017.

The company made a similar announcement four years ago, saying it suffered a loss of more than 800 million yuan in 2014 due to “rare cold water currents that occur once every several decades”, resulting in the loss of large numbers of shells.

The announcement of Bus Online (002188.CN), which reversed its previous forecast of a gain to a huge loss, is probably the most dramatic.

The company had expected a net profit of 164 million yuan to 210 million yuan last year, representing a year-on-year jump of 75 to 124 percent.

However, the company announced recently that it is now forecasting a loss of 1.5 billion yuan to 1.8 billion yuan for 2017.

It said the chairman of one of its subsidiaries had disappeared, leading to a suspension of its operation, and a considerable part of its receivables also became overdue.

In a sense, these alarming disclosures reflect the tougher stance adopted by the nation’s top securities regulator.

In order to boost the quality of listed firms, the China Securities Regulatory Commission (CSRC) has tightened its scrutiny of listing applications as well as listed firms.

China’s A-share IPO success ratio has slumped to 36 percent in January from an average of 78 percent last year. That means 6.4 firms in every 10 IPO hopefuls failed in their listing efforts.

If CSRC is skeptical about the financial figures or business operations of an applicant, it would not give the green light for its IPO.

The same kind of scrutiny is applied to listed firms. This may have prompted some top company officials to flee for fear that their wrongdoings would soon be uncovered.

On the other hand, those who have committed minor infractions may have opted to come clean in return for leniency.

So brace yourself for more stunning exchange filings in the months to come.

This article appeared in the Hong Kong Economic Journal on Feb 1

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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