Recently, an official of the Shanghai Stock Exchange (SSE) answered the questions about the examination of the 2018 annual reports of corporate bond issuers and the regulation-related work.
1. Can you give us an overview of the disclosure of the 2018 annual reports on corporate bonds?
Overall, the disclosure timeliness, adequacy and comprehensibility of the 2018 annual reports on corporate bonds have been further improved in comparison with previous years. Moreover, the contents of the annual reports focus more on the key issues related to the issuers’ solvency, such as the overall debt basket, debt maturity structure, asset quality and cash flow fluctuations, which will help investors to more intuitively assess an issuer's credit status, and the ratio for timely disclosure reaches 97.94%, an increase of 1.7% over the previous year.
Judging from the financial situations disclosed in the annual reports, the production and operation of the corporate bond issuers mainly show the following characteristics:
First of all, the issuers’ operations and profitability improved. In 2018, the issuers recorded a total operating income of RMB45.04 trillion, an increase of 12.12% over the previous year; the net profit was RMB2.28 trillion, up by 8.45% from a year earlier. Specifically, the operating incomes of private enterprises increased more significantly, and the total annual operating income and net profit respectively increased by 18.35% and 11.61% year-on-year. In addition, the industry profit structure demonstrated some changes, and the profits of the upstream industries showed remarkable improvement, as the mining industry, for example, registered a year-on-year increase of 57.41% in net profit.
Secondly, the size of the issuers’ debts remained stable, but the proportion of short-term debts increased. In 2018, the total interest-bearing debt of corporate bond issuers grew by 11.52% compared with the previous year, which was consistent with the gains in assets and incomes on the whole. At the end of the year, the asset-liability ratio averaged 60.78%, an increase of only 0.44 percentage point from the previous year, and the debt level was generally stable. From the perspective of debt structure, the short-term interest-bearing debt accounted for 32.67% of the total on average at the end of the year, an increase of 3.11 percentage points over the previous year. Specifically, the average proportion of the short-term interest-bearing debt of private enterprises went up by 6.2 percentage points from a year earlier, with the pressure on the liquidity management increased.
Thirdly, the size of investment and financing of enterprises contracted, and the operating cash flow improved significantly. In 2018, the issuers enhanced their “hematopoietic” capacity by improving operational efficiency. In the whole year, the cash flow from operating activities was RMB3.91 trillion, an increase of 135.76% year-on-year, with the industries in the real economy such as real estate, construction, and transportation recording more gains. The net cash outflow from investing activities totaled RMB5.70 trillion, a decrease of 7.51% from the previous year, and more than 60% of the issuers shrank the scale of investment. The net financing amount also posted a drop from the previous year, with some companies in the face of refinancing pressure.
2. Can you brief us on the main changes in the SSE’s requirements for the disclosure of the 2018 annual reports compared with those in previous years?
This year, the SSE has continued to adhere to the basic principle of focusing on the disclosure of credit status, implemented classified regulation according to the issuers’ credit profiles, constantly optimized the application support of the XBRL technology, and strived to improve the timeliness and effectiveness of annual report disclosure. At the same time, the SSE has also extensively listened to the market participants' opinions on the disclosure of the annual reports, and optimized the relevant mechanism arrangements in the following aspects on the basis of the experience in daily regulation, so as to improve the overall quality of the annual report disclosure.
First of all, the SSE has strengthened the regulation of information disclosure for privately offered corporate bonds. In order to solve the problem of some issuers of privately offered bonds lacking information disclosure in duration, in the latest “Rules of Shanghai Stock Exchange for Listing and Transfer of Non-publicly Offered Corporate Bonds”, the SSE clearly requires the issuers of privately offered bonds to disclose the annual report and the semi-annual report, thus providing institutional guarantee for the investors in the privately offered bonds to learn about the issuer's credit status.
Secondly, the SSE has intensified requirements for non-financial information disclosure so as to further enhance the comprehensibility of the annual reports. The SSE has always attached great importance to the integrity of disclosure of non-financial information, which is taken as an effective supplement to financial information. Based on the earlier research and surveys in the investors and the daily regulatory practices, the SSE has further specified the disclosure requirements for non-financial information in the annual report template. For example, it is required that the issuers should disclose in detail the products and services generating more than 10% of their net profit or income, and should also disclose the reasons for the changes and the impact on important financial indicators when the company adds new subsidiaries or disposes of important subsidiaries.
