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

The crackdown on China A-shares continues to intensify. On a single day, 10 listed companies were investigated and penalized, and an all-round “no blind spots” regulatory system is forcing listed companies to strengthen awareness of legal and compliant operations. Under the crackdown storm, the A-share ecosystem of differentiated valuation is being accelerated, with high-quality individual stocks drawing more attention, while problematic stocks are continuously discarded.

On the evening of April 3, 10 listed companies—including Electrotech Digital and *ST Guodian—were either investigated or penalized. Among them, companies such as Electrotech Digital “took a tumble” over violations related to information disclosure. Wang Minglong, one of the controlling persons of Xianhe Co., Ltd., was also filed for investigation on suspicion of short-term trading. Jiingjie Microelectronics, which has been “riding hot topics,” and Shuangliang Energy Conservation and Environmental Protection also each received official administrative penalty rulings. In addition, Yishang Display, which has already been delisted, and the relevant responsible parties also received corresponding penalties.

With penalty rulings concentrated and taking effect one after another, the market is being sent a clearer regulatory signal. Regulation has “no blind spots,” and violations must be held accountable. As long as you touch the red lines of violations and non-compliance 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 illegal activities in securities and futures were handled. Fines and confiscations amounted to more than RMB 15.47B. The CSRC transferred 172 case leads involving suspected criminal offenses to public security authorities. Malicious financial fraud cases, such as those involving Furen Pharmaceutical and Pulifang Pharmaceutical, were severely punished; fines and confiscations exceeding RMB 100 million were imposed in cases such as the manipulation by Jinsui Chun and illegal reduction in holdings by Tian Han; and intermediary institutions such as Shinewing Zhonghe, Asia-Pacific CPA firm, and East China Securities were punished in accordance with law.

The most direct impact of high-pressure regulation is accelerating the process of differentiated valuation in A-shares. This is because strict regulation guides market expectations, reshapes capital preferences, and the valuation performance of individual stocks within the market increasingly shows a “heaven and earth” pattern.

Problematic stocks are cooling off. Strict regulation is making the investment risks of problematic stocks higher and higher, prompting everyone to steer clear. Whether it is violations in information disclosure or illegal reductions in holdings, once a listed company triggers an early warning of illegal or non-compliant behavior, it will be removed from the market’s “watchlist” by funds at the first opportunity. The next-day sharp drop in the share prices of stocks under investigation is the best proof.

Once the risk alarm is sounded, the valuation shrinkage of problematic stocks is only just beginning. Value investors will exit first to avoid risk; the outflow of panic-driven capital will further pressure the company’s share price, and most of what remains in the market are some speculative funds. But as liquidity becomes worse and worse, speculative funds also lose the “soil” to survive, and ultimately they will choose to exit as well.

The process by which funds withdraw from the market is also the process in which the valuations of problematic stocks continue to shrink. In this process, the more a stock falls, the fewer people buy; the fewer people buy, the more it falls. The vicious cycle accelerates again and again, driving down the valuations of problematic stocks, which are thus accelerated out of the market.

Meanwhile, high-quality growth stocks and leading stocks will become increasingly hot. In a tightly regulated market environment, capital pays even more attention to the safety of individual stocks. The more a stock complies with rules and has stable performance, the higher its safety coefficient, and the more likely it is to win favor from various types of funds.

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

Under strict regulation, capital continuously withdraws from problematic stocks and theme stocks, flowing into core assets with solid performance, compliant and transparent operations, and standardized governance. The valuations of quality companies are re-examined, forming a positive feedback loop where “the strong always get stronger.” Under repeated value re-assessments, the valuation center of high-quality stocks and growth stocks will naturally rise in a spiral.

Good companies enjoy valuation premiums, while problematic stocks are worth only “cheap prices.” Under strict regulation, this will be the future trend of the A-share valuation system.