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The review of the 2018 interim report of companies listed on the SZSE has come to an end. The spokesperson of the Shenzhen Stock Exchange (hereinafter referred as the SZSE) answered questions of market concern from journalists.
I. Please introduce the basic situation of the review of the 2018 interim report of public companies listed on the SZSE.
Answer: In the first half of 2018, China's economy was generally stable, seeking improvement in stability and encountering changes in stability, with some listed companies facing new challenges and difficulties in their business development. The supervision of interim reports is an important checkpoint to the implementation of risk prevention and control. In this supervision of the interim report, the SZSE, taken the prevention and mitigating risk as the main line, and based on the three-dimensional supervision network of industry supervision and classified supervision, timely conducted risks investigation, revealed risks and disposed risks. Up to now, the SZSE has issued nearly 300 inquiry letters regarding interim reports to the public companies, focusing on nearly 2,000 questions of various kinds. Compared with the same period of the previous year, the number of inquiry letters has doubled, and the coverage of the inquiry is wider.
First, the SZSE endeavored to investigate risk, making the supervision of the interim report ‘targeted’. The SZSE has always regarded risk prevention and control as the top priority of the first-line supervision work, and conducted risk investigation throughout all aspects of daily supervision. In light of the changes in the economic situation in the first half of the year, the SZSE further optimized the risk investigation mechanism before the implementation of the supervision work of the interim report. It learnt about the risk basis indicators, drew a “risk map” and developed a risk dissolving plan according to various aspects such as market volatility and downside risks, company operating risks, company's standardized operational risks, and major sudden stock risks. The supervision of the interim report began with such three layers as industry, company and events, focusing on companies with high risks, paying attention to the company's performance fluctuations, accounting treatment compliance, company governance and standard operation, and highlighting the issues such as high-value goodwill impairment of listed companies, cash flow and debt status, high percentage pledge of shares by the large shareholders and risk transmission.
Second, the SZSE endeavored to reveal risks and protected the legitimate rights and interests of investors. In response to the problems found in the inquiries, the SZSE has classified the causes and implemented differential policies to ensure the company's compliance operations and high-quality development. For example, in the case of phenomenon of over 80% share pledge by the controlling shareholders of listed companies, the SZSE inquired the public companies from the aspects of possible pledge risks, asset status, etc., and focusing on understanding the measures taken by companies to resolve the pledge risk, and urging their actively respond to risks. Through after-event inquiries, nearly 70 companies have been urged to disclose supplementary corrections, with their true operating situation fully disclosed, the company's risk hazards fully disclosed.
Third, the SZSE endeavored to dispose risk well and timely punished events of violations of laws and regulations. In the first half of the year, there were incidents in which the controlling shareholders and de facto controllers of some listed companies illegally occupied the funds of listed companies and illegally guaranteed. The SZSE promptly initiated the disciplinary procedure and urged the controlling shareholders and the de facto controllers to propose a solution as soon as possible.
II. Please introduce what specific matters are focused on in the supervision of the interim report.
Answer: In the supervision of the interim report, the SZSE focused on the three issues such as goodwill and impairment, cash flow and debt, and risk transmission of high percentage share pledge by the large shareholders of listed companies. Through inquiries, the SZSE urged the companies to operate in compliance, reveal and resolve risks as early as possible. These works achieved good results. In terms of the inquiry situation:
First, the scale of goodwill is equivalent to that at the end of the previous year, and the risk of impairment is controllable. As of June 30, 2018, the book value of goodwill of A-share listed companies was 1.39 trillion yuan, accounting for 0.61% and 3.75% of the total assets and net assets at the end of the period. The percentages were basically the same as at the end of 2017. At present, only 20 companies listed on the SZSE whose goodwill to net asset are more than 80%, accounting for a relatively low percentage of the listed companies; the performance commitments of companies listed on the SZSE are generally well implemented, with more than 70% of companies fulfilling their performance commitments well, and with some companies, which failed to meet the target performance, basically able to meet their compensation obligations. Therefore the risk of impairment of goodwill is basically controllable. The SZSE noticed that in the interim reports, there were not many the SZSE-listed companies have goodwill impairment losses provision, and this phenomenon was, to a certain extent, related to the phenomenon that comprehensive impairment test of most companies are at the end of the year. In view of impairment shown in the medium term of some individual companies, the SZSE has guided these companies to release risks as soon as possible and reasonably assessed the amount of impairment. In the Shenzhen market, 18 companies made goodwill impairment provision in the medium term.
