Summary of the Key Points in Plain Language
This article summarizes a series of counterintuitive phenomena in the A-share market this year into one core conclusion: the old rule that “good performance equals rising stock prices” has completely failed. Top securities firms and banks, which were once considered to be highly profitable, now have stock prices below their net assets. On the other hand, outdoor equipment companies that have doubled their profits have seen their stock prices plummet. ST companies, which were losing millions in profits, can see their stock prices double just by changing their names to tap into current market trends. Even regulatory upgrades to a bank’s rating have no effect on its stock price. The market no longer believes in past financial figures or promised future growth; what matters most is the credibility of listed companies—whether they keep their promises. The market will only assign a high valuation if the company can actually deliver on its promises and fulfill the claims made about its performance.
---
Detailed Explanation of Each Point
1. Why are so many strange things happening in the A-share market this year? The old rules no longer work
You’ve probably heard before that a company’s stock price should rise as its profits increase, but this rule no longer applies. The reason is that investors have become skeptical due to various deceptive practices:
- Huatai Securities earned a record $11.6 billion in the first half of the year, yet its stock price was 30% lower than its net assets. It’s like if you opened a business with a starting value of $10 million, and someone wants to buy it for $6 million; shareholders couldn’t help but question the management at the press conference, asking, “Do you really have no idea about your own stock price?”
- Explorer predicted a profit doubling, but its main business (outdoor equipment) actually lost money. The profit came from a recently acquired chip company and unexpected gains from currency fluctuations. The market saw through this as “borrowed” profits that might disappear next year, and the company’s stock price dropped sharply.
- Conversely, companies that were in deep losses saw their stock prices soar within a few days after changing their name to “Indium Target New Materials” and claiming a new owner who was a former employee of the founder. No one believed they would really make big profits; it was just short-term speculation.
In short, the market now values a company’s credibility more than its financial statements. Only if a company can consistently deliver on its promises will it receive a high valuation.
2. The most valuable asset in the market today: “keeping promises” is more important than any positive news
The article cites a survey of 100 American institutional investors with over 10 years of experience. 93% of them said they would never invest in a company they couldn’t trust. This “credibility-based pricing” is evident in everyday company meetings: over the past decade, data from tens of thousands of earnings meetings show that if management’s optimistic forecasts are met in the subsequent quarter’s reports, the stock price will rise steadily over several months, not just briefly.
Conversely, if a company lacks credibility, even if it claims to have no AI business, the market will see this as a lie and its stock price will still drop. The market has become very skeptical because of previous unmet promises.
3. How quickly can a company’s credibility be ruined? One breach of trust can erase all goodwill
Institutional investors have ranked companies based on their lack of credibility. The top three reasons for losing credibility are:
- Failing to fulfill promised actions: 62% of investors consider this the most dangerous. For example, many companies promised to buy back shares for $200–400 million but only spent just over $100 million. The worst case was Jingxing Paper, which promised to buy back 80 million shares but only bought 4.57 million, less than the total.
- Changing plans without explanation: Investors expect companies to be consistent in their decisions.
- Failing to provide a plan for rectifying poor performance: This also leads to a loss of credibility.
Companies that are honest, such as Armstrong (a wall panel manufacturer), are more respected. They focus on a few key indicators and provide realistic forecasts, which builds their credibility over time.
4. The key to building credibility: Don’t promise what you can’t deliver
The article mentions Armstrong as an example. While other companies list dozens of performance indicators, Armstrong focuses on just a few reliable ones. This reduces the chances of misleading investors. They also provide specific but achievable forecasts, which builds trust.
5. A company’s credibility can be restored, but at a cost
Many think that being blacklisted for lack of credibility means the end of their chances. However, the market gives companies a chance to correct their mistakes. If a company provides a credible plan for improvement and explains the reasons for past failures, more than half of investors are willing to give it another chance. A typical example is Century Huatong, a gaming company that was downgraded to ST status for five years due to fraud. It recovered its market value by showing real profit growth and removed the ST label within a year. However, past mistakes, such as lost bets and regulatory penalties, remain. The market still holds companies accountable for their actions.
6. Regulators are enforcing new rules based on credibility
Regulators have made it clear that companies cannot make arbitrary stock price promises. Companies with consistently low stock prices must explain how they plan to improve their valuation. This turns the requirement of “keeping promises” from a soft suggestion into a strict rule. Every statement made by a company must be verified against its actual performance, and unmet promises will reduce its credibility.
In summary, the A-share market now values a company’s credibility more than its financial results. Companies that can deliver on their promises and are consistent in their actions are the ones that will thrive.