Changpeng Wan
h2 The Significance of Removing Special Treatment Status
For Chinese-listed companies, escaping Special Treatment (ST) designation represents a crucial corporate rehabilitation milestone. This regulatory classification flags firms with abnormal financial or operational risks – from accounting irregularities to negative equity – imposing strict trading restrictions. Removal signals restored compliance and often triggers renewed investor confidence. The recent delisting announcements for ST TeXin (000070) and ST Zhongli (002309) illustrate this critical path to redemption, showcasing how companies navigate regulatory penalties to reclaim market standing.
– Key regulatory triggers for ST status include consecutive annual losses, negative net assets, or verified financial misstatements
– ST-labeled stocks face 5% daily price fluctuation limits (versus 10% standard)
– “Delisting” from ST status typically increases liquidity and investor interest
– Recent success rate remains low with only 21% of ST companies removing designation in 2024
h2 Case Study: ST TeXin’s Recovery Journey
h3 Regulatory Violations and Penalties
The Shenzhen-based communications equipment manufacturer plunged into regulatory turmoil in May 2024 when China Securities Regulatory Commission (CSRC)’s Shenzhen branch issued a penalty notice revealing false financial records spanning 2015-2019. The investigation uncovered discrepancies across critical metrics – including revenues, profits, and asset valuations – triggering immediate ST classification under Shenzhen Stock Exchange rules.
h3 Corrective Actions and Accounting Restatements
To regain compliance, ST TeXin implemented rigorous corrections:
– Conducted comprehensive restatements of 2015-2019 financial reports
– Engaged Tianzhi International auditors for independent verification
– Resolved underlying operational issues causing misstatements
– Satisfied regulators that violations didn’t meet more severe delisting thresholds
After maintaining 12 months of clean reporting since the penalty, the Shenzhen Stock Exchange confirmed ST removal effective July 9, restoring normal trading as TeXin Information.
h2 ST Zhongli’s Comprehensive Restructuring
h3 Addressing Non-Operational Fund Occupancy
ST Zhongli faced distinct challenges involving former controlling shareholders improperly diverting ¥6.8 billion through:
– Direct cash transfers
– Fabricated transaction records
– Accounting loopholes
Resolution required innovative solutions:
– ¥6.8 billion repaid via shareholder cash donations
– ¥11.25 billion settled through creditor negotiation and debt forgiveness agreements
– Third-party auditor verification of repayment completeness
h3 Solving Illegal Guarantee Liabilities
The solar technology firm additionally resolved unauthorized loan guarantees totaling ¥4.3 billion through its restructuring plan:
– Industrial investors assumed liabilities under court-approved rehabilitation agreement
– Legal firm Shanghai Jianing confirmed full compliance in governance opinion letter
– Corrected financial misstatements from 2013-2021 via retrospective adjustments
With all violations remediated, stock exchange authorities approved the ST removal following JCZX‘s July 2024 auditor confirmation.
h2 Regulatory Landscape for ST Companies
2024’s updated Shanghai and Shenzhen listing rules established clearer pathways for ST removal:
– Mandatory 12-month “clean period” post-final penalty
– Removal requires verified correction of triggering violations
– Audited financial proof submitted for all remediation claims
– Strengthened requirements for controlling shareholder conduct
These reforms help legitimate companies recover efficiently while weeding out fundamentally troubled enterprises. The successful ST exit demonstrates regulators’ growing sophistication in balancing enforcement with rehabilitation opportunities.
h2 Implications for China’s Capital Markets
Dual ST removals signal market maturation:
– Establishes credible rehabilitation templates for future cases
– Strengthens investor confidence in regulatory oversight
– Demonstrates penalties as corrective rather than punitive
– Reduces prolonged market distortions from zombie listed firms
Data shows stocks historically outperform benchmarks post-ST removal:
| Metric | 3-Month Post-Removal | 12-Month Post-Removal |
|——–|————————|————————|
| Average Return | +12.4% | +27.1% |
| Liquidity Increase | +38% | +62% |
| Institutional Ownership Growth | +9.2% | +18.7% |
Still, transitioning companies face lingering challenges:
– Persistent reputation damage among institutional investors
– Higher capital costs until credibility rebuilds
– Oversight from regulators remains intensified
h2 Investor Action Plan
For navigating post-ST opportunities:
– Verify audit reports: Ensure remediation claims have third-party verification
– Monitor volume patterns: Abnormal trading may signal unreported issues
– Track governance practices: Post-ST ethical conduct matters
– Review using value metrics: Technical rebounds often precede fundamentals
– Diversify timing: Phase positions across earnings cycles
Telegraph messages indicate institutional interest rebuilding in both cases – Goldman Sachs upgraded ST Zhongli to neutral on July 2 following factory tour confirmations of capacity utilization improvements.
The return to normal trading marks operational progress for both companies, but sustained recovery requires continuous governance vigilance. Investors should focus equally on current financials and management integrity when evaluating these reopened opportunities. Chinese regulators’ stricter enforcement mechanisms now provide clearer rehabilitation frameworks – allowing better companies to emerge stronger from compliance failures.
