Apr 03, 2019 By LegalMiner

I. Overview of IPO Examination in 2018

1. Number of IPO examination in 2018

In 2018, a total of 200 companies went through IPO examination, of which 55.5% passed, 29.5% failed, 10% withdrew, and 5% suspended the vote.

Compared to the same period of last year, the total number of companies under IPO examination in the 2018 decreased by 59.9%, and the percentage of companies that passed the examination decreased from 76.2% to 55.5%.

2. Geographical distribution of enterprises under IPO examination in 2018

In 2018, companies from 26 provinces, municipalities and autonomous regions filed IPO applications. In terms of geographical distribution, the province with the largest number of enterprises filing for IPO in 2018 was Guangdong, followed by Zhejiang and Jiangsu, a consistent pattern that has been seen in recent years.

3. Industry distribution and capital raising of companies that passed IPO examination in 2018

In 2018, there were a total of 200 companies under IPO examination, of which 111 passed. Among the 111 companies that succeeded, a majority (i.e., 75 companies) came from the manufacturing industry, which also raised the most capital with a total number of RMB107.5 billion, accounting for over 64.7% of all capital raised. The financial industry came second, with 13 companies successfully passing the examination, raising RMB 27.886 billion, and accounting for 16.8% of all capital raised. The industry of information transmission, software and information technology services ranked third, raising RMB 12.781 billion.

II. Analysis of IPO Denials in 2018

1. Analysis of IPO denials with respect to board distribution

With respect to board distribution, there were 27 IPO denials for the main board, accounting for 45.7%; 6 IPO denials for the small and medium sized board, accounting for 10.2%; and 26 denials for the growth enterprise market board (GEM), accounting for 44.1%. Compared with the same period of last year, the proportion of companies that have applied for GEM listings has declined significantly.

2. Geographic analysis of IPO denials

In terms of geographical distribution, the province with the largest number of IPO denials (i.e., 14 denials) in 2018 was Guangdong, accounting for a quarter of all IPO denials, followed by Beijing. Compared with last year, Zhejiang and Shanghai have seen reduced IPO denials, consistent with the total reduction of IPO applications in these two regions.

3. Industry analysis of IPO denials

Compared with 2017, the industry concentration for IPO denials in 2018 has become more obvious. In particular, the number of IPO denials for manufacturing companies, which ranked No. 1 in terms of IPO denials, increased from 64.0% to 69.4%.

In 2018, the top three industries with the largest number of IPO denials were manufacturing, information transmission, software and information technology service, and construction. Among them, the manufacturing industry has seen the largest number of IPO denials, i.e., 55, accounting for 69.4% of total denials, which is slightly higher than the percentage of manufacturing companies among all companies under IPO examination. The data shows that the approval rate for companies in the financial service industry is relatively high. No denial has been made for financial service companies under IPO examination.

4. Analysis of reasons for IPO denial

The data shows that among the feedback on companies that failed IPO examination, the top five risk concerns are: gross profit margin, affiliated transaction, continuous profitability, legal and compliance, and accounting issues.

Among them, the issue of gross profit margin has been raised most frequently and applied for 75% of IPO denials. The issues of affiliated transaction and continuous profitability have also been raised for 66.1% and 51.8% for IPO denials.

5. Analysis of core reasons for IPO denials

1) Gross profit margin

Gross profit margin is a very important financial indicator and has been the focus of IPO examination by the CSRC for the past two years. Based on feedback on IPO denials, companies with gross profit margins that are apparently higher or lower than the industry benchmark and companies with large fluctuation in gross profit margin are very likely to be subject to inquiry from the examination committee.

A. Gross profit margin is too high

Example: Shenlian Biomedical (Shanghai) Co., Ltd.
Specific question: Given gross profit margin is as high as 78%, whether high gross profit margin is sustainable.

Feedback:
“In the reporting period, the issuer's product gross margin was about 78%. The issuer representative please do the following: (1) Taking into account the unit price of products from similar companies, explain whether the pricing strategy for the issuer’s products is consistent with industry practice, whether the high gross profit margin is sustainable, and whether potential risks associated with relevant policy change have been disclosed; (2) explain the reason that caused the significant decline in turnover rate of accounts receivable in 2016 and January to June 2017. The sponsor shall explain the verification method, basis, and issue a clear verification opinion. ”

B. Large fluctuation in gross profit margin

Example: Guangdong Chaoyang Electronic Technology Co., Ltd.
Specific problems: the main business growth trend is inconsistent with the change in gross profit margin, abnormal gross profit margin changes, etc.

Feedback:
“In the reporting period, the issuer’s operating income continued to grow, the customer concentration was high, and the gross profit margin of the main business fluctuated. The issuer’s representative please explain the following:

a. The specific cooperation with major customers, whether affiliated transactions are sustainable, and whether there is significant dependence on major customers;

b. The reason and rationality for continuous growth and fluctuation of operating income, and the reasons and rationality of mismatch between main business growth and gross profit margin fluctuation;

c. The reason and rationality for year-by-year decrease of the gross profit margin of the main business from 2014 to 2016 as well as increase in the first half of 2017;

d. The reason and rationality for the issuer’s sales expense rate and management expense rate to be lower than those of comparable listed companies in the same industry;

e. The reason and rationality for the large difference in gross profit margin between domestic and overseas business. The sponsor representative shall issue a verification opinion. ”

2) Legal and compliance

The legal and compliance issue has also been a focal point with respect to IPO denials. In particular, companies’ administrative penalties are noteworthy. Even a small fine could draw special attention from the examination committee. In addition, with new international guidelines such as GDPR, data compliance issue has become a focus of the CSRC for internet companies applying for IPO.

A. Administrative penalties

Example: Guangdong Green Precision Parts Co., Ltd.
Specific circumstances: administrative penalties

Feedback:
"The issuer was unable to provide justification for the shortage of bonded materials and therefore in violation of customs laws and regulations. As such, the issuer was subject to a RMB 566,000 fine by Huizhou Customs of the People's Republic of China. The issuer representative please explain the following:

a. Whether such act constitutes major illegal act and its basis;

b. Whether the relevant customs filing is considered regular business or temporary business of the company, the cause of the problem and its plan to rectify such situation. The sponsor shall explain the verification method and process, and issue a clear verification opinion.”

B. Data compliance

Example: Beijing Bo Rui Hongyuan Data Technology Co., Ltd.
Specific circumstances: Whether there may be infringement of rights of third-party users or personal information security?

Feedback:
“The issuer is engaged in application performance management business. Part of such business need to install SDKs and probes on the APP or server. The issuer representative please explain the following:

a. The specific impact of passive monitoring of business technology on customer network and application performance;

b. Whether there is any provision or other circumstance in the business contracts sighed with customers or business arrangements that might violate third party trade secret or personal information security;

c. Whether there is any provision or confidentiality clause in the contracts signed with customers that may assist customers or third parties in any manner to violate third party trade secret or personal information security.

d. Whether the procedures for obtaining authorization in the issuer's related business are complete. The sponsor shall explain the verification process, the basis, and issue a clear verification opinion. ”

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