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Introduction: This is not the first time that CITIC Securities and its related sponsors have been punished for failing to implement adequate verification procedures for suspicious transactions with overseas customers. In 2023, the Shenzhen Stock Exchange reported a case of an IPO with problems as a typical regulatory warning in the investment banking circle. Like Bona Precision's IPO, the main flaws of this company are also concentrated on many doubts about overseas sales and inventory authenticity issues, and the sponsor is also CITIC Securities.

This article was exclusively published by Koukou Finance (ID: koukouipo)

Author: Lei Du@Beijing

Editor: Zhai Rui@Beijing

Nearly seven months after the termination of its IPO, a newly released regulatory letter from the regulatory authorities indirectly revealed the mystery of the failure of Shenzhen Bona Precision Drug Delivery Systems Co., Ltd. (hereinafter referred to as "Bona Precision") to go public.

Recently, the Shenzhen Stock Exchange announced the punishment results for two sponsors of CITIC Securities, Xie Bowen and Zhang Qiang, and decided to take self-regulatory measures of written warnings against the two. This is also the first regulatory measure implemented by the Shenzhen Stock Exchange on IPO projects in the second half of 2024.

Xie Bowen and Zhang Qiang were the sponsors of Bona Precision's application for listing on the Growth Enterprise Market.

On June 28, 2023, under the sponsorship of Xie Bowen and Zhang Qiang, Bona Precision submitted its listing application to the Shenzhen Stock Exchange and was accepted.

As a company specializing in the research and development, production, sales and related technical support of spray drug delivery devices and other pharmaceutical packaging materials, Bona Precision, whose profit scale is not outstanding, was not favored by the outside world at the beginning of its IPO.

According to Bona Precision's IPO fundraising plan at the time, it originally planned to issue no more than 13 million new shares through this listing to raise 545 million yuan to invest in the "Bona Zhigu Factory (Phase II) New Factory Building Project", "R&D Center and Information Upgrade Construction Project" and to supplement working capital.

Public data shows that in 2020 and 2021, its operating income was only 190 million and 218 million, and the corresponding non-net profit was not only less than 20 million, but also showed a downward fluctuation.

Without the sharp improvement in performance in 2022, Bona Precision would not have been able to reach the threshold for listing.

In 2022, Bona Precision's operating income achieved a breakthrough of 300 million while increasing by 48% year-on-year. The corresponding non-net profit increased by 300% year-on-year to 57.6934 million. This finally allowed it to meet the most basic performance requirements for listing on the GEM at that time-a net profit of no less than 50 million in the most recent year.

In addition to its small performance scale, whether Bona Precision's technology and innovation are in line with the positioning of the GEM has also attracted the attention of regulators and doubts from the public.

In the previous IPO inquiry review, the Shenzhen Stock Exchange also questioned whether there are significant technical differences between Bona Precision's spray drug delivery device and the spray bottles of daily necessities. Bona Precision itself also admitted that more than 70% of its finished products produced during the reporting period could be produced using universal molds.

In early January 2024, just after completing two rounds of review and inquiries from the Shenzhen Stock Exchange, Bona Precision suddenly applied to terminate the listing review by voluntarily withdrawing its IPO materials. In accordance with relevant regulations, the Shenzhen Stock Exchange formally approved its relevant application on January 5, 2024, thereby declaring the failure of Bona Precision's IPO.

Bona Precision's IPO failed, and it was also the first batch of listed companies to be suspended by the Shenzhen Stock Exchange in mid-2024.

At that time, the wave of A-share IPO withdrawals had not yet begun to surge, so there were many different opinions about the mystery of the termination of Bona Precision's IPO.

As the project sponsor representative, he failed to strictly follow the relevant provisions of the "Sponsor Due Diligence Work Guidelines", "conducted sufficient investigations on the issuer's major trading customers with a relatively high proportion of overseas sales revenue, failed to implement the verification procedures in place, and failed to maintain professional suspicion of abnormal situations discovered during the field visits and take further measures to conduct prudent verification." This is the violation mentioned by the Shenzhen Stock Exchange in the latest regulatory letter issued to Xie Bowen and Zhang Qiang.

The issuer mentioned above is Bona Precision.

"Although the regulatory authorities' punishment this time did not involve Bona Precision, judging from the content of the regulatory letter, the Shenzhen Stock Exchange clearly does not recognize the authenticity of Bona Precision's related transactions. This may be due to problems with the company's own operating conditions, or it may be due to negligence in the practice of the intermediary institutions." A senior sponsor representative from a large securities firm in Shanghai believes that, however, judging from the punishment of Xie Bowen and Zhang Qiang, the two were indeed suspected of "going through the motions" during the due diligence process of Bona Precision's IPO.

