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After several consecutive days of decline, small-cap stocks have shown signs of recovery.

As of the midday trading on June 7th, the Wind Micro-cap Index (8841431.WI) rose by 3.71%. In response to reporters' questions after the market closed on the 6th, the China Securities Regulatory Commission (CSRC) mentioned that the new delisting rules have set a certain transition period, and it is expected that the number of delisted companies will not increase significantly in the short term, alleviating market concerns about delisting risks.

Despite the rebound, since the beginning of June, the micro-cap index has experienced a four-day losing streak, with a cumulative decline of over 10%. After the continuous decline, more than a hundred stocks have approached the 1 yuan "life-and-death line." As of the close on June 6th, there were as many as 37 stocks with prices below 1 yuan, setting a new high for this year, among which 5 listed companies have already locked in for early delisting.

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Industry analysts believe that due to the increased delisting risks for some companies, the market has a certain level of panic about small-cap stocks, leading to capital flight. If small-cap stocks continue to be sluggish, it may inadvertently harm some high-quality growth targets.

Fierce selling of small-cap stocks

On June 6th, the Wind Micro-cap Index fell by 6.51% in a single day. By the close of that day, the cumulative decline was 14.78%, giving back all the gains since April 23rd.

Choice data shows that as of the close on the 6th, there were a total of 3,092 A-shares with a market value of less than 5 billion yuan. If this is taken as the standard, on that day, 2,937 small-cap stocks fell, with 88 of them experiencing a drop of more than 10%.

In the past six months, sharp fluctuations have become the norm for small-cap stocks. According to statistics from Choice, as of the 6th, the maximum drawdown within the year for 360 small-cap stocks reached more than 70%, with 16 stocks experiencing a maximum drawdown of more than 90%.

A typical example is the delisted stock Yuancheng, which fell by more than 90% in a single day. On June 5th, Yuancheng opened at 0.23 yuan, a 97.66% drop from the previous trading day's closing price, and the closing loss still reached 96.44%. Similar is the case with *ST Zuojiang, whose stock price was still at 53 yuan per share on January 23rd, and then fluctuated down to a low point of around 6.82 yuan on the 7th, with a range drop of 84.29%.

After the continuous decline of small-cap stocks, more than a hundred stocks have approached the 1 yuan warning line. As of the close on the 6th, there were as many as 37 stocks with prices below 1 yuan, setting a new high for this year. There were 128 stocks with prices between 1 yuan and 2 yuan.According to the par value delisting rules of the A-share market, listed companies whose closing prices fall below the par value per share for 20 consecutive trading days will face the risk of delisting. Therefore, some companies have already chosen to secure their delisting spots in advance based on par value.

According to preliminary statistics by reporters, currently, five companies including *ST MeiJi, ST Sunshine, ST Futong, ST Aikang, and *ST YiLian, have seen their stock prices fall below 1 yuan for several trading days, and even if they hit the upper limit in the subsequent trading, they cannot break through 1 yuan, thus securing their delisting based on par value. Taking ST Aikang as an example, the stock has experienced 23 consecutive days of limit-down since May 6th, and closed at 0.52 yuan per share on June 6th, with 13 trading days below 1 yuan. Even if it hits the upper limit for the next 7 trading days, it cannot rise above 1 yuan.

There are also companies in a situation where a single day's rise or fall determines their fate. For instance, China Yurun Industry, which closed at 0.49 yuan per share on June 6th and has been below 1 yuan for 10 trading days, if it continues to decline, it will also move towards the final chapter of delisting.

Multiple factors have resonated to trigger the decline. This year, this is the third time that small and micro-cap stocks have experienced a rapid sell-off.

Compared to the previous two times, many institutions interviewed believe that this round of decline stems from the increased risk of delisting, leading to a rise in market concerns.

On April 30th, the Shanghai and Shenzhen stock exchanges issued new delisting rules, strictly setting multiple delisting indicators. According to data statistics from Choice, as of June 6th, there have been 9 companies delisted from the A-share market this year, and another 24 companies may face the risk of delisting due to touching financial indicators, with 55 companies "starred and capped" to sound the alarm for delisting risks.

According to incomplete statistics by reporters, this year, more than 70 listed companies have been investigated, over 180 have received regulatory letters, and more than 280 have received annual report inquiry letters, far exceeding the number in previous years. Among them, small and micro-cap stocks, due to their relatively weak profitability and frequent operational issues, have become a high-incidence area for delisting risks.

Choice data shows that, as of the close on June 6th, among the companies with a total market value of 50 billion yuan or less, the median year-on-year growth rate of operating income in 2023 is 1.49%, and the median year-on-year growth rate of net profit is -5.52%. In contrast, the median year-on-year growth rate of operating income for companies with a total market value greater than 50 billion yuan in 2023 is 4.6%, and the median net profit is 6.15%. It is evident that the profitability of small and micro-cap stocks is relatively weak. In addition, among the 36 companies with a market value of less than 5 billion yuan, 15 companies' annual reports have been issued with "non-standard" opinions by auditing institutions.

