Selling houses and land at the end of the year to preserve their shell, “two years of loss, one year of profit” not returning for a long time, and maliciously speculating on delisted stocks... it will be difficult for low-quality A-share companies to get out of business for a long time.

In response to the “big problem” of A-share delisting, the GEM reform created the strictest delisting system in history by enriching and improving delisting indicators and streamlining and optimizing multiple dimensions of the delisting process, and promoted the establishment of an ecosystem where poor quality companies can be cleared accurately and quickly.

The market expects that the GEM reform will increase the sector's delisting rate, greatly enhance the market's survival of the fittest function, free up the capital occupied by shell companies to obtain a more reasonable allocation, and gradually marginalize poor quality companies.

Optimizing indicators to treat symptoms

In the A-share market, the delisting problem has always been a “big problem.”

Surprise deals at the end of the year to avoid losses and keep them under cover; “two years of loss, one year of profit”, and “long-term no return” to financial manipulation... all kinds of fancy operations stunned the market.

This round of GEM reforms targets the persistent problems of A-shares mentioned above, created the strictest delisting system in history, and achieved “treating the symptoms” by optimizing delisting indicators.

Adjusting the net profit continuous loss index to a composite indicator of “net profit is negative before and after deducting non-recurring profit and loss plus operating income of less than 100 million yuan” is one of the highlights of this reform.

An accounting practitioner explained to the Securities Times reporter that using “net profit before and after deducting non-recurring profit or loss as negative” as a standard, listed companies can no longer avoid losses through surprise transactions, government subsidies, asset disposal, etc., which can accurately crack down on shell companies whose main business is unprofitable and have actually lost their ability to operate continuously, achieve “the bad guys must be eliminated” and close the “no delisting” loophole; on the other hand, the combination considers the “operating income below 100 million yuan” standard, and also has or does not have commercial business originating from trade unrelated to the main business Revenue from substantial related transactions Certification deductions are carried out to increase inclusiveness for enterprises in cyclical industries, with phased losses but with a certain income scale, and significantly improve the accuracy of financial delisting.

“Accurate” reforms also include comprehensive cross-application of financial indicators and unification of the trigger period for financial delisting to two years.

The aforementioned accounting practitioner told the reporter that incorporating audit opinions into financial delisting indicators and applying them interchangeably with net assets and “revenue+net profit” indicators can prevent listed companies from evading delisting by manipulating financial indicators or audit opinions; in particular, shortening the delisting time to two years. In particular, shortening the net profit delisting index from four years to two years of the “revenue+net profit” delisting index will “accurately” crack down on “two years of loss and one year of profit” manipulation, and root out the persistent “long-term non-return” problem of companies whose performance deteriorates.

Furthermore, in order to strengthen the decisive role of the market selection mechanism, further develop the market-based delisting function, and give full play to the role of the market elimination mechanism, this reform fully takes into account the market capitalization scale characteristics and market transactions of GEM stock enterprises and subsequent incremental enterprises, and added a market capitalization delisting index of “less than 500 million yuan for 20 consecutive trading days”.

Streamline the process and get off to a smooth start

To clear the “exit customs”, in addition to treating the symptoms, it is also necessary to speed up clearance.

Looking closely at the reform of the GEM delisting system, targeted arrangements have also been made, such as canceling the suspension of listing, resuming the listing process, and no longer setting a delisting period for transactional delistings.

In the past, during the suspension of listing, investors had no trading opportunities. Companies were often unable to restore the profitability of their main business in the short term, yet they coveted to seek a resumption of listing through unreasonable or even illegal transactions or financial processing, adding resistance to delisting, causing market questions and malicious hype.

This arrangement greatly reduces the delisting process, avoids increased uncertainty and resistance to implementation when the delisting process is too long, reduces the window of opportunity for malicious speculation, and unblocks market exports.

The process of speeding up survival of the fittest is bound to be accompanied by pain.

This reform of the delisting system coincides with the disclosure period of the 2019 annual report, involving the implementation arrangements of more than 800 stock companies. In particular, the delisting indicators and implementation process before and after this reform have all changed greatly, and transition arrangements between the old and the new rules need to be reasonably set.

In order to ensure the smooth integration of old and new rules and protect the legitimate rights and interests of listed companies and investors, the Shenzhen Stock Exchange plans to arrange the delisting system in accordance with the principle of dividing old and new. Among them, financial delisting risk warning situations such as “net profit+revenue”, net assets, and audit opinions under the new regulations start with 2020 as the first fiscal year to prevent “sudden death” of stock companies due to the application of the new regulations; however, if the listing has been suspended or the suspension of listing is affected by the 2019 annual report, etc., the old rules still apply.

The New Deal is showing off, and the future can be expected

“The GEM reform added new market capitalization and delisting. I hope the company will pay attention to its own stock price and not delist because the market value does not meet the standards!” “The GEM reform is here. The company has serious losses. Will it be delisted?”

Although the GEM reform is still being discussed, the “power” of the reform of the delisting system has already been shown. Following the basic end of the disclosure of the 2019 annual report, the reporter discovered that many investors took the initiative to compare the company's current situation with the new delisting indicators one by one, and “soul torture” the company's response measures.

In terms of individual stocks, at present, the stock prices of 3 GEM companies have fallen below face value, namely Jinya Technology, Shenwu Environmental Protection, and Shengyun Environmental Protection. In addition to Jinya Technology, which is about to end its listing, the market capitalization of three companies, including Tianxiang Environmental, Storm Group, and Shenwu Environmental Protection, is between 500 million yuan and 1 billion yuan.

The market also expects that after the implementation of the registration system, face value and market value delisting indicators are expected to play a greater role as the market size grows steadily and pricing and valuation levels return to rationality.

Sun Jinju, assistant to the president of Open Source Securities and director of the Research Institute, said that in terms of the delisting system, GEM simplified the delisting procedure, lifted the suspension and resumption of listing, and set various financial delisting indicators. The delisting standards after the reform of the GEM registration system are more strict and diverse than the current version, and are better adapted to the requirements of the registration system.

Chen Guo, chief strategy analyst at Anxin Securities, said that the promotion of the registration system and increased delisting efforts are two sides of the same coin. Compared with US stocks and Hong Kong stocks, A-share delisting conditions are relaxed. The reform of the GEM registration system has simplified the delisting process, lifted the suspension of listing and resumed listing, and improved delisting standards. The GEM delisting rate is expected to increase dramatically, thus freeing up the capital occupied by shell companies to obtain a more reasonable allocation.

Chen Guo further stated that under the survival of the fittest in the market, GEM will accelerate polarization, the investment trend will shift to the leader, turnover will gradually be concentrated on the leader, and poor quality companies will gradually be marginalized.

“Extensive entry and strict exit”. On the basis of the reform of the Science and Technology Innovation Board delisting system in the early stages, this round of revisions to the GEM delisting system has taken another step forward, further streamlining delisting indicators and procedures, in line with the direction of market-based and legalized reform. At the same time, it also provides experience for the next step in the reform of the entire market delisting system.