"The sponsor should proceed from the interests of investors, improve internal decision-making and responsibility mechanisms, strictly abide by the business rules and industry self-discipline requirements formulated in accordance with the law, fully understand the issuer's operating conditions, risks and development prospects, and improve the quality of listed companies. Strictly implement the internal control system, make full use of cash flow verification, customer and supplier penetration verification, on-site verification and other methods to prudently review the issuance and listing application documents, ensure that the financial data is consistent with the actual operating conditions, and effectively prevent financial fraud." Article 27 of the "Shenzhen Stock Exchange Stock Issuance and Listing Review Rules (2024 Revised Edition)" (hereinafter referred to as the "Listing Review Rules") clearly stipulates: Sponsors and their sponsor representatives shall be honest, trustworthy, diligent and responsible, and ensure the authenticity, accuracy and completeness of the prospectus and the issuance sponsorship letter, listing sponsorship letter and other documents issued by them.

1) Suspicion about overseas customer transactions

The Shenzhen Stock Exchange revealed that the fuse that triggered the punishment of Bona Precision's IPO sponsor representative stemmed from the concern about the sponsor's on-site visit and verification procedures for overseas clients during the second round of review inquiries.

According to the prospectus submitted by Bona Precision to the Shenzhen Stock Exchange, LLC PTC Erecton (hereinafter referred to as Erecton), a Russian company, is its trading client. During the IPO reporting period, Erecton and its three affiliated parties conducted transactions with Bona Precision and have become Bona Precision's top five customers since 2021, and is also its largest overseas customer.

From 2020 to the first half of 2023, Bona Precision's sales revenue to Erecton and its affiliates grew rapidly, reaching RMB 3.2153 million, RMB 6.4556 million, RMB 28.9436 million and RMB 13.5961 million, respectively, accounting for 1.78%, 3.17%, 9.42% and 7.72% of the main business income, respectively.

In the past few years, Bona Precision's operating data has shown a high growth trend. Especially after 2022, Bona Precision's performance has been by leaps and bounds, which is inseparable from the support of the Russian market.

When explaining the rationality of its performance growth to the Shenzhen Stock Exchange, Bona Precision admitted that the main reason for the sharp increase in revenue was that some customers and projects had a long development cycle and related projects began to contribute revenue in 2022. At the same time, it was also affected by geopolitics. The development of the Russian market contributed a certain amount of revenue. Under geopolitical factors, many international manufacturers withdrew from the Russian market, causing local pharmaceutical companies to seek alternative suppliers of pharmaceutical packaging materials.

Bona Precision also submitted materials to the Shenzhen Stock Exchange stating that Erecton and its affiliates are well-known Russian pharmaceutical packaging material distribution companies. Bona Precision reached a cooperative relationship with them as early as 2015. The two parties have established a long-term partnership and have cooperated with dozens of end customers during this period. The two parties have been trading continuously since 2015 and the cooperation has never been interrupted. Bona Precision mainly develops its business in the Russian market through the trader Erecton and its affiliates.

Perhaps it is precisely because of the importance of Erecton and its affiliates to Bona Precision that the Shenzhen Stock Exchange is particularly cautious about the authenticity of transactions with this overseas company.

As the sponsor of Bona Precision's IPO, two sponsor representatives from CITIC Securities said that they verified Bona Precision's relevant overseas customers through on-site visits, on-site interviews, and on-site inspections. The verification procedures included on-site inspections of customers' production and operation, warehousing, office and other places, and also reviewed relevant business transactions, financial and other information.

However, the Shenzhen Stock Exchange's inspection of the sponsorship work papers submitted by the above two sponsor representatives showed that the relevant project team mainly conducted verification through interviews at Erecton's office, watched warehouse surveillance videos and took photos at Erecton's office, but did not conduct an on-site inspection of its warehouse.

"When the issuer's sales revenue to Erecton and its affiliates grew rapidly in 2022 and the related revenue had a significant impact on the issuer, Erecton was the issuer's main trading customer and frequently changed the subject of transactions with the issuer, the project team had visited Erecton overseas, but only conducted visits and verifications through interviews at the office and video surveillance of Erecton's warehouses, and did not conduct on-site visits and verifications at its warehouses," the Shenzhen Stock Exchange stated in the relevant regulatory letter: Xie Bowen and Zhang Qiang, as the sponsors of Bona Precision's IPO, "did not conduct sufficient verification of the authenticity of the issuer's sales to Erecton, and the verification procedures were not implemented properly."

