Recently, SZSE completed the post-review of 2017 annual reports of the SZSE bonds. As of now, SZSE has sent letters of annual report inquiries to 211 bond issuers, which accounts for 31% of the total number of issuers who have disclosed annual reports. More than 1,000 questions have been asked to these issuers.
An annual report is one of the most important information disclosure annoucements of a bond issuer. It is a key source for market participants to fully understand the issuer’s operation, financial, and cash flow conditions. Besides, it provides crucial clues for bond trustees, bondholders, and regulators to identify, manage and investigate bond risks. An SZSE official in charge expressed that under CSRC’s leadership, SZSE’s post-review of the bond annual reports is based on the principle of classified supervision. Oriented with questions and risks, SZSE identifies key regulatory objects by focusing on the issuer’s solvency and closely tracks information disclosure, financial accounting, use of raised funds and corporate governance etc. Such post-review has become an important part of SZSE’s implementation of its frontline supervision function.
The review tells that the 2017 annual report disclosure in the SZSE bond market has been improved significantly compared to previous years. The vast majority of issuers have been deeply industrial and achieved sound management, stable performance, and standard operation in their use of raise funds and corporate governance. According to statistics, in 2017, the SZSE bond issuers’ profitability and liabilities were generally stable, with an average operating revenue of about CNY15.5 billion, while the average net profit attributable to the parent companies was about CNY750 million. The average asset-liability ratio was 59%, thus, the financial leverage is safe as a whole. Meanwhile, the profitability of SZSE-listed bond issuers increased steadily in 2017, with the average operating revenue up 14% year-on-year and the average net profit attributable to the parent companies increased by 11% year-on-year. Such improvement in profitability mainly came from the enhancement of main business operation. The issuers of high-tech companies and strategic emerging industries delivered good financial performance in 2017, with the average operating revenue up 9% year-on-year; however, due to factors such as rising R&D expenditure, the average net profit attributable to parent companies and the asset-liability ratio basically kept flat with the same period of the previous year. Thanks to both the periodic factor and the industrial production capacity integration and optimization, the issuers of coal, iron and steel industries etc. enjoyed significantly improved profitability and cash flow level in 2017. Their average operating revenue went up 64% year-on-year, average net profit attributable to parent companies increased by 79% year-on-year and average net cash flow from operating activities grew by 73% year-on-year.
Highlight key points with clear targets to focus on six types of regulatory objects based on credit risk prevention and control
In order to improve the efficiency and quality of post-review, SZSE has set up a special panel for this year’s bond annual reports. Combined with the experience in previous years, starting from the characteristics and requirements of bond credit risk prevention and focusing on situations that may reflect the change in the issuer’s solvency, we define 6 types of key targets of review and supervision. The first is those who suffered adverse changes in operation, finance and cash flow or other major issues that may compromise their solvency. The second is those who or whose important subsidiaries are listed as defaulter or have defaulted their debts. The third is those who or whose important subsidiaries are subject to major administrative penalties or self-regulatory disciplinary punishments. The fourth is those whose bond follow-up ratings have been downgraded in the most recent year or whose rating outlooks are negative or who are included in the negative watch list. The fifth is those whose bond prices have fallen sharply recently and whose investor coverages are wide. The sixth is those whose financial indicators or major issues have been included in the indicators of concern or risk indicators listed in the Guidelines for Bond Credit Risk Management.
In view of the recent situation where major shareholders’ equity pledge financing has the close risk affecting the bond market, SZSE strengthens the supervision of annual reports this year. By analyzing the relevant data of the issuer’s stock pledge financing, we find out the issuer with a high proportion of stock pledge financing or stock pledge with close risk and stress the review of the issuer’s profitability, cash flow status, and holding of unrestricted shares at the level of consolidated statements and its parent company’s statements. If the issuer finances through exchangeable bonds, we closely follow the possible risk resulted from the insufficient proportion of shares pledged for exchangeable bonds and the issuer’s response for this.
