China Startups Tumble After Regulator Says Investors Misled

(Bloomberg) -- China’s securities regulator punished two high-flying startups for misleading shareholders, barring them access to public markets for new funding.

Shares of Ningbo Ronbay New Energy Technology Co. and Zhejiang HangKe Technology Inc. closed down at least 10% in Shanghai after the companies were told they wouldn’t be allowed to sell stocks or bonds publicly for a year. The punishment -- for not fully disclosing links to a customer who then failed to pay its bills -- is the first of its kind for a company trading on the city’s Star board.

About nine months after it launched a new stock venue designed for technology startups, China is showing its fast-growing firms that it will take a tough stance on corporate disclosure. The Star board, which has a simpler vetting process for hopefuls looking to list and less stringent rules on valuations and profitability, has seen 96 companies debut since July. Ningbo Ronbay and HangKe were among the first batch of 25 listings.

China Startups Tumble After Regulator Says Investors Misled

“This move is obviously tougher than simply issuing a fine,” said Fu Lichun, an analyst at Northeast Securities Co. “Though the actual hit to the business might not be that huge, the fact that the punishment decision was made rather quickly shows China is serious about putting the rule of law first and foremost as the Star board matures.”

In November, Ningbo Ronbay said it would probably not be able to collect the more than 200 million yuan ($28 million) due from customer BAK Power Battery after it missed a payment. Ningbo warned at the time that the entire amount could be written off, causing earnings to “collapse.” On Friday, the China Securities Regulatory Commission told Ningbo Ronbay it would be punished for failing to fully disclose its transactions with BAK Power on its IPO prospectus.

Zhejiang HangKe was punished by the CSRC due to its links with the same customer. It failed to disclose the termination of contracts with BAK Power and misstated the proportion of advance payments it had received, according to an exchange filing. HangKe also failed to tell shareholders that 117 million yuan of bills weren’t paid by BAK Power between October 2018 and June 2019.

While neither of the stocks are included in any major global benchmarks, the news comes amid increased scrutiny around corporate governance in China. In the past few weeks, the fallout from separate accounting scandals at U.S.-listed firms TAL Education Group and Luckin Coffee Inc. burned investors and drew attention to cross-holding risks in Chinese firms.

©2020 Bloomberg L.P.

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