Struggling Chinese ADSs Get Temporary Relief - Will They Recover or Turn to Pink Sheets?

With new requirements and a push towards more transparency, will these stocks rebound, reverse, or just pack up and head to Hong Kong?

Belinda Zhou
    May 27, 2020 11:00 AM  PT
Struggling Chinese ADSs Get Temporary Relief - Will They Recover or Turn to Pink Sheets?
author: Belinda Zhou   

In light of Covid-19 setbacks, the U.S. Securities and Exchange Commission has offered relief to struggling listed companies, granting an extension to regain compliance with the minimum bid price requirements. The 180-day countdown to regain compliance for companies that have received warnings from the stock exchange has been halted and moved to Aug. 1, upon which it will resume.

There is a slew of Chinese ADSs trading near or under $1 which have traditionally used a reverse stock split a last resort, however temporary. Lately, following a number of fraud allegations, the U.S. Congress is turning to action, attempting to implement changes that would increase the protection of the U.S. investor. A recent bill would require that foreign companies let the Public Company Accounting Oversight Board oversee the auditing of their financial records if they are looking to raise capital by selling stocks or bonds to the American investor. All U.S. companies and most foreign entities already work with the PCAOB in this regard; Chinese companies, however, do not. In the Sino-American trade and finance war, struggling Chinese companies are likely to be the first casualties. 

Fintechs Carry out Strategic Changes

A Beijing-based consumer lending marketplace and former peer-to-peer lender, Hexindai Inc. (Nasdaq: HX) announced in December that it received a notice to maintain its minimum bid price. A day later, it formed strategic cooperation with Entertainment Manufacturing International Culture Media Group Co. Ltd. The move sent shares in Hexindai to up 37% at the time, closing at 92 cents per share. 

In January, the company announced a management team change. Its chief operation officer, Lili Hua, resigned and the vice president of operations, Luping Wei, took over.

Hexindai reported in September that its revenue dropped to $4.9 million in the three months through June, down 91% year-over-year. The company had delayed its earnings release for the first fiscal half of 2020. It said its personnel was unable to resume work due to the coronavirus-related travel restrictions.

In January 2019, an activist short-seller, Bonitas Research LLC, alleged that the Chinese lender overstated its business operations to attract capital from U.S. investors that it then paid out to insider shareholders. 

Hexindai has been publicly traded in New York since 2017. On Tuesday, its shares closed at 42 cents apiece. 

A spokesperson for the company recently said: "Hexindai has recently (i) launched an e-commerce platform, xiaobai maimai, and (ii) developed self-operated e-commerce and social e-commerce businesses. This will enable Hexindai's transformation will promote the company's long-term development." 

Hexindai is not the only fintech stock struggling. Jianpu Technology Inc. (NYSE: JT), which consults enterprises in China, reported earlier this month that it may also face delisting. It hopes to regain compliance by Dec. 22.

The stock in X Financial (NYSE: XYF) has fluctuated near $1 per share since 2020. The company announced on April 28 that its net income in the fourth quarter reached $11.4 million, or 7 cents per share, down 67% year-over-year. The company is also facing a class action in the U.S.

Taoping Deadline Extended

Taoping Inc. (Nasdaq: TAOP), an internet-based smart display screens company, has been struggling with its stock level since as early as June 18. Following a delisting warning, it formed a strategic partnership with a pharmacy chain, Yifeng Pharmacy Chain Co. Ltd. Taoping said in the announcement that it will install its devices in Yifeng's 4,000 stores in China.

In October, Taoping announced a $1 million financing in the form of convertible promissory notes and warrants. 

"This new investment is expected to give us more financial flexibility, help us expand our network to reach 1,000 cities, and accelerate the development of our new-media ecosystem," Jianghuai Lin, the chief executive officer of Taoping, said in a statement at the time.

In March, Taoping said it raised $2 million from two investors by selling an aggregate of 1,714,286 ordinary shares, convertible notes equipped with a principal amount of $1,480,000, and warrants to purchase 320,000 ordinary shares at $1.5 per share.

Taoping has until Dec. 16 to regain compliance. It was trading at 35 cents intraday Wednesday.

SXT Pharma Seeks Government Support

China SXT Pharmaceuticals Inc. (Nasdaq: SXTC) received a notification from Nasdaq on Dec. 27, which gave it until June 24 to maintain the minimum bid price of $1 per share.

The company produces ready-for-use traditional Chinese medicine products. The company announced in January that it got the support from the local government after its DNA exam laboratory was approved by the drug authority of Jiangsu province. Shares in SXTC jumped 7% at the time.

The company announced on March 16 that it has received certain funding, though it didn't release the specific details. SXTC said it will be used for the development of the key technologies used in medical herb planting pre-processing of raw materials for traditional Chinese medicine products. However, shares in SXTC dropped 11% on March 16.

Meanwhile, shares in China Pharma Holdings, Inc. (NYSE: CPHI) have been trading below $1 for over two months. The company said in May that its revenue decreased 40% to $1.8 million in the first quarter of 2020. CPHI attributed the decline to the negative impact of the outbreak of COVID-19. 

Additional Grace Period Saves Companies 

Agriculture products supplier Farmmi Inc. (Nasdaq: FAMI) reported the company still has 107 calendar days from July 1, 2020, to regain compliance.

It hopes to be eligible for an additional 180 calendar day grace period after that, although Nasdaq has said the second 180-day compliance period is applicable only if companies satisfy certain conditions.

Farmmi worked hard to avoid being delisted. Its subsidiary, Zhejiang FLS Mushroom Co. Ltd., recently got a major order valued at more than $2.1 million.

"This major, multi-million dollar repeat order is great news and another sign of the progress we are making in our business as we focus on driving profitably long-term growth," Yefang Zhang, the chief executive officer of Farmmi, said in a statement.

Shares in Farmmi closed at 51 cents per share on Tuesday.

Used car dealer Kaixin Auto Holdings (Nasdaq: KXIN) said on April 27 that it received a notification letter from Nasdaq for it failed to meet the minimum bid price requirement. Because of the relief policy, Kaixin is permitted to regain compliance by Dec. 28.

Kaixin received another letter from Nasdaq for the company was not in compliance with Nasdaq's audit committee requirements after a management change. Sing Wang, who served as a member of the audit committee, has resigned from Kaixin's board of directors on April 1.

Ceramic tiles manufacturer China Ceramics Co., Ltd. (Nasdaq: CCCL) received a warning from the Nasdaq in January and now has until July 6.

Pet food company TDH Holdings, Inc. (Nasdaq: PETZ) is also facing a delisting. Shares in TDH closed below $1 in March and haven't rebounded despite some recent highs over $1.

Will these stocks rebound, reverse, or just pack up and head to Hong Kong? Investors want to know--and soon.