China Insight: Behind the Delisting of Footwear and Apparel Enterprises, a More Stringent Chinese Stock Market Is Tightening Up

Some Chinese footwear and apparel brands were forced to take delisting or privatization steps last month after the China Securities Regulatory Commission released the “Guidelines on the Strict Implementation of the Delisting System” report and the three stock exchanges in Shanghai, Shenzhen and Beijing formulated new delisting rules. 

Reviewing the policy might lead companies to conclude that a measured exit from the Chinese capital markets could strike a balance between listing and delisting and wipe out the bubbles of the stock exchanges. The review also comes as the renminbi has strengthened significantly against the U.S. dollar and Chinese stock markets are seeing wild variations in share prices, pushing some public fashion companies to a critical moment.

The delisting of GRN Group, the former “King of Footwear in China,” marked the fall of a giant in only five years, with its market value shrinking from 40 billion renminbi, or $5.5 billion, at its peak to zero. Meisheng Culture (ST Meisheng), the leading company in anime apparel production that was known for its Disney Princess dress, experienced successive declines, with its share price lower than 1 yuan for 20 consecutive trading days, which triggered a mandatory delisting. An illegal information disclosure by Aokang Footwear (ST Aokang) resulted in administrative penalties of 3 million renminbi, which also could leavel Aokang open to investor lawsuits.

Earlier this year the fashion design company Bobaolong exited the A-share market, becoming the second delisted stock in 2024. Many companies in the fashion sector have followed its path since then. Even Li Ning, the poster company of “Made in China,” was caught up in the delisting swirl. With a $27.7 billion decline in its market valuation, some speculated that Li Ning might be the first to privatize, although it has not done so yet.

On the one hand, there are more than 5,300 listed companies on the A-share market with ups and downs driven by multiple forces, resulting in the waste of listing resources that should have created concrete value for investors. On the other hand, there is a continuous tightening of the regulations for listed companies and the increasing ease of delisting. How to respond to delisting and privatization has become a challenge that distinguishes success from failure for Chinese fashion companies fighting in the capital market.

Crazy mergers and acquisitions — the disenchanted “Silver Bullet”

How could the once legendary Meisheng Culture, which raised $65.7 million in its initial public offering and $336.7 million after two rounds of directional add-issuance and saw its shares realize a two-year increase of more than 20 times in its heyday, reach the point where it may be about to fall out of the market 12 years after its listing?

Meisheng Culture made its fortune from importing textiles and exporting and other businesses. It started as a gift and accessory OEM, serving the major animation apparel companies around the world represented by Disguise of the U.S. and Christy of the U.K. Later, with direct authorization from Disney, it obtained the right to independently design and sell products in the Chinese market, thus beginning to export OEM products as well as to do domestic sales of the independently designed products. These two different business lines enabled it to double revenues from 2008 to 2010 and realize a compound growth rate of 43 percent.

After its listing, with soaring revenues from the Disney Princess sress, Meisheng attempted to build its own IP to benefit from the lucrative market. It began to deploy around the production and monetization of IP content and the creation of an “IP culture ecosystem” with investment, mergers and acquisitions. Over five consecutive years it completed more than 30 mergers and acquisitions, covering the upstream and downstream of the animation industry worldwide, including Europe and North America. It even tapped into the AR and VR fields and invested in the concept of the metaverse in 2022.

But its decline began to show after 2015. Frantic acquisitions by the company failed to deliver the expected growth as promised, and with them came a succession of M&A defeats. The last straw that really impacted the company was the file against its founder, who was suspected of information disclosure violations.

It happens that Li Zhihua, the real controller and chairman of GRN Group, was also placed under investigation by the CSRC for suspected information disclosure violations. The company followed Meisheng in its delisting. Both of them started as OEM firms, rose to the top of the industry and creatively acquired upstream and downstream enterprises when their main businesses were in crisis.

On May 1, ST Aokang was also given an administrative penalty of 3 million reniminbi due to the  non-operational use of funds of its real controller and chairman Wang Zhentao. Will Aokang, one of the leading footwear companies in the local market, be able to avoid the same mistake made by its predecessors?

Textile market reshuffle intensified by performance losses 

“I’ve never seen a company like Meisheng, a company killed by its major shareholders, when its fundamentals are still good,” according to investment experts.

Unfortunately, ST Xinye and ST Sunshine were facing a similar situation, even delisting due to executive misbehavior.

Beginning in April, the share price of Xinye Textile (ST Xinye), a company mainly operating in the production and sale of medium and high-end cotton textiles, remained lower than 1 yuan as of press time. What’s worse, it has suffered three years of cumulative losses totaling $27.7 million and has been fined $5.9 million for seven consecutive years of financial fraud. At the same time, the then-chairman Wei Xuezhu and the other executive have been prohibited from entering the capital markets.

Started in Xinqiao Town, Jiangyin City, Jiangsu Province, Sunshine Group (ST Sunshine) is the world’s largest woolen textile manufacturer and high-grade clothing production base and the only company in China to win the honors of “World Famous Brand” and “Export Clothing Exempted From Inspection.” It had been known as “Xinqiao Twins” together with Heilan Home. Due to bad investments, founder Lu Keping, who was once known as the “woolen giant,” has been frequently punished and fined since its listing.

The stock price of ST Sunshine has fallen over the last week, with a cumulative decline of more than 27 percent in the current year, and it also is facing the risk of delisting.

In a nutshell, 2024 might see a record number of delistings in the Chinese stock exchanges. The new delisting rules show a wider scope of mandatory delisting due to violations and an increase in standardized delisting situations. Approval for delisting due to financial factors is tightening up while market value standards and other trading delisting indicators are being improved. All of them are signals to encourage the initiative to delist. It can be concluded that one of the directions of China’s capital market reform is to strike a balance between listing and delisting.

Facing a more stringent mechanism, delisting or privatization might be a better choice for footwear and apparel companies with weakening profitability.

Editor’s Note: China Insight is a monthly column from WWD’s sister publication WWD China looking at trends in that all-important market.

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