In recent weeks, a notable trend has emerged within the stock market, particularly among companies involved in mergers and acquisitions. Many stocks that soared to new heights have suddenly experienced dramatic declines, leaving investors in shock. Such fluctuations are not uncommon in the unpredictable world of stock trading, especially for firms involved in high-stakes corporate maneuvers.

For instance, one notable casualty of this trend is Songfa Co., which witnessed its stock price leap from 14 RMB to a staggering 54 RMB, only to come crashing down thereafter. Similarly, Hai Li Co. saw its shares rise from 5 RMB to 21 RMB before experiencing a significant downturn. These cases reflect a broader pattern affecting numerous companies recently.

One company that has not escaped this volatility is Yingluohua, designated with the ticker code 000795.SZ. This firm has found itself at the center of controversy after a succession of three consecutive days of trading limits, concluding with an 8.29% drop on what was supposed to be a recovery day. While the plight of about 77,800 stockholders might be disheartening, a sliver of comfort lies in the fact that they experienced significant gains in the past.

A sense of dizzying exhilaration has gripped the market since September 24, leading to rampant buying and speculative trading—a phenomenon sometimes called a "bull market". Veteran investors, such as a trader known informally as "Shanghai's Uncle", have described the experience as overwhelming, almost dizzying, as stock prices seemed to soar unchecked.

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This frenzy accelerated following the release of new regulatory guidelines by the China Securities Regulatory Commission (CSRC), which aimed to revitalize the merger and acquisition landscape. The announcement of these guidelines ignited a surge of investment enthusiasm, driving the mergers and acquisitions index up by an impressive 63.09% between September 24 and November 11. Numerous stocks surged during this period, with Yingluohua among the beneficiaries.

On October 31, Yingluohua disclosed plans to acquire a 100% stake in Quan Fang Technology, utilizing a significant amount of its own capital, approximately 120 million RMB. Founded in October 1996, Quan Fang Technology specializes in the research and development of specialized electronic materials, with overwhelming shareholding held by Hengdian Holdings. Their ties to Yingluohua are deeply intertwined, as Hengdian Holdings is also a major shareholder in Yingluohua itself, directly controlling approximately 39.48%. This acquisition was part of a larger transaction under a unified control structure, which typically spurs optimism in financial markets.

However, the profitability of Quan Fang Technology raises concerns. Financial results indicate that while revenues are recorded at 187 million RMB in 2023 and an estimated 158 million RMB for the first three quarters of 2024, net profits have been minuscule at just 2.84 million RMB and 835,800 RMB, respectively. Despite its lackluster performance, market speculation can dramatically increase stock prices. Yingluohua managed to hit its first trading limit on the day of the acquisition announcement, with some investors speculating that insider information was leaked.

By November 12, Yingluohua achieved a remarkable streak of “nine days, eight limit-ups,” culminating in a staggering 116.32% increase, reaching a 27-year high. However, this remarkable ascent did not come without scrutiny. Leading up to this peak, the son of Yingluohua's deputy general manager, Li Shiqing, engaged in short-term trading that raised eyebrows. On November 7, he purchased 8,200 shares at the daily limit price. The next day, he sold all his shares at a price nearing another trading cap, netting a profit of approximately 9,747 RMB from his swift transactions.

This quick turnaround earned him profits nearing 10%, but the legality of such trades is tenuous at best. Under Article 44 of the Securities Law, senior management and their immediate relatives are barred from selling or buying stocks within a six-month period post-purchase or sale. Following the outcry over these trades, Yingluohua promptly issued an apology and announced plans to return any profits accrued from these transactions.

Notably, this pattern has not been isolated to Yingluohua alone. In another case demonstrating a similar disregard for regulations, a supervisor from a different well-known company faced administrative action for engaging in such short-term trades during the market upswing. This is a growing concern; recent reports indicated that over 53 executives and their family members have faced disciplinary actions in similar instances this year alone.

The recurrence of these infractions suggests a systemic issue within the governance of stock trading. Industry insiders advocate for tighter regulations, higher penalties, and stricter enforcement to discourage such behaviors, which undermine the credibility of the markets.

Returning to Yingluohua, there are signs that while the company is significantly enhancing its operations, the journey is not without hurdles. Reports show substantial growth in revenue and profitability, with Q1-Q3 of 2024 boasting an impressive 2.06 billion RMB in net profits. Nonetheless, apprehension looms over the company's capacity to maintain such growth rates, especially considering that comparisons to previous years saw net profits plummet by more than half in 2023.

Moreover, revenue streams primarily derive from their core manufacturing of neodymium iron boron permanent magnets and related electrical and health equipment. This division saw contributions of 55%, 25%, and 18% to revenue over the initial three quarters of the year. Despite a growth in product volume, unit prices have reportedly declined, resulting in slight revenue drops.

In conclusion, the tumultuous environment surrounding Yingluohua and similar firms underscores the volatility of stock markets and the intricate balance between regulation and speculative trading. With ongoing scrutiny and evolving market conditions, the path forward poses both opportunities and challenges for investors. As the industry grapples with ethical quandaries and performance metrics, the long-term stability and reputational trust hinge on effective governance and compliance.