2019.02.02 Zhang Wei Views:
In a recent week, many listed companies had disclosed massive losses in quite a ridiculous way. Seriously speaking, that was a real embarrassment to China’s capital market.
In a recent week, many listed companies had disclosed massive losses in quite a ridiculous way. Seriously speaking, that was a real embarrassment to China’s capital market.
Over 380 companies on A-share market have disclosed their earnings forecasts, claiming a total loss of ¥282.388B for which goodwill impairment accounts a substantial part. Zeus Entertainment (002354) lost ¥7.3B to ¥7.8B. PD Group (601258), ¥6B to ¥6.5B. And Kaidi (000939), ¥5B to ¥6B. What’s worse, 9 companies including Homyear Capital (600240), Liyuan Precision Manufacturing (002501), Feilo Acoustics (600651), Tianshan Animal Husbandry Bio-engineering (300313) and Chinasun Pharmaceutical Machinery (300216) lost more than their market value. What an embarrassing week for A-share market!
Zhang Wei: 2019 will be a Big Bath year for China’s capital market.
Last year, I predicted that 2019 would be a Big Bath year and sadly, it seems I was right about that. Behind the embarrassment lies a disrupted pricing system of China’s capital market and regulators being too lenient with the evil-doers.
Goodwill has formed an artificial “quake lake” in stock market.
Zeus Entertainment (002354), for example, reported ¥1.8B revenue 2018 Q1-Q3, with net profit worth of ¥250M. And then a net loss of ¥7.3B to ¥7.8B was posted in a revised annual financial statement, with goodwill impairment charge of ¥4.9B. Similarly, companies acquired by Dongfang Precision Science and Technology (002611) suffered goodwill impairments charge of ¥3.06B to ¥4.142B. In the case of Kangni Mechanical & Electrical (9603111), the impairment was ¥2B to ¥2.271B.
Such a significant amount of goodwill results from acquisition premiums in a large scale in recent years. Especially in 2015, many companies pumped up their stock prices and market value by M&A and the target companies were overvalued when they were acquired, which led to huge amounts of goodwill. Statistics show that goodwill on A-share market had reached ¥1.4T by the end of 2018, which had formed a large “quake lake”.
Specifically, goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process.
Article 4 of Accounting Standards for Enterprises No. 8 – Asset Impairment states that an enterprise shall, on the day of balance sheet, make a judgment on whether there is any sign of possible assets impairment. No matter whether there is any sign of possible assets impairment, the business reputation formed by the merger of enterprises and intangible assets with uncertain service lives shall be subject to impairment test every year.
Under Article 23, the business reputation formed by merger of enterprises shall be subject to an impairment test at least at the end of each year. The business reputation shall, together with the related asset group or combination of asset group, be subject to the impairment test. That is to say, a company needs to check its goodwill for impairment yearly.
The listed companies dare not to take a chance because they would be delisted if their income hasn’t been covering their goodwill impairment expense for 3 consecutive years. They’d be better off to take a Big Bath in a pre-emptive strike.
The approval-based IPO system is to blame for a disrupted pricing system.
The huge amount of goodwill has severely disrupted the financial environment of A-share market, which highlights a complete disorder in the pricing system of China’s capital market under the approval-based IPO system. Moreover, shell resource value has distorted issuing and pricing system and zombie firms that have been dormant are brought back to life repeatedly.
Since it’s tough to get listed on domestic stock market, companies that have the chance to go public are willing to do whatever it takes including M&A, private placement and share pledge to pump up the stock prices in order to dump their own shares at the inflated price. Meanwhile, the high barriers to entry bock many companies’ way of flotation. During the period of IPO “quake lake”, the number of queuing companies peaked at over 800. And there are thousands of small and medium-sized companies which do not get a chance to enter capital market.
While in the secondary market, individual investors predominate in A-share market. When the market is showing good momentum, stock prices will likely go up around the time of the M&A announcement. It’s the exact opposite in overseas markets. The findings of an American study suggest positive returns for a considerable proportion (15-30%) of target firms but negative returns for the acquirers in an acquisition.
The perpetrators should be treated with harsh punishments.
The massive goodwill impairment of listed companies this time has underlined a lack of harsh penalties and delisting system.
Public firms announced their financial disclosures with little seriousness and legal force. Homa Appliances(002668) saw a downward forecast revision of earnings forecast to a loss ¥1.242T-1.578B from a profit of ¥305M-343M. Feima International (003310), a loss of ¥1.75B-1.95B from a profit of ¥15.29M-138M. Broad-Ocean Motor (002249), a loss of ¥2.1B-2.3B from a profit of ¥230M-439M
Most market participants can neither understand nor accept such dramatic downward turns. Public firms reporting profit for first three quarters but massive loss for the fourth quarter are committing accounting fraud. But the current capital market is too lenient with those listed companies and acknowledges no responsibility to investors.
