CSRC moves to delist weak firms

PUBLISHED : Monday, 07 May, 2012, 12:00am
UPDATED : Monday, 07 May, 2012, 12:00am


Roughly 50 mainland firms face being delisted by the end of this year after mainland regulators tightened the criteria to remain listed.

The new rules, published by the Shanghai and Shenzhen bourses at the end of last month, have expanded the delisting criteria as part of the reform efforts of Guo Shuqing, chairman of the China Securities Regulatory Commission (CSRC).

The biggest hurdle now facing listed firms is likely to be a new provision on maintaining positive asset values, which could see the delisting of dozens of firms by the end of this year. Firms reporting negative asset values for two straight years will be expelled, the bourses say.

Net asset value measures a firm's assets minus its liabilities. If the value is negative the firm is considered to be insolvent.

According to Donghai Securities, 27 Shanghai-listed firms and 18 Shenzhen-listed companies reported negative net asset values at the end of last year. If their net asset values remain negative by the end of this year, their listing status will be rescinded immediately.

Analysts view the net-asset-value criterion as an effective way to cull poor-performing firms. Since the first delisting of a mainland firm in 2004, only 50 habitual loss-makers have lost their listing status, accounting for 2 per cent of the 2,500 A-share firms.

In America, the delisting rate at the Nasdaq market stands at about 8 per cent, and roughly 6 per cent for the New York Stock Exchange.

An efficient delisting mechanism is regarded as an essential part of running an efficient stock market, which in theory allows investors to buy shares in quality firms that then reward them with cash dividends or long-term earnings potential.

But for many investors and several listed firms, the reality on the mainland has been that the bourses are treated as little more than casinos.

For firms posting three straight years of losses, they will be suspended from trading and be delisted if they fail to make money in the fourth year.

To be sure, the lengthy delisting process has made it hard for regulators to expel underperforming firms, while many loss-making firms have used so-called asset restructuring deals to engineer a turnaround.

Retail investors have flocked to such unprofitable firms, betting on potential bailouts efforts by the major shareholders. But most of these investors have suffered severe losses from their investments.

When he became CSRC chairman last year, Guo vowed to improve the overall quality of listed firms and focus on reforming the delisting process. 'By singling out the firms with negative net asset values, he will effectively expel quite a big number of 'bad boys',' said Essence Securities analyst Liu Jun. 'It's not easy for the technically insolvent firms to make a turnaround within a year.'

Under the new rules, firms whose annual revenues fall short of 10 million yuan (HK$12.3 million) in four consecutive years will also face delisting. 'The new delisting rules reflect the regulators' attitude towards the market - buy blue-chip shares and chase stable long-term returns,' said Donghai Securities analyst Bao Qing.

The mainland bourses also tightened their criterion on earnings to ensure that underperforming firms would be delisted. Also, loss-making firms can no longer count on exceptional gains to avoid delisting since the bourses will only look at their underlying profits to decide whether these firms get to keep their listing status.

Prior to these changes major shareholders or affiliated firms could do lucrative deals with loss-making firms to help them give the illusion of having achieved strong earnings.

'The regulator is making loud noises to tell retail investors that they shouldn't buy those unprofitable stocks because the firms won't generate any returns,' said J.P. Gan, a managing director of Qiming Venture Partners. 'In the long run the mainland market will be healthier after the bad firms are [gotten] rid of.'