Second, the overall cash flow situation improved and the debt ratio remained basically the same. In terms of cash flow, in general, in the first half of 2018, the SZSE-listed companies’ net cash flow generated by the operating activities totaled more than 40 billion yuan, significantly improved over the negative cash flow situation in the same period last year. In terms of industries, at the end of the mid-term of 2018, the proportion of cash rate of income generated by operation activities in all industries on the SZSE was more than 90%. All these companies achieved a year-on-year increase in the balance of cash and cash equivalents. The balance of cash and cash equivalents of these companies from national defense, agriculture, forestry, animal husbandry and fishery, medical biology, and electrical equipment sectors increased by more than 50% over the same period of the previous year. Balance of cash and cash equivalents of companies of the steel industry, which benefited from the supply-side structural reform, increased by nearly 80% over the same period of the previous year. In terms of debt, as of June 30, 2018, the weighted asset-liability ratio after the removal of advance receipts of the companies listed on the SZSE as a whole was 37.69%, which was basically the same as the 37.35% at the end of 2017. In terms of industries, the average asset-liability ratio after the removal of advance receipts of such industries as mining, computer, household appliances, communications, automobiles and other 11 industries, which involved nearly 600 companies, decreased compared with the end of the previous year, and the asset-liability ratio of state-owned enterprises in these industries is generally low. For other companies, for example, the average asset-liability ratio after the removal of advance receipts of state-owned enterprises in extractive industries is 32.77%, and that of public enterprises in the extractive industries is 46.73%. Although some industries, such as pharmaceutical bio, beverage and food industries, have not seen a decline in this indicator, they have remained at a low level of 28%. With no significant increase in the size of the debt and improved cash flow, the debt repayment risk is generally controllable. The SZSE paid close attention to specific companies with large debt repayment risks, and learnt the specific difficulties faced by the companies, and urged them to seek solutions proactively.
Third, some of the controlling shareholders’ and de facto controllers’ risks have emerged. Since 2018, the debt risk of the controlling shareholders and de facto controllers of some listed companies have become more prominent, mainly because these shareholders’ stock pledges cannot be repaid or the stock price falls below the liquidation line and the stocks are forced to liquidate. At present, the average performance guarantee for pledge in the Shenzhen exchange market exceeds 200%. The amount of default disposal in the secondary market is relatively stable, accounting for only 0.02% of the daily average transaction value.
III. SZSE has set up two guideline systems on industry information disclosure for emerging industries and traditional industries with high market attention respectfully over the previous years; please introduce the implementation process of them.
For the 2018 interim report, the industry guidelines of Shenzhen market are applicable to 712 companies, and the overall implementation effect looks well. The implementation rate for film and television and other 14 industries is over 90%; in terms of disclosure effect, over 50% companies provide detailed and well-analyzed disclosure among 13 guidelines, and 80% of them provide sound disclosure among 6 guidelines. Beside, all companies in express deliver and film and television industries are disclosed well. The SZSE noticed the effect of special industry indicators of some companies on performance and accounting treatment, and urged those companies to analyze production and operation status from the angle of the industry and reveal risks. Specialized information disclosure made the market more transparent, decreased the communication cost of investor of listed companies and gained attention and acknowledge from the market.
IV. Recently, the share repurchase of listed companies were relatively active, please introduce the focus of the SZSE regarding this issue during the review of interim report.
