[West Street Observation] Make problem stocks only worth "bargain prices"

Ask AI · How the Regulatory Storm Is Reshaping the A-Share Valuation Ecology?

The A-share crackdown continues to intensify. On a single day, 10 listed companies were investigated and penalized, and a “full-coverage” regulatory system is forcing listed companies to strengthen their sense of compliance with laws and regulations. Under the regulatory storm, the A-share differentiated valuation ecology is being accelerated and catalyzed: high-quality stocks attract more attention, while troubled stocks are kept being discarded.

On the evening of April 3, 10 listed companies, including Dianke Digital and *ST Guandian, were either investigated or penalized. Among them, Dianke Digital, among others, “fell short” in information disclosure violations and irregularities; Wang Minglong, one of the controlling persons of Xianhe Shares, was filed for investigation on suspicion of short-term trading. Yingjit芯 and Shuangliang Energy Efficiency, which had been riding the heat, also received official penalty orders. In addition, the delisted company Yishang Display and relevant responsible persons also received corresponding punishment.

With penalty orders rolling out in dense succession, the market is being sent a clearer regulatory signal. Regulators have “no blind spots,” and violations will be pursued for responsibility—once you cross the red line of illegal and noncompliant conduct in the capital market, delisting is not a “safe harbor” to evade punishment.

According to data previously released by the CSRC, in 2025, a total of 701 cases involving violations of securities and futures laws and regulations were investigated and handled, with fines and confiscations totaling more than 15.474 billion yuan, and 172 case clue transfers involving suspected crimes were sent to public security authorities. Malicious financial fraud cases involving Furen Pharmaceutical, Puliyao Pharmaceutical, and others were severely punished; penalties and fines exceeding 100 million yuan were imposed on cases such as the manipulation by Jinsui Chun and the illegal reduction of holdings by Tianhan; and intermediary institutions such as Shinewing Certified Public Accountants, Asia-Pacific Assets, and East China Securities were punished in accordance with the law.

The most direct impact of high-pressure regulation is that it accelerates the process of differentiated valuation in A-shares. This is because strict regulation guides market expectations, reshapes capital preferences, and within the market, the valuation performance of individual stocks increasingly shows a “different seasons of ice and fire” trajectory.

Troubled stocks with risks all over them are cooling off. Tight regulation makes investment risk in troubled stocks increasingly high, and everyone avoids them. Whether it’s information disclosure violations or illegal reduction of holdings, once a listed company triggers an early-warning for illegal and noncompliant conduct, it will be kicked out of the market’s “watchlist” by capital immediately. The next-day plunge in the share prices of those stocks under investigation is the best proof.

Once the risk alarm is sounded, the valuation shrinkage of troubled stocks is only just beginning. Value investors will exit first to hedge against risk, and the panic capital flight will further pressure the company’s share price; among what remains inside the market are mostly some speculative funds. But as liquidity gets worse and worse, speculative funds also lose their “soil” to survive, and ultimately will choose to leave as well.

The process of capital withdrawing from all sides is also the process of continued valuation shrinkage for troubled stocks. In this process, the more the stock falls, the fewer buyers it has; the fewer buyers it has, the more it falls—the vicious cycle accelerates again, driving troubled stocks’ valuations lower even faster. Troubled stocks are thus eliminated at an accelerated pace.

Meanwhile, high-quality growth stocks and leading stocks will get hotter and hotter. In a tightly regulated market environment, capital pays even more attention to the safety of individual stocks. The more a stock follows the rules and has stable performance, the higher its safety coefficient, and the easier it is to win the favor of various kinds of capital.

Taking patient capital as an example, long-term holding places higher demands on the fundamentals and safety of the investment targets. Low-risk high-quality stocks and growth stocks will become the first choice for allocation.

Under strict regulation, capital keeps withdrawing from troubled stocks and theme stocks, and flows into core assets with solid performance, compliant and transparent operations, and standardized governance. The valuations of high-quality companies are reassessed, forming a positive cycle of “the strong get stronger.” Through repeated value re-evaluations, the valuation center of gravity for high-quality and growth stocks will naturally rise in a spiral.

Good companies enjoy valuation premium, while troubled stocks are only worth “cabbage prices.” Under strict regulation, this will be a future trend for the valuation system in A-shares.

Beijing Business Daily Commentator Dong Liang