After the regulator pointed out the problem of due diligence, Xie Bowei and Zhang Qiang also submitted application materials stating that Erecton was a trader customer with low inventory, and the project team visited some warehouses and production lines of Erecton's end customers. However, in the photos of the end customer visits submitted to the regulator, they failed to identify the relevant products of Bona Precision. Therefore, the relevant defense was not recognized by the Shenzhen Stock Exchange.

"Companies' overseas sales data has always been a hotbed of financial fraud. Firstly, the registration information of overseas companies is difficult to verify, their true identities are difficult to verify, and on-site verification of transaction data is also subject to geographical restrictions, making it easy to falsify. Secondly, the treatment of relevant accounting policies abroad is different from that in China, and it is easy to use time differences to adjust financial data." The above-mentioned senior sponsor representative told Kekou Finance.

In the past IPO review process, many companies have failed due to issues with the authenticity of overseas transaction data.

According to Kkk Finance, recently there was a company that was planning to go public. It had passed the review of the exchange and obtained the registration of the China Securities Regulatory Commission, but ultimately the regulatory authorities did not approve the launch of the issuance within the validity period of the registration approval. The failure of the company's IPO was due to a competitor's report on the authenticity of its overseas operating data.

"Failure to conduct prudent verification of abnormal circumstances discovered during the visit" is the "second sin" that the Shenzhen Stock Exchange accused Xie Bowen and Zhang Qiang of violating regulations in the process of sponsoring Bona Precision's IPO in the relevant regulatory letter.

E-Tech (Shanghai) Co., Ltd. (hereinafter referred to as "E-Tech") is one of Erecton's affiliated parties. It is mainly engaged in the international trade of raw materials, pharmaceutical packaging materials and other products. During the reporting period of Bona Precision's IPO, its cumulative sales to E-Tech amounted to RMB 9.4354 million.

The Bona Precision IPO project team, including two sponsors from CITIC Securities, paid an on-site visit to Etai Technology in February 2023.

According to Bona Precision, the actual controller of Etai Technology is the natural person Liu Wei, who once worked in the domestic office of a Russian pharmaceutical company. The actual controller of Erecton, Liubov GURARIY, is a Russian.

Liu Wei met Liubov GURARIY through business introduction and kept in touch with him. Later, Liubov GURARIY planned to develop supply channels in China and formed a cooperative relationship with Liu Wei. Liu Wei was mainly responsible for domestic procurement and logistics, while Erecton had resource channels in the Russian market and was mainly responsible for resource development and sales services in the Russian market.

However, according to the relevant verification photos of the sponsorship work papers submitted to the Shenzhen Stock Exchange by the two IPO sponsors of Bona Precision, Etai Technology, which claims to be engaged in international trade sales of raw materials, pharmaceutical packaging materials and other products, has a large number of shoe boxes of a certain brand piled up in its office, which is inconsistent with the description of its business nature. In this regard, the Shenzhen Stock Exchange determined that Xie Bowei and Zhang Qiang did not pay enough attention to this abnormal situation during the due diligence process, and took further verification measures, and the verification procedures were not implemented properly.

2) CITIC Securities' IPO sponsorship quality continues to be controversial

This is not the first time that CITIC Securities and its related sponsors have been punished for failing to implement adequate verification procedures for suspicious transactions of overseas clients in recent years.

"In 2023, the Shenzhen Stock Exchange reported a case of an IPO that was successfully approved with problems within the investment banking circle as a typical regulatory warning. Like Bona Precision's IPO, the company's main flaws also focus on many doubts about overseas sales and issues with the authenticity of its inventory, and the sponsor is also CITIC Securities." The above-mentioned senior sponsor representative revealed to Kekou Finance.

At the beginning of 2023, the Shenzhen Stock Exchange revealed in the first phase of the "GEM Registration System Review Dynamics" issued internally to investment banks and other intermediary institutions that it had focused on the "authenticity of overseas revenue" and "authenticity of overseas inventory" of a company planning to go public, and initiated problem-oriented on-site supervision of the company.

It is reported that during the listing reporting period, the export revenue of this company, which was supervised on site by the Shenzhen Stock Exchange, accounted for 78.43%, 83.75% and 84.11% of the company's main business revenue in the corresponding period. At the same time, the book value of overseas inventory was 329.3491 million yuan, 338.7895 million yuan and 455.5725 million yuan respectively.

