In just 22 days in May, 57 listed companies in the A-share market have been issued risk warnings. As of May 22, mainland China had 57 listed companies that were issued other or delisting risk warnings (marked with ST or *ST before the company’s stock symbol), with more than 80% of these companies receiving non-standard opinions in their 2023 financial reports or audit reports. This includes 28 companies that received audit reports with disclaimers of opinion, as well as issues related to financial fraud, major lawsuits, and other problems. The financial issues mainly revolved around consecutive losses, negative net assets, revenues below a billion, triggering the ST or * ST clauses.
On the evening of May 19, Guorui Technology announced that it had been penalized for financial fraud in the telecom sector led by Sui Tianli, and the company received an administrative penalty decision. At the same time, the company was issued other risk warnings.
In its 2020 annual report, Guorui Technology inflated its operating income, operating costs, and profits by 2.26 billion yuan, 1.86 billion yuan, and 0.40 billion yuan respectively, accounting for 49.68% of the disclosed profit total for that year.
On May 17, Zhongtai Chemical received an administrative penalty decision and was issued other risk warnings due to reasons such as financial fraud and misuse of shareholder funds. In 2022, Zhongtai Chemical falsified its revenue and costs by a total of 4.248 billion yuan to meet revenue targets.
Moreover, companies like ST ChunTian, ST LianLian, ST XianFeng, and ST GaoHong were flagged because they triggered the provision stating “the net profit after deducting non-recurring gains and losses in the latest three consecutive accounting years is negative, and the audit report of the latest annual financial report indicates the uncertainty of the company’s ability to continue as a going concern.” ST FuTong’s internal control audit report in 2023 also received a disclaimer of opinion.
According to “Market Observation,” a widely recognized creator in the financial field in mainland China, there are three main reasons behind financial fraud in listed companies: to avoid ST or delisting, to meet performance commitments, and to maintain stock prices for further financing.
Market Observation advises investors to identify financial fraud in listed companies. The most direct form of financial fraud is inflating profits, which requires comprehensive coordination on the asset side, revenue side, cash flow, etc., making it easy to spot signs of financial fraud in certain areas.
It is crucial to focus on operational cash flow since having actual cash inflows in the accounts increases financial authenticity. If a company has good profits but consistently poor cash flow, the credibility of its profits should be questioned as fabricating cash flow is harder.
Additionally, pay attention to the dividend capability of listed companies. If a listed company continuously gives significant dividends in tangible form, it indicates a lack of good investment projects and high growth potential but at least confirms its financial integrity. In a market where financial fraud is common, a high dividend rate may become an important criterion for assessing investment value.
Furthermore, for companies facing significant operational risks, especially those related to major ethical flaws, investors should consider staying away from them.
Market Observation also warns that companies with severe financial fraud lack basic integrity, and investors should avoid them altogether.
In response, netizen “Caterpillar” commented, “Ultimately, it is the retail investors who get hurt. ST or delisting, major shareholders are even happier, feeling the cover for their retreat. Why not compensate the retail investors?”
User 9651994 on Tencent’s platform shared their opinion, “Checking listed companies appears to be for everyone’s benefit, but who is responsible for the losses suffered by the investors inside? If a delisting occurs, all the losses post the suspension should be on the listed company. This execution isn’t difficult.”
Another netizen, “Yunxing,” believes, “Just having ST is not enough. Allowing them to delist means letting them safely leave the stock market with the blood and sweat money of the shareholders. This is their dream. The first step should be to freeze their illegal gains through legal means, return the hard-earned money to shareholders, and bring the participants in illegal fundraising to justice, truly upholding fairness and justice in the capital market.”
In the Chinese A-share market, if a stock symbol is prefixed with “ST,” it signifies a “special treatment” stock, indicating investment risks. If *ST is added, it means the stock carries “delisting risk,” where if a company records three consecutive years of losses, its stock faces the risk of delisting.