Four main lines to track and trace: information disclosure, financial accounting, fundraising, and corporate governance compliance
Combining the characteristics of bond products and our supervisory experience, in this year’s annual report we’ve taken the timely, truthful, accurate and complete information disclosure, financial accounting compliance, standardized use of raised funds, and effective corporate governance as the four main lines to summarize in time the questions discovered during the review. We’ve issued the annual report inquiry letters at the earliest time and conducted inquisitive investigation on the key regulatory targets, enhancing the depth and professionalism of the review. At the same time, we’ve communicated with local securities regulatory bureaus in a timely manner on the issues found out in the review, so as to absorb their auditing opinions, take timely measures against the violation clues found, and give full play to the role of coordinated supervision.
First, to pay attention to the timely, truthful, accurate and complete disclosure of information. By issuing a report on the disclosure of 2017 annual report at the beginning of the year, holding an annual report disclosure training for the issuer, and taking a series of measures, SZSE has continuously strengthened the timeliness and regulatory requirements for annual report disclosure. Accordingly, the issuers’ information disclosure awareness has been significantly improved and the disclosure of 2017 annual report further improved as companred with previous years.
This year, in the SZSE bond market, 684 issuer (including 417 non-listed issuers) should disclose their annual reports, an increase of 103 units over the previous year. The disclosure rate as of April 30 reaches 96.5%, up by 5.3% comparing with the last year. For the issuer failing to disclose the annual report on time, SZSE urges the trustee to find out the reasons and check whether the issuer’s solvency is adversely changed. Also, SZSE sends the supervision letter of annual reports to the issuers one by one, urging them to disclose annual reports in a timely manner and explain whether there are major issues affecting their solvency. For the issuers who have not yet rectified within the given time limit, SZSE takes strict regulatory measures. As of now, nine bond issuers have not yet disclosed their annual reports. SZSE will continue to intensify supervision and take disciplinary actions as necessary
Judging from the disclosure quality, the vast majority of issuers prepare the 2017 annual report in accordance with the Information Disclosure Content and Format Criteria No. 2 for Companies Eligible for Public Securities Issue and the Information Disclosure Content and Format Criteria No. 38 for Companies Eligible for Public Securities Issue. This year’s disclosure has been more detailed and significant with regard to the previous conditions such as the use of periodic reports to replace extraordinary reports or the formalistic disclosure or lack of disclosure of major business development, financial analysis and major events that may affect debt repayment risks. And the major events had basically been disclosed through an extraordinary report in a timely manner. For certain issuers’ major issues that may affect their solvency, such as their performance, cash flow, asset-liability ratio, major lawsuits and external guarantees, SZSE has intensified the supervision of major risks and required the companies to comprehensively and concisely disclose the risks in the “Significant risk warning” part of the annual report, so that investors’ right to know could be fully ensured.
Second, to focus on financial accounting compliance. The issuer’s annual financial statements shall be prepared in accordance with the Accounting Standards for Business Enterprises and audited by an accounting firm with qualifications in securities services. In the post-review, SZSE pays special attention to the audit opinions issued by the auditor and the compliance of the issuer’s financial accounting treatment.
In the 2017 financial report disclosed so far, a total of 13 issuers have been issued the audit reports of non-standard unqualified opinions, accounting for 1.93% of the SZSE-issuers who have disclosued annual reports. Among them, there are 4 unqualified audit reports with an explanatory paragraph, 7 audit reports with qualified opinions, and 2 audit reports with disclaimer of opinions. SZSE pays great attention to the influence of the issues involved in unqualified opinions on the companies’ ability to continue as a going concern and their solvency.
In the review of financial accounting, SZSE focuses the issuer’s financial statement quality and financial information fairness, which mainly include accounting policies, changes in accounting estimates, basis and impact of the correction of major accounting errors, sufficiency of provisions for asset impairment, reasons for significant changes in account titles and financial indicators, and follow-up handling of major issues. For example, for the real estate industry issuer, SZSE highly values the recognition of the fair value changes in profit and loss account of investment real estate. If the changes greatly increase over the previous year or take a large proportion of operating profit for the year, the issuer is generally required to provide relevant basis to explain the reasonableness of the entry. For the issuer with a large interest-bearing debt balance, SZSE pays close attention to the matching of interest-bearing interest in interest-bearing debts and capitalized interest in asset-type subjects, and asks the issuer to explain the basis for interest capitalization and the comformity with relevant regulations of enterprise accounting standards. If the issuer has a large amount of other monetary funds in its monetary fund account, SZSE inquires the issuer about the type of other monetary funds, whether there is a restricted situation, the restricted period, and whether they meet the conditions of cash and cash equivalents in the cash flow statement. For those issuers who frequently change audit institutions or frequently correct accounting errors in financial statements, SZSE urges them to explain the reasons and decision-making procedure for replacement of audit institutions, and the rationality and impact of correcting accounting errors.
