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On 2 December 2019, Hunan China Sun Pharmaceutical Machinery Co. Ltd. (hereinafter referred to as “QSYJ” or the “Company”) disclosed the Notice on Receiving Advance Notification on Administrative Punishment and Market Access Ban from China Securities Regulatory Commission (hereinafter referred to as the “Notice”) and gave a special risk warning: according to the facts ascertained in the Advance Notification, the Company’s net profit was actually negative for four years straight from 2015 to 2018. The forgoing major violation of law is a cause for forced delisting according to Article 4(3) of the Implementation Measures of SZSE on Forced Delisting of Listed Companies for Major Violation of Law (hereinafter referred to as Implementation Measures), and the Company’s stock may be forced to delist from the market. The spokesperson of SZSE answered reporters’ questions about market concerns.
I. What’s the basis for possible forced delisting of QSYJ due to major violation of law?
A: According to Article 2(1) of the Implementation Measures, where a listed company committed fraud during share offering or committed violations during material information disclosure or committed other major violations that severely damage the order of the securities market and that has seriously affected its listing status, its stock shall be delisted. According to Article 4(3) of the Implementation Measures, when there is any false record, misleading statement or material omission in the annual report disclosed by a listed company, according to the facts ascertained for administrative punishment by China Securities Regulatory Commission (CSRC), where the financial indicators of the continuous accounting year of the listed company have met the delisting standard as stipulated in the Rules Governing the Listing of Shares on the ChiNext Board of Shenzhen Stock Exchange (Revised in November 2018), the listed company’s stock shall be delisted.
The Notice disclosed by the Company shows that according to the facts ascertained in the Advance Notification, the Company’s net profit was actually negative for four years straight from 2015 to 2018, constituting a situation for forced delisting for major violation of law as defined in Article 4 (3) of the Implementation Measures. If CSRC finally decides to impose the foregoing administrative punishment on QSYJ, SZSE will officially initiate the forced delisting procedures against QSYJ for its major violation of law according to regulations.
II. QSYJ’s stock has been suspended. How will the delisting procedures be implemented?
A: The Company’s audited net assets for 2018 were negative, and both its 2017 and 2018 annual reports were accompanied by an audit report in which certified public accountants issued a disclaimer of opinion. According to Articles 13.1.1 and 13.1.6 of the Rules Governing the Listing of Shares on the ChiNext Board of Shenzhen Stock Exchange and the review opinion of the SZSE Listing Committee, the listing of the Company’s stock has been suspended since 13 May 2019.
On 2 December 2019, the Notice of QSYJ shows that according to the facts ascertained in the Advance Notification, the Company’s net profit was actually negative for four years straight from 2015 to 2018, constituting a situation for forced delisting for major violation of law. Under such circumstances, the delisting procedures for financial indicators that the Company is currently undergoing will overlap with the forced delisting procedures for major violation of law. SZSE will, in line with the principle of “adopting applicable rules when relevant situation is involved”, start the delisting procedures when any situation triggers a delisting condition, and make the delisting decision according to regulations.
III. If the forced delisting procedures for major violation of law are initiated against QSYJ, will investors still have trading opportunities?
A: According to Articles 13.4.23, 13.4.24 and 13.4.26 of the Rules Governing the Listing of Shares on the ChiNext Board of Shenzhen Stock Exchange, where a listed company is issued with a delisting decision by SZSE and doesn’t apply for review, the listed company’s stock trading will enter the delisting transitional period beginning on the next trading day after the expiration of fifteen trading days following SZSE’s delisting decision; where the listed company files an application for review and the Appeal Review Committee maintains the delisting decision, the listed company’s stock trading will enter the delisting transitional period beginning on the next trading day after the Appeal Review Committee makes such a decision. The delisting transitional period includes thirty trading days. During the delisting transitional period, the daily price limit of the listed company’s stock is 10%. SZSE will delist the listed company’s stock on the next trading day after the expiration of the delisting transitional period.
