Q&A on Regulatory Measures of SSE in Imposing Delisting Risk Alert on Shares of Dalian Sunasia

Today, the Shanghai Stock Exchange (SSE) decided to impose the delisting risk alert on the shares of Dalian Sunasia Tourism Holdings Co., Ltd. (hereinafter referred to as Dalian Sunasia or the Company). Regarding the regulatory measures, an SSE employee in charge of the relevant business answered related questions from the press.

Q1: Can you brief us on the main regulatory process of the SSE imposing the delisting risk alert on the shares of Dalian Sunasia?

A: On April 30, 2021, Dalian Sunasia disclosed its 2020 annual report. The annual report shows that the company's operating income in 2020 was RMB114.22 million, and the net profit after deducting non-recurring gains and losses was RMB-84.05 million. After reviewing the Company's annual report in accordance with its regulatory responsibilities, the SSE found that the Company had disclosed three times on January 30, April 28, and April 29, 2021 respectively, and that it may be subject to the delisting risk alert, and clearly estimated its main business income at less than RMB100 million. The operating income disclosed in the annual report is accordingly quite different from the data revealed in the previous announcements. In addition, it was also found in the review that there were major doubts about the accounting treatment of some of the Company's sales revenues, which might not meet the relevant provisions of the Accounting Standards for Business Enterprises. The Company's operating income would be less than RMB100 million after the deductions based on the provisions, and relevant financial indicators would trigger the circumstances where the delisting risk alert should be imposed in accordance with the Rules of Shanghai Stock Exchange for Listing of Stocks (the "Stock Listing Rules" for short). A review inquiry letter, issued by the SSE in view of the above-mentioned situations on the evening of April 30, 2021, the day when the Company's annual report was disclosed, mainly required the Company to verify the specific reasons for the remarkable increase in the operating income and components of the income in the fourth quarter of 2020 and whether related accounting treatments met the provisions of the Accounting Standards for Business Enterprises. On May 18, 2021, Dalian Sunasia replied that the newly increased incomes were mainly derived from penguin sales. In 2020, the Company sold 52 penguins in total. Among them, those from the sales of 44 penguins were confirmed as the main business incomes, totaling RMB18.76 million; and those from the sales of the remaining 8 penguins were considered as assets disposal incomes. However, the Company's previous annual financial reports showed that all penguin sales were included in the assets disposal gains and losses, and were not deemed as operating incomes. Therefore, the Company's accounting treatment of penguin sales in 2020 was significantly different from that in previous years. Then another inquiry letter issued immediately by the SSE on annual report review to Dalian Sunasia on May 18 required it to disclose the specific transactions in the penguin sales and the basis for related accounting treatments. Dalian Sunasia's response to the second inquiry letter on May 31 stated that the incomes which could be confirmed as the penguins sold were consumable biological assets and that the Company had relevant internal controls for penguin classification. However, the Company failed to provide evidence to substantiate the above-mentioned statement.

For further verification, the SSE and the Dalian Office of the CSRC conducted on-site inspections of Dalian Sunasia starting on June 8. During the inspections, the completeness and effectiveness of the internal control related to financial accounting for penguin sales could not be verified as a result of the Company's refusal to provide relevant supporting materials on the pretext of trade secrets. And it was found that there were changes and inconsistencies in some important accounting documents and original audit papers. In order to urge the Company to provide the basis for the accounting treatment of incomes from penguin sales, the SSE re-issued an inquiry letter to Dalian Sunasia and the Company's annual audit accountants on July 6, requiring the Company to provide sufficient evidence within 5 trading days to prove that the accounting treatment of penguin sales complied with relevant provisions and the sales were related to the Company's main business. In addition, the SSE clearly informed the Company that if sufficient evidence was not provided within the prescribed time limit to verify the authenticity of the relevant income, the compliance of the financial accounting and the fact that the income was related to the main business or had commercial substance, the SSE would require the Company to deduct the income from the penguin sales in accordance with the relevant provisions of Article 13.3.2 of the Stock Listing Rules, and decide whether to impose the delisting risk alert on the Company's stock based on the amount of the deducted operating income. As of July 13, 2021, Dalian Sunasia had not respond to the inquiry letter within the prescribed time limit. On the same day, the company's annual auditor re-verified the relevant audit evidence according to the clues found in the supervision on-site inspection, and submitted the corrected special opinions on income deduction to the Shanghai Stock Exchange, clearly stating that the total amount of RMB30.21 million including RMB18.76 million of "newly increased sales incomes" related to the penguin sales and other incomes should be deducted, and after the deduction, Dalian Sunasia's main business incomes amounted to RMB84.01 million. As a result, in accordance with Article 13.3.2 and Article 13.3.5 of the Stock Listing Rules, the SSE has made a decision to impose the delisting risk alert on Dalian Sunasia's shares. The annual report inquiry letter issued by Shanghai Stock Exchange to the Company, the Company's related replies, and accountants' opinions have all been disclosed to the market in accordance with the regulations.