Third, to focus on the conformity of raised fund use. One of the issuer’s major duties is to approve or regulate the use of bond-raised funds, which is also an important measure of the issuer’s honesty and trustworthiness. For such situations found in the review as the fund-raising account was not exclusively used for the design purpuse, the use of raised funds and the fulfillment procedures were not fully disclosed, the raised funds were not used according to the approved or agreed purpose, and the auditor’s audit opinions on the use of raised funds were not disclosed, SZSE initiates a deep investigation and requires the issuer to explain and make supplementary disclosure, and takes regulatory measures as appropriate.
At the same time, in consideration of the requirements of the State Council on local government debt management, SZSE also focuses on the use of raised funds by quasi-platform bond issue enterprises. In particular, SZSE specially checks whether the raised funds were transferred to others or misappropriated and whether the extracting procedures and the fund use for affordable housing construction projects are compliant, thus preventing local governments from disguised financing. In the review of annual reports, SZSE has found that a certain issuer had misappropriated some of the bond-raised funds originally agreed to be used in a shantytown reconstruction project to another resettlement housing construction project. Accordingly, SZSE has required the issuer to rectify in time and adopted appropriate supervision measures.
Fourth, to pay attention to the effective running of corporate governance. The failure of corporate governance may take companies into the difficulty of operation or the larking peril of major risks. In the annual report review this year, SZSE mainly focused on whether there are illegal actions against the Corporate Law and the Articles of Association in the issuers’ corporate governance and internal control. In the case of large-amount asset mortgage and pledge, external guarantee, external investment, fund borrowings and connected transactions, SZSE closely checked the compliance and conformity of transaction purposes, as well as the decision-making power and procedures while following such issues as violations against the prospectus, recoverability of lending funds and its impact on the ability of debt repayment.
Early arrangements and preventative measures to do well in bond risk control
Always upholding the principle of laying equal stress on market development and risk control, SZSE has highly valued the control of bond credit risks while serving the real economy. Under the unified leadership of CSRC, SZSE made comprehensive deployment on bond risk control at the beginning of the year, with efforts focused on improving the weak and multiple measures taken side by side to constantly deepen risk control mechanisms and truly fulfill its front-line regulatory duties. Firstly, in view of the outstanding issues exposed in trustees’ bond credit risk management, SZSE issued in this February the Notice on Further Strengthening Credit Risk Management over Bond Duration. On the basis of the Guidelines on Credit Risk Management over Bond Duration, this has further underpinned trustees’ responsibility as the “guardian” of risk management and detailed the requirements on risk monitoring, screening and per-warning to consolidate the construction of risk control systems. Secondly, SZSE has vigorously conducted work on the risk monitoring and screening of inventory bonds. The emphasis has been laid on the in-depth investigation on the risks of the 2017 mature and resold bonds to get a clear picture of the risk base, take preventative measures to resolve risks and hold fast to the bottom line of no systematic risks. Thirdly, SZSE has made timely prognosis on and tracked junk bonds to urge bond issuers and trustees disclose risk warnings in time. Also, SZSE has encourage them to know about investors’ willingness of bond resale before executing the resale so that they can guide and fully communicate with investors to specify the resale expectations and take effective measures to prevent and dissolve risks.
An SZSE official said that next SZSE will continue to follow the unified leadership of CSRC and implement the concept of strict comprehensive law-based supervision to truly fulfill its front-line regulatory responsibilities and adopt progressive regulatory measures in time against any violations found in the supervision of annual reports. Moreover, SZSE will intensify the supervision over the information disclosure by intermediaries and the management of credit risks, closely follow the bond rating tracking by rating agencies and constantly enhance intermediaries’ awareness and ability of due diligence and responsibility fulfillment so that SZSE would consolidate the work on risk prevention and promote the sustainable stable sound development of the SZSE bond market.