On-site supervision by the regulatory authorities revealed three major suspicious points in the company's sales to U.S. customers, such as shareholding and employment relationships between the CEO, president and sole director of the company's wholly-owned subsidiary in the U.S. and the company's major customers in the U.S.; the anomaly of both the shipping address and the receiving address on the sales logistics delivery notes to major U.S. customers being the listed company's own wholly-owned companies, raising suspicion of false sales; in addition, the source of some of the sales proceeds from major U.S. customers could not be verified, and some of the checks for the payments were signed by insiders of the company to be listed.

Regarding the authenticity of overseas inventory, the company to be listed took advantage of the time difference of "drifting on the sea" by sea transportation to increase its inventory. Most of the "drifting on the sea" inventory at the end of 2021 had not been sold as of the end of May 2022, which was inconsistent with the practice of comparable listed companies in the same industry to complete sales within 2 to 3 months. Its relevant sponsors and the third parties they hired did not carry out procedures such as monitoring, lottery, and sampling and inspection of the "drifting on the sea" inventory that had been put into storage at the time of lottery.

The above-mentioned senior sponsor representative stated that the company whose overseas sales and inventory data were found to be questionable by the Shenzhen Stock Exchange after on-site supervision was Shaanxi Jiahe Biotechnology Co., Ltd. (hereinafter referred to as "Jiahe Biotechnology").

Public information shows that Jiahe Bio submitted an application for listing on the Growth Enterprise Market to the Shenzhen Stock Exchange on June 30, 2021 and was accepted, and CITIC Securities was the sponsor of its IPO.

On April 11, 2023, CITIC Securities received a written warning from the Shenzhen Stock Exchange due to various violations in sponsoring Jiahe Bio's IPO. At the same time, the two sponsors of the project were criticized by the Shenzhen Stock Exchange.

"Your company should take this as a warning, take practical measures to rectify the situation, and conduct internal accountability in light of the relevant issues," the Shenzhen Stock Exchange required CITIC Securities in the above-mentioned regulatory letter regarding the penalty for sponsoring Jiahe Bio's IPO. "In the process of engaging in sponsorship business, your company should strictly abide by laws and regulations, sponsorship business practice standards, and the Exchange's business rules, follow the principles of honesty, trustworthiness, diligence and responsibility, conscientiously perform the duties of a sponsor, urge the sponsor representative to improve the quality of their practice, and ensure the authenticity, accuracy, and completeness of the prospectus and issued documents."

As soon as the regulatory authorities finished their warning, CITIC Securities did not seem to have truly learned the lesson, and thus repeated the same mistake in the process of sponsoring the Bona Precision IPO submitted two months later.

It has to be admitted that with the repeated appearance of quality problems in many sponsored IPO projects in recent years, CITIC Securities, known as the "king of investment banks" in the A-share market, is experiencing a new round of controversy.

Earlier in 2024, a well-known financial insider forwarded a message saying that in mid-2023, CITIC Securities "sponsored 30 IPOs in one year, 22 of which fell below their issue price."

Subsequently, CITIC Securities also refuted the rumor, saying, "After verification, the number of companies sponsored by our company for IPO in 2023 that broke their issue prices was 21, and the break rate was 70%."

According to Kekou Finance, in the past year, a number of CITIC Securities' IPO sponsorship projects have been subject to various controversies, which have not only aroused market doubts, but also attracted the attention of regulators. Some projects have apparently been treated more cautiously by regulators.

What the outside world may not have discovered yet is that CITIC Securities, which once had an absolute leading advantage in the IPO underwriting business of the Science and Technology Innovation Board, has not had any Science and Technology Innovation Board IPO project registered and approved by the CSRC in the past year.

On September 28, 2023, the Science and Technology Innovation Board listing application of Shanghai Hi-Tech Group Co., Ltd. was approved by the China Securities Regulatory Commission for registration and took effect. This is also the last registration approval document obtained so far for the Science and Technology Innovation Board listing project sponsored by CITIC Securities.

In March 2024, CITIC Securities also triggered an almost one-sided "condemnation" from the market due to "the response was not clear enough" in the sponsorship of a certain IPO project. The Shenzhen Stock Exchange had to step forward and answer reporters' questions to announce that it would initiate on-site supervision of CITIC Securities. According to KK Finance, after the on-site supervision of the Shenzhen Stock Exchange, the hope of the project being able to continue to go public has become slim.

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