Answer: 137 SZSE-listed companies has disclosed repurchase preplan since 2017, but some of their actual repurchased shares or total amount fund were far different from the planned upper ceiling. Taking advantage of the interim report review, the SZSE enquired those listed companies on the difficulties they had during the share repurchase, reasons for failing the implementing progress, and included companies involved in malicious speculation into the major list of information disclosure review. According to recorded share repurchase information as of 30 June 2018, the number of SZSE-listed companies which has finished repurchase in the first half of 2018 is 600, and the total repurchase amount reaches RMB 40 billion, which are 15.27% and 14.87 percent higher than that of the second half of 2017, and 46.05% and 47.13% percent higher than that of the first half of 2017. The repurchase enthusiasm rises significantly. Generally speaking, the share repurchase of SZSE-listed companies is relatively active, which boosts market confidence and protects legal rights and interests of investors.
V. The cash dividend of listed companies looks continuous promising over the previous years; please introduce the results of interim profit distribution of Shenzhen market.
Answer: SZSE-listed companies actively reward investors while maintaining their own continuous development and stable cash flow, with the rate of cash dividend increasing year by year. Through consistent guide, more and more companies choose to conduct cash profit distribution in the interim period, and arrange cash flow reasonably. So far, 48 SZSE-listed companies has launched 2018 interim cash dividend plan with a total cash dividend amount of RMB 12.829 billion, a 94% increase compared to that of 2017 (RMB 6.598 billion of 41 companies). As for the 48 SZSE-listed companies, their 2018 interim net profit reaches RMB 28.982 billion, accounting for 7.31 percent of the total interim profit of Shenzhen market. 33 companies, nearly 70% of them, conducted profit distribution in 2017, displaying well consistency for continuous and stable reward towards investors. SZSE also noticed that some company’s cash dividend went high as 400%, which was much unmatched to the companies’ book retained cash and cash equivalents. Therefore the SZSE asked those companies to give a through statement on the reasons and effects of such cash dividend plans, reminded them of keeping continuity and stability of the overall cash dividend layout, as well as the consistency of cash dividend strategies and their profitability, cash management and future development strategy.
VI. Comparing to previous years, is there any change of measures in the interim supervision?
Answer: during the process of the after-event interim report review, the SZSE has pushed the upgrading of review method through the operation of the 1st phase enterprise portraits project. Comparing to the previous after-event supervision, this review witnessed a rise in intelligence level.
The SZSE has began the preparation and planning of enterprise portraits project since the end of 2016 to adapt to the gradually complicated capital market, carry out CSRC’s (China Securities Regulatory Commission) requirements on the strengthening the construction of supervisory ability of technology, and raise the ability in detecting clues on law and regulation violation. As of now, the SZSE’s 1st phase enterprise portraits project has been put into use. This project includes 7 major modules with applicable functions such as company scan, company label, shareholding and shareholders, restructuring review assistance, relationship tree, and information search. Depending on text mining, cloud computing and other information technology, and combining the experience in companies and the industries, supervisors can announce enquiries direct to the problem, which further enhances the level of accurate supervision.
Specifically, focusing on risk prevention, supervision strengthening and efficiency enhancement, enterprise portraits integrates common business functions on the basis of connected data, making new progress in terms of developing intelligent application. Firstly, the project condenses supervision experience and promotes the ability in detecting clues. By integrating loads of supervision practice experience, it collectively shows information frequently concerned in supervision, aids supervisors in grasping companies’ risk and feature promptly, and therefore promotes the ability in detecting clues. Secondly, by taking advantage of cutting-edge technology, the project explores intelligent assistance function. In off-standard supervision business, it explores an intelligent direction. For instance, the accuracy of automatic extraction and remindful review concerns is over 95% in terms of restructuring review, and the fast calculation and clear demonstration of hundreds of millions of data are achievable in terms of enterprise maps.
Furthermore, the SZSE has further exerted on-spot and non-spot coordinated supervision in terms of interim supervision measures. On-spot examination comes as a new measure for frontline supervision, serves as a beneficial supplement to non-spot supervision, and becomes an important tool for enhancing the SZSE’s frontline supervision function. Currently, the SZSE carries out close cooperation between on-spot and non-spot supervision in risk identification, warning and disposition towards high-risk companies and matters, truly sharpening the teeth of frontline supervision.