IV. If QSYJ’s stock is delisted, can it be relisted?
A: According to Article 2 of the Implementation Measures of Shenzhen Stock Exchange for the Relisting of Delisted Companies (Revised in 2018), the ChiNext Board will not accept applications for relisting. Therefore, if the Company is delisted according to laws and regulations, it cannot be relisted.
V. What work has SZSE done in the day-to-day supervision of QSYJ?
A: Since QSYJ was listed in May 2011, SZSE has paid constant attention to the performance changes, information disclosure, standard operation, etc. of the Company, and earnestly implemented frontline regulatory responsibilities. Our key regulatory matters include:
First, digging deep in the reasons for performance changes and reporting violation clues. SZSE found in the post-event review of the 2016 Annual Report of QSYJ that the sales income of the Company’s two new products accounted for 47% of its total operating income, that both products were sold to a single customer and had an abnormally high gross margin, and that there were many doubtful points in the customer’s capital strength, capacity utilization and history. After in-depth analysis and prudent researches and thinking, SZSE reported relevant clues about QSYJ’s suspected violations. In January 2018, CSRC put the case on record and investigated QSYJ’s violation in information disclosure.
Second, promptly adopting regulatory measures to crack down on violations. SZSE has paid constant attention to the Company’s information disclosure, occupation of funds, illegal guarantee, etc. SZSE promptly imposed disciplinary punishment against the Company’s illegal external guarantee, occupation of funds by related parties, illegal share lessening by the actual controller, failure to fulfill performance compensation obligation to counterparties in major assets restructuring, etc. So far SZSE has made 2 public censure decisions and 5 decisions on circulating a notice of criticism regarding the Company and relevant persons concerned.
Third, fully revealing delisting risk to protect investors’ legal rights and interests. After the Company was investigated by CSRC, SZSE has paid close attention to relevant progress, and urged the Company to promptly issue an investigation progress and risk warning notice according to requirements and give a risk warning that it may involve the situations for forced delisting for major violation of law to fully reveal risk to the market and investors. The Company has been issuing monthly investigation progress and risk warning notices since January 2018, and has been issuing weekly notices on suspended listing risk warning since the 2018 interim report was released. The Company also strengthened risk disclosure in its 2018 earnings forecast and preliminary earnings estimate. Since June 2019, required by SZSE, the Company has been issuing notices on its work progress during the suspension period and its delisting risk in the first five trading days every month.
Fourth, strengthening regulatory cooperation to improve regulation efficiency. Under the unified leadership of CSRC, SZSE has maintained close communication with relevant departments and agencies, established an information sharing mechanism, cooperated with each other while fulfilling respective responsibilities, formed a resultant force of regulation, given play to the synergy of regulation, and adopted regulatory measures regarding QSYJ’s violation according to laws and regulations.
VI. How will SZSE continue to fulfill its primary responsibilities for delisting and improve the quality of listed companies?
A: The delisting mechanism of listed companies is an important operating mechanism of the capital market to select the superior and eliminate the inferior, and refine resource allocation. It is also a fundamental arrangement to defuse market risks and purify the market environment. It can help improve the quality of stock listed companies. SZSE will resolutely implement the requirements of “Four Respects” (respecting the market, rule of law, profession and risks) and “One Resultant Force” (seeking support from all sectors of society), follow the work arrangement of the “Action Plan to Improve the Quality of Listed Companies”, and earnestly fulfill the entity responsibilities for delisting. Moreover, SZSE will maintain regulation willpower, control the market exit well, keep diversified exit channels unimpeded, promote the normalization of the delisting mechanism, crack down violations, and protect investors’ legal rights and interests. It will continue to strictly perform frontline regulatory duties, strengthen continuous, precision and classified regulation of listed companies, enhance the effectiveness of information disclosure, improve corporate governance level, and cooperate with relevant parties to jointly improve the quality of listed companies and build a good capital market ecology.
