China's stock market regulator is on the lookout for flawed IPOs. Photo: wbf

Translated by Andrew Vanburen from a Chinese-language piece in 21 CN


Some are as easy to get into as forking over a membership fee.

Others require applicants to first be meticulously vetted.

China's stock market is looking more like the latter these days as nearly 15%, or 27 of the A-share hopefuls in the first half, were denied entry to the stock market.

This begs the question: Is the bourse regulator getting stricter? Or it the market watchdog just doing its job?

For those familiar with the trials and tribulations of S-chips in Singapore where listed Chinese firms have faced myriad scrutiny over their accounting practices, the same reasons for falling out with the market watchdog don’t necessarily apply in these 27 cases.

The grand total in the first six months stands as thus: 187 firms successfully made it to market, 27 were turned away at the gates and five voluntarily withdrew their IPO applications.

Although the more than two dozen rejects were denied a presence on the stock market for individual reasons, most were sent packing due to a set number of issues.

Questionable related company transactions, unique flaws, lack of an earnings record, unauthorized fund collection techniques, basic qualification shortcomings, suspect operational practices, an overcrowded/overcompetitive sector and accounting/bookkeeping discrepancies were the most commonly-cited barriers to bourse entry by the market watchdog – the China Securities Regulatory Commission (CSRC).

Major Typo:  Xi’an Global Printing's IPO was turned down.  Photo: Company

The top three problems encountered were unique flaws, an insufficient profitability history and lack of fundraising potential.

So who was shown the door and why?

Xi’an Global Printing Co Ltd, a major producer of test papers and periodicals in Western China, had its A-share application rejected because it failed to be sufficiently transparent about the status of four affiliated firms.

The CSRC has had its share of oversights like this in the past, wherein a listco hopeful appears healthy and unencumbered, with investors only to learn post-listing that there are several heavily leveraged units looking to sponge off the IPO proceeds to stay afloat.

Happier Days: Kitchenware play Shanghai Guanhua's listing plan was rejected.  Photo: Company

Stainless steel cookware maker Shanghai Guanhua also got the wagging finger – twice – from the market regulator for similar problems to those exhibited by Xi’an Global.

Furthermore, the pot and wok play was found to have a very arcane management structure, including many later-discovered familial ties between high-ranking board members and leading company executives.

In addition, both Xi’an Global and Shanghai Guanhua were found to have family ties dominating their respective supplier relationships on both ends of the transaction process.

Family ties are of course very much revered in China, and rightly so.

But the CSRC shies away from allowing firms to go public who show excessive signs of nepotism, knowing full well the investor uproar that will inevitably take place when things go sour financially.

Jiaxing Glead Electronics, a microwave technology specialist which even receives orders from the country’s space program, ran afoul of the CSRC in its IPO application when it was discovered that the Zhejiang Province-based firm’s assets didn’t match its balance sheet statement for a period of two years.

Other than the underwriters and executives at these 27 rejected firms, most industry watchers are of the opinion that the CSRC is right to be very particular in just who is allowed to sell shares in the country.

Not only will this boost investor confidence in China’s capital markets, but keeping out unqualified listcos is the market regulator’s job, after all.

See also:

HEAT STROKE: China’s Erratic Summer IPOs

OLD MAN, NEW MONEY: Meet China’s Nearly Century-Old Investor

Five China Sectors About To Get Hot

BUCKING TREND: China Shares Ready For Rebound?

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