Three Mainland Stocks Likely To Get Booted

After years of losses, three companies likely will soon be forcibly delisted from the Shanghai and Shenzhen stock exchanges as regulators seek to improve the quality of China’s equity markets.

The three firms, all of which suspended trading last year, are expected to be kicked off in the next few weeks.

If all are removed, 2018 will already have seen the most delistings in years. Forced departures are extremely rare, with only eight since 2012, mainly companies with years of losses.

The Shanghai-listed companies are Jilin Jien Nickel Industry Co. Ltd., which does most of its business in nonferrous metal smelting, and Shenji Group Kunming Machine Tool Co. Ltd., which makes machinery. The third company, Shenzhen-listed Ingenious Ene-Carbon New Materials Group Co. Ltd., is in the graphite industry.

All three companies released their annual reports for 2017 in the early morning of April 28, barely before the deadline set by the bourses. The Shanghai-listed pair both reported net losses for the fourth year running — grounds for forcible delisting under current regulations.

After three years of losses, Ingenious Ene-Carbon reported a net profit for 2017, but its auditors refused to give an opinion on the report, a sign that they could not access financial data or had other doubts. A company in this position is a candidate for removal.

Jilin Jien reported it had over 10.7 billion yuan ($1.69 billion) in current liabilities at the end of 2017. Shenji Group has been in trouble since 2012, with persistent losses and falsified earnings reports.

More delistings are likely on the horizon as regulators move to clean up the country’s equity markets. Draft rules were published simultaneously by the Shanghai and Shenzhen stock exchanges in March, aiming to “severely crack down on and curb share issuance fraud, unlawful information disclosure, and other illegal and irregular activities by listed companies that seriously undermine order in the securities market,” according to the Shenzhen exchange.

These followed an announcement by the China Securities Regulatory Commission that bourses should bear more responsibility for enforcing delistings and for drafting related regulations.

The new draft rules mainly outlined tougher punishments for offenses already laid out in existing regulations, such as falsifying or omitting information to help secure regulatory approval for initial public offerings or backdoor listings, in which companies gain entry to the stock market by injecting their assets into listed shell companies.

Several more companies currently under investigation are also in danger of being forcibly delisted this year. Their fate may act as a gauge for future regulatory strictness, a securities expert said.

Contact reporter Ke Baili (gabriel@caixin.com)