Q2: Can you elaborate on the basis for the SSE's determination that the operating incomes related to the penguin sales should be deducted in the process of judging whether the 2020 financial data of Dalian Sunasia triggered the financial standards for delisting risk alert?

A: The Stock Listing Rules clearly stipulates that during the course of determining whether a listed company's stock has triggered the circumstances for the delisting risk alert, in the situation concerning the indicator of the operating income, the operating incomes that have nothing to do with the main business and the incomes that do not have commercial substance should be deducted. Dalian Sunasia disclosed on its own in January 2021 that after deducting the business incomes that had nothing to do with its main business and the income that did not have commercial substance, the Company's operating income in 2020 would be less than RMB100 million. Later, the Company disclosed in the 2020 annual report that the operating income of more than RMB100 million after the deduction showed a major deviation before and after the information disclosure. The main reason for the situation is that the Company recognized most of the gains from the penguin sales in 2020 as operating incomes related to its main business. The reason for determining that the business incomes related to the penguin sales should be deducted is mainly based on the following three facts:

First, the basis for the recognition of the incomes from the penguin sales is insufficient. The current Accounting Standards for Business Enterprises has clear and strict provisions on whether the gains from the sales of biological assets can be recognized as incomes. If the biological assets sold by a company are consumable biological assets, the gains can be recognized as incomes; and if they are productive biological assets, the gains cannot be recognized as incomes. In response to the inquiry letter, Dalian Sunasia stated that in the fourth quarter of 2020, penguins were divided into consumable and productive ones, corresponding to those in the temporary rearing area and those in the exhibition area, and that accounting treatment was carried out accordingly. The sales of the penguins in the exhibition area were directly categorized into the assets disposal incomes, and the sales of the penguins in the temporary rearing area were recognized as the incomes from inventory sales. In the first three quarters of 2020, Dalian Sunasia directly classified the gains from penguin sales into the assets disposal incomes. In the fourth quarter, the company corrected the errors in the accounting treatment of penguin sales in the first three quarters of 2020, stating that 44 of the penguins sold in 2020 were consumable penguins, and the gains were recognized as the incomes from the relevant inventory sales. However, during the on-site inspections, Dalian Sunasia refused to provide necessary information such as the penguin band codes and the biological files to distinguish between productive penguins and consumable penguins, and failed to prove that its recognition of the incomes from penguin sales as operating incomes complied with the provisions of the Accounting Standards for Business Enterprises on classification of incomes.

Second, the Company's penguin sales incomes lack stability. According to the data provided by Dalian Sunasia, the Company sold 40, 30, 15, 4 and 52 penguins from 2016 to 2020, respectively. Among them, from 2016 to 2019, the sales of penguins by the company were accounted as the sales of productive biological assets, and the sales revenue was not confirmed, indicating that the Company's sales of consumable penguins had not formed a stable business model and a certain scale. Despite the significant increase in the Company's penguin sales volume in 2020, it is highly uncertain whether the business model of directly selling penguins and accounting as expendable penguins can be sustained..

Third, the company's annual auditor also believes that the deduction should be made. After noticing the results of the SSE's on-site inspections, the Zhongxingcai Guanghua Certified Public Accountants LLP, the company's annual auditor, re-verified the relevant audit evidence and submitted the corrected special opinions on income deduction. According to the special opinions, the "special" relevant incomes from penguin sales might affect the report users' normal judgments on the Company's ability of continuous operation and profitability," and it is confirmed that the amount of RMB18.76 million of "newly increased sales income" from such sales should be deducted, with the amount of Dalian Sunasia's main business income after deduction at RMB84.01 million.

In view of the above-mentioned situations, the accounting treatment of penguin sales by Dalian Sunasia lacks support of effective evidence as well as due stability, so that this part of the income cannot be recognized as the operating income related to its main business, and should be deducted in determining whether the Company's stock has triggered the circumstances for the delisting risk alert according to Article 13.3.2 of the Stock Listing Rules. Since the Company failed to deduct relevant incomes according to the rules, the SSE required the Company to make the deductions in accordance with Article 13.3.2 and Article 13.3.5 of the Stock Listing Rules, and decided to impose the delisting risk alert on the Company's stock based on its operating income after the deductions.

