Data from East Money Choice shows that as of April 18, 2017, among a total of 11,037 listed companies required to disclose their 2016 annual reports, 4,430 had already done so.
With the "April 30" deadline approaching, audit institutions have made last-minute changes to their plans, prompting many listed companies to announce delays in disclosing their 2016 annual reports. According to incomplete statistics from New Third Board Online, as of April 19, 2017, over 110 New Third Board companies had received "risk warnings" from their sponsoring brokerages due to their failure to disclose annual reports on schedule.
Among these companies are 17 Innovation Layer enterprises. In accordance with the regulations of the National Equities Exchange and Quotations (NEEQ), these 17 Innovation Layer companies will be demoted to the Basic Layer for failing to disclose their annual reports on time.
The 17 Innovation Layer companies are: Xinyue Co., Ltd. (834859.OC), Shunda Intelligent Co., Ltd., Securities Media Co., Ltd., Jianzhuangye Co., Ltd., Mimeile Co., Ltd. (833048.OC), Hans Union Co., Ltd., Tiangang Co., Ltd., Longfu Huanneng Co., Ltd., Guanghui Technology Co., Ltd., Zhongqingneng Co., Ltd., Tianye Co., Ltd., Dacheng Medical Co., Ltd., Tai'an Technology Co., Ltd., Yindu Media Co., Ltd. (430230), Haitao Co., Ltd., Yuanchuan Technology Co., Ltd. (834841.OC), and Zhenghe Ecology Co., Ltd.
Notably, Xinyue Co., Ltd. (834859.OC) stated that "the difficulty in completing the company's annual report exceeded the company's original plan"—such candor is not common among most companies. Instead, most companies cite various reasons for failing to disclose annual reports on time.
On April 18, Yuanchuan Technology Co., Ltd. (834841.OC) announced that it could not disclose its 2016 annual report by April 30, 2017, as its annual audit had not yet been completed and it was in the process of deregistration from the stock market. On the same day, its sponsoring brokerage, Century Securities, also issued a corresponding risk warning announcement.
Longfu Huanneng Co., Ltd., Zhongqingneng Co., Ltd., Weimei Interaction Co., Ltd., and Dacheng Medical Co., Ltd. cited the same reasons for delaying their annual report disclosure as Yuanchuan Technology. It is clear that these companies have made a firm decision to withdraw from the New Third Board.
It is worth adding that many listed companies plan to "exit" the New Third Board. According to incomplete statistics from New Third Board Online, as of April 18, 2017, among the over 110 companies that received risk warnings for delayed annual report disclosure, at least 20 decided not to disclose their annual reports due to planned deregistration, or fell behind in annual report preparation due to being busy with deregistration procedures.
However, for listed companies that still wish to remain on the New Third Board, the Innovation Layer remains somewhat attractive. As such, these companies need to disclose their annual reports by April 30.
In accordance with the "Measures for the Tiered Management of Listed Companies on the National Equities Exchange and Quotations (Trial)" issued on May 27, 2016, the maintenance standards for the Innovation Layer stipulate that the tier of listed companies shall be adjusted on the first trading day of the last trading week in May each year; accordingly, listed companies that fail to meet the maintenance criteria for the Innovation Layer shall be adjusted to the Basic Layer.
As required by the NEEQ, the relevant data such as share capital for reference shall be based on the figures as of April 30. In other words, if Innovation Layer companies fail to disclose their annual reports on time by April 30, 2017, they are likely to face the risk of demotion. Furthermore, if they still fail to disclose their annual reports by June 30, these companies will have to "voluntarily" deregister.
However, choosing not to disclose annual reports on one’s own accord is one thing, while having poor performance to hide is another. New Third Board Online found that behind the delayed annual report disclosure of many Innovation Layer companies lies the issue of their declining sustainable operating capabilities.
Yindu Media Co., Ltd. (430230) is a well-known "troubled" company in the Innovation Layer. To date, it has received 18 risk warnings from its sponsoring brokerage, Citic Securities Orient Securities Co., Ltd.
In a risk warning announcement issued on April 14, Citic Securities Orient Securities stated that Yindu Media had actually ceased operations, had not yet scheduled the disclosure of its 2016 annual report, and had not yet engaged an accounting firm to audit its 2016 financial status. It added, "It is reasonably judged that Yindu Media may be unable to disclose its 2016 annual report by April 30, 2017. If it fails to disclose the report by June 30, 2017, the company may face mandatory deregistration by the NEEQ."
In addition, Mimeile Co., Ltd. (833048.OC) is also faring poorly. This Innovation Layer company received a risk warning from its sponsoring brokerage on February 27 this year due to concerns over its sustainable operating capabilities. New Third Board Online learned that the company had overdue repayments on financing obtained through online lending intermediaries and was involved in labor arbitration with 29 employees over unpaid wages.
Recently, there have also been changes in the company’s senior management, including its actual controller and chairman. In fact, as early as September 21, 2016, Mimeile had already been warned by its sponsoring brokerage of the risk of demotion after being penalized by the China Securities Regulatory Commission (CSRC).
On April 14, Guanghui Technology, another company in the Innovation Layer, admitted that the accounting firm it had engaged had not yet started its audit work. Behind this issue lies the predicament of the company’s bank accounts being frozen.
Audit institutions are undoubtedly the busiest during the annual report season. For instance, Innovation Layer companies such as Shunda Intelligent Co., Ltd., Jianzhuangye Co., Ltd., Tai'an Technology Co., Ltd., and Tiangang Co., Ltd. have announced "changes to their accounting firms or law firms."
