Across The Border

Chinese loss-makers in a sprint to chase one-off gains, keep listed status

Almost 40 companies listed in Shanghai and Shenzhen face the prospect of being kicked off the bourse unless they can turn a quick profit

PUBLISHED : Friday, 23 September, 2016, 2:20pm
UPDATED : Friday, 23 September, 2016, 10:10pm

As the year-end approaches, habitual loss-making firms in China’s A-share market are frantically selling off assets in a desperate bid to pocket last-minute gains and keep their listing status.

According to data provider Wind Information, a combined 38 companies on the Shanghai and Shenzhen stock exchanges, after posting losses for two consecutive years, will face trading suspension unless they can turn a profit this year.

Amid a slowing economy, the companies are unlikely to suddenly improve their fundamentals in the fourth quarter of this year, but they can seek lucrative one-off asset deals to pocket extraordinary gains that are enough to lift them out of the red.

“Listing status is still seen as a rare resource on the mainland since public firms can continue to raise funds via share placement,” said Huaxi Securities analyst Wei Wei. “Those companies will make a last-gasp effort to avoid delisting.”

On the mainland, companies posting losses for three years in a row are expelled from the stock exchanges and demoted to the over-the-counter market.

Listing status is still seen as a rare resource on the mainland since public firms can raise funds via share placement
Wei Wei, analyst, Huaxi Securities

The China Securities Regulatory Commission (CSRC) has been striving to fine-tune the delisting mechanism as a way of improving the overall quality of publicly traded firms while safeguarding investors’ interests.

However, the thorny issue of underachieving firms taking advantage of so-called asset restructuring deals as a way of maintaining their listing status has yet to be effectively resolved.

Only 2 per cent of perennial loss-makers have been delisted since Beijing established the stock market in 1990, compared to at least 5 to 6 per cent in developed western markets.

In 2012, the stock exchanges tightened controls over loss-makers, publishing a new rule that made it difficult for the underachievers to avoid delisting by pocketing one-off gains.

Under the new regulation, companies could no longer count on exceptional gains to keep their listed status, because the bourses would look at their underlying profits to decide whether they could remain in the A-share market. But the exchanges waived the rule three months later, allowing the loss-makers continue to rely on extraordinary gains to remain listed on the A-share market.

Companies that have reported two years of losses are given the label “special treatment” firms, or ST stocks on the mainland.

They are subject to a daily trading cap of 5 per cent, compared with the 10 per cent limit imposed on other stocks.

The CSRC, following a stock market rout that wiped out capitalisation of US$5 trillion last year, shelved plans to revamp initial public offering (IPO) registration process, which would have made it easier for firms to list.

About 800 companies are now lining up to secure an approval from the regulator to float new shares to raise funds.

It’s unfair to let unprofitable companies use one-off gains to avoid being kicked out of the exchanges
He Yan, hedge fund manager, Shanghai Shiva Investment

The huge backlog of IPO applicants has made the listing status more valuable because unlisted, profitable firms can use the listed vehicles of the underachievers to conduct reverse-merger deals before obtaining a listing status.

“It’s unfair to let unprofitable companies use one-off gains to avoid being kicked out of the exchanges,” said He Yan, a hedge fund manager at Shanghai Shiva Investment. “Retail investors would bet on a turnaround of the loss-makers to chase short-term profits, but in most cases they get burned.”

Among the 38 listed loss-makers is Nanjing Putian Telecommunications, which said in a filing to the Shenzhen exchange early this week that it pocketed net income of 22.7 million yuan from selling two properties in Beijing, more than enough to offset its 21.1 million yuan in losses for the first half of this year.

The deal drew sarcastic responses from the stock market as investors jokingly described it as an “inspirational” example to encourage listed firms to speculate on properties, rather than improving their fundamentals.