Q3: According to relevant media reports, Dalian Sunasia recently claimed that relevant staff members of the SSE's company regulation department were obstructing the Company's information disclosure. Could you brief us on the relevant situation?

A: The SSE has paid attention to the above-mentioned media reports and made verification. The Company's claims that the relevant staff members have interfered with the Company's information disclosure are not true. Since 2019, Dalian Sunasia has disclosed information in a seriously disorderly manner, resulting in quite a few violations. In order to prevent the Company from making announcements arbitrarily and affecting investors' normal investment decisions, the SSE has suspended Dalian Sunasia's use of direct channel for information disclosure since February 2, 2021. As the Company's announcements shall be registered and reviewed for compliance by the SSE in advance, its announcements in compliance with the laws and rules can still be published and disclosed normally. On the evening of July 15, 2021, Dalian Sunasia submitted 5 announcement documents, namely, the announcement on replies to the SSE's inquiry letter, the announcement on the correction of related transactions, the announcement on receiving the SSE's work letter, the announcement on the resolutions of the board of directors, and the announcement of the resolutions of the board of supervisors. Among them, the company's announcement on the resolutions of the board of directors mainly includes the content in four aspects: first, questioning the corrected opinions on income deduction issued by the annual auditor (including the fact that the above-mentioned opinions were not confirmed by the Company with the official seal); second, not recognizing the SSE's disclosure of the above-mentioned opinions on income deduction that were not endorsed by the Company with its seal; third, the Company having the right to protect its rights through multiple channels; and fourth, suggesting that the company hold an expert evaluation meeting. In addition, the announcement on the resolutions of the board of supervisors confirms and approves the content of the above-mentioned resolutions of the board of directors. In accordance with the review, regarding the first and second parts, the corrected opinions on income deduction issued by the annual auditors are their responses to the SSE's inquiry and are information that should be disclosed, and the current rules do not require that the opinions on income deduction issued by the accountants should be confirmed by the company with the official seal. Therefore, the Company's disapproval of the SSE's disclosure of the above-mentioned opinions on income deduction without the Company's seal lacks the basis in rules. Regarding the third and fourth parts, they are not the announcement information that should be disclosed in accordance with the Stock Listing Rules. As soon as the review opinions were formed, the relevant staff members of the SSE's company regulation department informed the Dalian Sunasia of the review opinions through the company business system and telephone, and notified the Company that the relevant announcements can be normally disclosed after revisions. Meanwhile, the SSE specifically explained to the Company that it could express appeals and opinions through other legal channels for the matters that are not within the scope of information disclosure. After receiving the above-mentioned feedback, Dalian Sunasia stated that it would no longer submit the announcement on the resolutions of the board of directors and the announcement on the resolutions of the board of supervisors on the same day, and that the other three announcements submitted by the Company on the same day were normally published.

Q4: After the *ST treatment was imposed on the Company's stock, what changes should investors pay attention to in the mode of stock trading?

A: Imposing the delisting risk alert treatment (*ST) on a company's shares and implementing the differentiated trading mechanisms mainly aims to warn investors of the company's current delisting risks and remind investors to pay full attention to the company's risks existing in current operations and information disclosure in the course of trading stocks and make prudent decisions. With the *ST imposed, the shares of Dalian Sunasia will be transferred to the risk alert board of the SSE for trading, and also with changes in the trading mode: first, the price limit for the shares will be 5%; second, investors should adopt the limit order in participating in the trading; and third, the total number of the shares of a single stock under the risk alert bought by an investor within a day through auction trading and block trading shall not exceed 500,000 shares. In addition, the first-time investors who place the orders to purchase the company's shares shall sign the Risk Disclosure Statements on Stocks Under Risk Alert in written or electronic form in accordance with the requirements of the designated securities company for trading; without the signing, the investors, who can only sell the previous holdings, are not eligible to buy the company's shares. Investors should pay full attention to the above-mentioned changes in the modes of trading the stocks under the risk alert, and may also further consult the Measures of Shanghai Stock Exchange for Stock Trading Management on the Risk Alert Board and other business rules to learn about specific provisions.

It should be noted in particular that the delisting risk warning, mainly aiming to inform investors of the delisting risk, does not indicate that the Company's stock will be delisted immediately. Should the conditions stipulated in the Stock Listing Rules are met after the disclosure of the Company's 2021 annual report, the Company can apply for revocation of the delisting risk warning, and the SSE will handle it in accordance with the rules.