Zhang Yi, CEO of iMedia Consulting, analyzed to the First Financial reporter that under the new delisting rules of the "New National Nine," some small and micro-cap stocks are relatively weak in performance and scale, and the possibility of triggering forced delisting risks is relatively high. The market's increased concern about the uncertainty of the business prospects of small and micro-cap stocks is also a major factor in the recent sharp decline of these stocks.Some institutional insiders believe that the current market panic sentiment is not evident, and it is more of a short-term fluctuation. "There is no panic selling, but rather a result of investors making rational investments," said the person in charge of Shenzhen-Hong Kong Dragon (Dongguan) Capital Investment Co., Ltd. to the reporter of First Financial Daily. The performance of small and micro-cap stocks is unstable, and after the first-quarter reports come out, it is natural for stocks that have not fulfilled their performance to have reasons for adjustment. This has a short-term emotional impact on the overall market. Coupled with the Dragon Boat Festival, funds are holding cash and waiting to see, or increasing the adjustment of positions, which is a normal phenomenon causing short-term market fluctuations.

"The market style has begun to diverge, with the 'big and small ticket seesaw effect' between value blue chips and micro-cap stocks as a typical contrast, which is continuously intensifying," a private equity person in South China told the reporter. The current situation is a game of existing funds, and due to risk-avoidance sentiment, some funds sell small and micro-cap stocks and buy blue-chip stocks.

Avoiding Misinjury to High-Quality Small-Cap Stocks

If small and micro-cap stocks continue to fall, what impact will it have on the market? Most of the insiders interviewed believe that in the medium and long term, clearing out problematic companies will be beneficial to the healthy development of the market. However, in the short term, if the clearance speed is too fast, some high-quality small and micro-cap stocks are prone to being mistakenly injured.

Shen Meng, a director of Xiangsong Capital, told the reporter of First Financial Daily that the disorderly decline of small and micro-cap stocks is due to the vague understanding of the current delisting policy boundaries. If this situation is allowed to continue, it will intensify investors' concerns and cause fluctuations in the secondary market of a larger range of listed companies.

In addition, some institutions are worried that under the background of the general decline of small and micro-cap stocks, there are small and micro-cap stocks with excellent fundamentals that have been "mistakenly injured."

Recently, some small and micro-cap stocks have seen significant declines without obvious bearish information. A typical example is Zhiyuan New Energy. In mid-April, the company disclosed its annual report for 2023, achieving a revenue of 1.777 billion yuan during the reporting period, a year-on-year increase of 971.39%; it achieved a net profit of 56.2417 million yuan, turning from a loss to a profit compared to the same period last year. However, without obvious bearish news, the stock has continued to fluctuate downward, falling from above 30 yuan per share in mid-April to around 22 yuan per share at present.

In addition to Zhiyuan New Energy, there are about 1,000 small-cap stocks that have seen year-on-year increases in revenue and net profit in 2023, but their stock prices have recorded a decline this year.

"At present, the profitability of small and micro-cap stocks is generally relatively weak, but it is not reasonable to equate small and micro-cap stocks with delisting risks based on market value," a senior investment insider told the reporter, noting that many large-cap companies have grown from small-cap stocks.Some small and micro-cap stocks are also emerging from the predicament of being "starred and capped." Last night, *ST Fuji, *ST Huichen, ST Guoan, and ST Start announced in succession that they will "remove the cap" on June 11th next month.

How to reduce market panic during the deleveraging process and ensure a smooth transition? Improving the investor compensation mechanism may be the key.

Financial commentator Guo Shiliang believes that the continuous improvement of delisting rules and the increasing delisting rate are conducive to enhancing the efficiency of the survival of the fittest in the stock market and the vitality of the stock market. However, in practice, it is not the case that the more delisted stocks, the better. The key to increasing the delisting rate in the stock market is to improve the supporting measures of the market, especially to enhance the efficiency of investor compensation. Listed companies should not be "dismissed once delisted."

He also believes that in overseas mature markets, the delisting rate is not low, but more are voluntary delistings, such as privatization delistings. Voluntary delistings often provide original shareholders with a certain price difference compensation or a certain premium space compared to the most recent closing price.

From the perspective of individual investors, it is necessary to treat policy changes more rationally. Zhang Yi suggests that one can look for companies that can withstand pressure and have good R&D, channel, and product layout from the fundamental aspects.

In his view, although small and micro-cap stocks are currently impacted in the short term and there is a period of pain, in the medium and long term, as the market goes through the process of "good money drives out bad money," high-quality targets will gradually become clear, and there is still room for entry.