In fact, New Third Board Online found that many listed companies had no choice but to change their audit institutions at the last minute, rather than making the decision voluntarily. A number of New Third Board companies, including those in the Innovation Layer, admitted that the delay in annual report disclosure was due to the fact that their original accounting firms had a shortage of auditors and were expected to be unable to complete the audit work in the near term, thus forcing them to urgently replace their accounting firms.
Changing audit institutions at such a "critical juncture" leads to a heavy audit workload and insufficient time for annual report preparation, resulting in the failure to disclose annual reports on schedule.
Among these cases, some listed companies were even suddenly "abandoned" by their audit institutions. Feinikes Co., Ltd. (430700.OC) is one such example. On April 12, 2017, the company received a written notice from BDO China Shu Lun Pan Certified Public Accountants (Special General Partnership) stating that "due to a shortage of personnel, we are unable to continue the 2016 annual audit work and therefore decide to terminate the audit engagement for the company’s 2016 annual report."
Under such circumstances, Feinikes had no choice but to state that since it needed to replace its audit institution, the time available for preparing the annual report after the replacement would be tight, and the company expected to be unable to disclose its annual report by April 30, 2017.
Interestingly, Feinikes had only announced on February 7 that it would replace its audit institution with BDO China Shu Lun Pan Certified Public Accountants. A notable detail is that last year (2016), Feinikes barely managed to release its 2015 annual report just before the June 30 deadline, narrowly avoiding mandatory deregistration. It remains to be seen whether this New Third Board company will be as fortunate this year.
New Third Board Online learned that Feinikes has average qualifications. The company mainly engages in the production, sales, and installation of explosion-suppression materials. In the first half of 2016, it achieved operating income of 2.8332 million yuan and a net profit attributable to listed shareholders of -240,700 yuan. As of June 30, 2016, its total assets amounted to 22.4558 million yuan.
Similarly, on April 18, Shenghe New Materials Co., Ltd. (839378.OC), another Basic Layer company, also received a "termination notice" from BDO China Shu Lun Pan Certified Public Accountants. According to the announcement, the accounting firm stated that it had decided to terminate the 2016 annual audit work for the company due to the repositioning and adjustment of its business structure and a shortage of personnel.
As a result, Shenghe New Materials also had to "reluctantly" replace its audit institution at the last minute. New Third Board Online learned that Shenghe New Materials, which was just listed on November 1 last year, mainly engages in the R&D, production, and sales of modified plastic particles. In 2015, the company achieved operating income of 59.6541 million yuan and a net profit of 3.7386 million yuan. As of February 29, 2016, its total assets were 59.8964 million yuan.
Such "coincidences" inevitably bring to mind market rumors that "a large domestic accounting firm is not very enthusiastic about New Third Board audit businesses that have no potential for IPO (Initial Public Offering)."
In the industry’s view, audit institutions’ "picky" attitude toward New Third Board business is also a last resort. After all, many listed companies are small in scale and have weak payment capabilities; moreover, their operations are seriously non-standard. This not only increases the workload of audit institutions but also exposes them to significant risks.
For example, Painuo Optoelectronics Co., Ltd. (833513) also recently replaced its accounting firm. Jianghai Securities, the sponsoring brokerage of this Basic Layer company, pointed out that the company had irregular financial practices, such as transferring funds from corporate accounts to personal bank cards for daily reimbursement, small purchases, and temporary equipment purchases. These irregularities prevented the annual audit work from being completed on schedule, resulting in the company’s inability to disclose its 2016 annual report by April 30, 2017.
Poor performance may also be a reason why audit institutions are reluctant to "start work." Yingmei Soft Decoration Co., Ltd. has not yet confirmed its 2016 audit service provider due to its poor operating performance in 2016. Andatong Co., Ltd. also faced difficulties in fund turnover due to poor operations in 2016, failing to pay audit fees to its audit institution on time, which meant the accounting firm had not yet started the audit work.
A shortage of personnel at audit institutions can be considered an objective reason, but some listed companies have failed to cooperate effectively with audit institutions in annual report preparation. Huizhan Co., Ltd. (835649) was unable to complete its annual report as scheduled because its finance department failed to provide some financial materials in a timely and complete manner.
While some companies take the initiative to exit the New Third Board, many listed companies are simply unable to disclose their annual reports. Rungang Forestry Co., Ltd. (832438) stated that its operating conditions had become abnormal due to investment mistakes and that it was in the process of verifying relevant matters. Changxin Rural Microfinance Co., Ltd. admitted that it was under investigation by the Industrial and Commercial Bureau of Suzhou Industrial Park, making it unable to disclose its annual report on time. Shikongke Co., Ltd. claimed that the handover of work between the former chairman, general manager, and the current board of directors had not been completed, which prevented the audit work from starting on schedule and the audit report from being finalized on time.
Hongfang Co., Ltd. is a special case: the company’s actual controller, Chen Chao, passed away on April 15, 2017, which made it impossible for the company’s board of directors to hold a meeting on schedule, and thus the company could not complete the disclosure of its annual report by April 30, 2017.
Annual reports are an important basis for investors to evaluate a company. Therefore, for listed companies, disclosing annual reports is an "obstacle" they must overcome.
All information presented by New Third Board Online is for investment reference only and does not constitute investment advice. Investment involves risks; please proceed with caution when entering the market!