Thirdly, the SSE has refined the information disclosure requirements for specific bond products. As there have been more and more innovative bond products in recent years, the SSE has continued to refine the information disclosure requirements for the specific bond products in duration, calling for the issuers to more relevantly demonstrate the changes in credit levels and the differential arrangements for specific products. For example, regarding the exchangeable corporate bonds, the issuer should disclose the latest share-swap price, the ratio of the market value of the shares to be used for exchange to the balance of the exchangeable bonds, the basic situation of pledge, the repayment pressure that may be caused by stock price fluctuations, and so on.
3. What are the key points in the regulation of the 2018 annual reports?
In the process of reviewing the annual reports, the SSE focused on the characteristics of bond credit risks, paid attention to the solvency, and considered the risk management practices in recent years, to strengthen the efforts in the following aspects:
First of all, the SSE focused on the companies’ disclosure of solvency. The SSE especially reviewed the latest credit status of the issuers with short-term debt repayment pressure, and paid special attention to the overall debt burden, the quality of assets that guarantee the debt repayment, cash flow, monetary funds and other factors of the companies, so as to assess the feasibility of their plans and arrangements for debt repayment. With regard to the issuers in the major sectors such as real estate, construction and manufacturing, the SSE, according to the rules of the changes in the industry cycles, followed the issuer's rankings and competition situations in the industry; as for the issuers with large proportions of trade in the income or profit sources, the SSE paid further attention to the specific impact of the business model, regional distribution and changes in the external economic environment on the issuer's operating performance.
Secondly, the SSE paid special attention to the disclosure of the supplements to the annual reports. In the situation where the annual report was supplemented or corrected, the SSE cross-checked the relevant adjustments in comparison with the original documents, temporary announcements, financial reports and other previously disclosed documents. The SSE earnestly examined the key information that would affect the issuer’s solvency, involved significant adjustments in financial data, or might trigger the insurance terms, paid necessary attention to the issuers who were suspected of violations in the compliance of information disclosure or fulfilling responsibilities for risk management, and took regulatory measures according to the circumstances.
Thirdly, the SSE tightened the responsibilities that the intermediaries should take in the disclosure of the annual reports. In the cases of major errors or omissions or accounting problems found in the review, the SSE issued the regulatory inquiries to the issuers while requiring the trustees and the accounting firms to conduct self-examination of and explain their performance of duties, so as to urge the intermediaries to effectively fulfill their responsibilities and continuously improve the internal restraint mechanism of the market.
In terms of the problems in the disclosure of the annual reports, the SSE sent regulatory inquiries or urges to a total of 149 issuers of corporate bonds, requiring the issuers to make corrections within a time limit, and the related issuers have basically completed the supplementary or corrected disclosure as required currently, with the quality of disclosure improved. In addition, the SSE issued regulatory warnings to 32 bond issuers who failed to disclose their annual reports in a timely manner, and may take further regulatory measures based on the circumstances in the future.
4. What are the follow-up arrangements of the SSE for the daily regulation of corporate bonds?
Focusing on risk management and investor protection, the SSE will continue to make effective efforts in the daily regulation of information disclosure for corporate bonds, and give full play to the role of information disclosure in revealing risks. In the near future, the SSE will take necessary self-regulatory measures for the violations in information disclosure, and initiate the preparation and supervision for the disclosure of the 2019 semi-annual reports. At the same time, by summarizing and analyzing the data of the annual reports and considering the relevant circumstances reflected in the risk management report, the SSE will pay close attention to the relevant credit status of the issuers in certain regions and specific industries, and urge the market participants to complete the necessary work in risk investigation and monitoring and effectively manage, warn of, defuse and dispose of credit risks for bonds.
Going forward, the SSE will further optimize the modes of regulatory cooperation, enhance measures for risk prevention and control, advance the coordination of relevant institutions, and promote settlement and disposal of the relevant credit risks in an orderly manner. At the same time, the SSE will intensify regulation over violations found in the self-regulation, especially the matters of bond risk management that are related to the interests of investors, and resolutely investigate and deal with all violations.