The “low-cost fraud” has long been the scourge of A-share market. Previous regulations focused enforcement resources on intermediary institutions and stock prices manipulation rather than the public companies and their actual controllers.
What kind of STAR Market do we need?
Without reforming the system, the Sci-tech Innovation Board, or STAR Market, will only end up a minor technical advance rather than a milestone success.
For the STAR Market to succeed, a registration-based IPO system should be implemented with corresponding delisting mechanism. Rules and regulations should be put into place to punish listed companies and their major shareholders for fraudulent practices, false promises, insider trading and market manipulation. That is the way to restore integrity and promote fairness, equality and transparency in China’s capital market and protect investors with best efforts.
This editorial written by Zhang Wei was originally published on Securities Times, to read the full article in Chinese please check http://news.stcn.com/2019/0202/14849641.shtml
Rewritten by a Lu Ying, Edited by Li Yunzhen
Over the past year, the bull market returned, with technology leading the way.
As I said back in October 2024, the rally that began on September 24 was not merely a rebound, but a reversal. Since then, China's capital markets have undergone a broad revaluation, moving from undervaluation toward fair value.
The Shanghai Composite Index reached its highest level in a decade. The "Yi-Zhong-Tian" trio—Eoptolink, Zhongji Innolight and TFC Communication, three prominent Chinese optical communications stocks—saw their share prices multiply severalfold in a single year. Cambricon's market capitalization briefly exceeded RMB 600 billion. Elsewhere in the technology sector, triple-digit price-to-earnings ratios and valuations exceeding RMB 10 billion became commonplace.
Some investors were greedy; others, fearful. Still others asked me: Are technology stocks in a valuation bubble?
My answer is that what we are witnessing is the hunger and anxiety of an era, reflected in the capital markets. Once you understand this, the current fervor for technology investing is no longer difficult to explain.
Investment has nothing to do with macroeconomics, but everything to do with geopolitics.
China-US relations will shape the investment landscape for decades to come. Geopolitics has played a major role in shaping the hunger and anxiety of our times, fundamentally reshaping the way we invest.
What, then, lies at the heart of China's hunger and anxiety?
The Fourth Industrial Revolution is already underway, yet China has not fully overcome the technological shortcomings left by the Third. There is no time to lose.
This is why some people wonder: Why do Chinese computing chip companies command such high valuations when their technologies still lag so far behind NVIDIA's? Why does NVIDIA trade at just 50 times earnings, while a company hailed as "China's answer to NVIDIA" commands a multiple of 300?
To me, this gets the logic exactly backward.
It is precisely because these companies cannot catch up with NVIDIA in the near term that they command a higher strategic premium. The wider the technological gap, the greater the strategic value.
The further something lies beyond our reach, the stronger our hunger. The harder it is to catch up, the deeper our anxiety. If China were to achieve a complete breakthrough in computing chips one day, valuations might actually come down.
Where can one find China's most spectacular natural landscapes?
Much of the answer, I believe, lies in and around the Hengduan Mountains: the Meili Snow Mountains, Jade Dragon Snow Mountain, Mount Gongga, Mount Siguniang, Jiuzhaigou, and many others. Vast differences in elevation and deep fault lines have given rise to landscapes of extraordinary grandeur.
Hard-tech investing follows a similar logic.
Technological gaps, discontinuities in capabilities, and missing links in industrial systems: a leap in difficulty brings a leap in valuation, and a successful breakthrough can, in turn, bring a leap in returns.
This logic extends well beyond computing chips. It is equally evident in memory semiconductors, commercial spaceflight, and other sectors where China still faces substantial technological gaps with other countries.
It was precisely this conviction that led CoStone Capital, starting in 2016, to decisively focus its investments on three areas: hard tech, emerging industries, and life sciences and healthcare. In this context, "hard tech" refers specifically to important industries in which China faces a technological gap with the United States.
Thanks to this forward-looking strategy, CoStone Capital established an early presence across the full value chains of key sectors, including semiconductors, artificial intelligence, and robotics.
Looking ahead, the frontiers of technological progress and industrial upgrading are boundless. Nor can the gaps in hard technology be closed overnight. The twin windows of opportunity presented by technological innovation and the development of homegrown alternatives to foreign technologies have only just begun to open.
The road ahead is long, but the future holds immense promise.
As an investment firm, CoStone Capital will continue to invest where the hunger and anxiety of each era run deepest, move forward with the tensions that shape our times, and extend our reach toward the most challenging—and most important—frontiers.
Spring 2026