ChiNext may record first fraud suspension

The Shenzhen Stock Exchange's (SZSE) ChiNext may soon see its first suspension due to financial fraud, less than 10 months after new listing rules for the board went into effect.

Wanfu Biotechnology (Hunan) Agricultural Development Co announced Friday in a filing to the SZSE that it had falsified its earnings reports to add an extra 740 million yuan ($118.92 million) in revenue and 180 million yuan in profits to its accounts between 2008 and 2011.

The company's admission was issued as a self-check report as it awaits an official verdict on the fraud charges facing it from the China Securities Regulatory Commission (CSRC). The company was first suspected of inflating its books by the Hunan Securities Regulatory Bureau in September, less than one year after it went public on ChiNext, China's Nasdaq-style board for growth and emerging enterprises, with the case later handed over to central securities authorities for further investigation. As of yet, the CSRC has yet to release any details of its own probe into the matter.

The company was temporarily pulled from ChiNext on February 22 after being hit by fraud allegations, but is scheduled to resume trading Monday, pending an official pronouncement from the CSRC.

Wanfu could see its listing suspended either for breaching China's corporate laws or for its worsening financial performance, with delisting possible if its financial results don't improve within a year of suspension, the company also explained in its filing.

Under listing regulations issued by the SZSE in April 2012, a ChiNext-listed company can have its listing suspended if it is found carrying out serious financial crimes or irregularities, suffered losses for three consecutive years or if its net assets drop into the red.

After deducting 59.13 million yuan in non-existent earnings, Wanfu's own self-adjusted financial results show it taking losses of 3.38 million yuan in 2012. Meanwhile, its net profits attributable to shareholders from 2011 were marked down to 1.14 million yuan. The company has so far yet to release adjusted results from 2008 to 2010.

She Minhua, a stock analyst from Zhong De Securities, reached by the Global Times Sunday, explained that Wanfu's case should sound alarm bells for both regulators and publicly traded companies.

"Although Wanfu Biotechnology is the first ChiNext company found to be financially cheating, it is definitely not the only one that has glossed over its financial reports," She said. "This case should prompt regulators to more seriously supervise the information that is being offered by listed companies and initial public offering candidates."