Purpose
Provide comprehensive A-share and China Market Due Diligence Checklist — structured checklists for investment and M&A due diligence.
DD Categories
1. Commercial DD
Industry & Market:
- Market size and growth trajectory
- Competitive landscape (5-10 peers mapped)
- Market share trends
- Customer concentration
- Supplier concentration
- Pricing power assessment
- Barriers to entry
- Technology disruption risk
Business Model:
- Revenue model clarity and sustainability
- Customer acquisition channels
- Unit economics (if applicable)
- Revenue recognition policy
- Seasonality patterns
- Geographic diversification
- Product pipeline
- Dependency on key customers/suppliers
Operations:
- Capacity utilization
- Supply chain resilience
- Quality control systems
- Operational efficiency benchmarks
- Key operational metrics
- Technology infrastructure
2. Financial DD
Historical Financials:
| Item | Source | Verification |
|---|---|---|
| Audit reports | Cninfo | Check audit opinion |
| Financial statements | Cninfo | Cross-check against filings |
| Related party | Annual report notes | Identify and quantify |
| Subsidies | Notes to income statement | Normalize earnings |
| Impairments | Income statement | One-time vs recurring |
| Revenue recognition | Annual report notes | Policy assessment |
Quality of Earnings:
- Revenue quality (cash vs accrual)
- Operating cash flow vs net income
- One-time items identified and quantified
- Non-recurring gains/losses
- Accounting policy changes
- Earnings management indicators
Balance Sheet:
- Cash and cash equivalents confirmed
- Receivables aging and adequacy of allowance
- Inventory valuation and obsolescence
- Fixed asset verification
- Intangible assets and goodwill
- Debt schedule (all borrowings)
- Off-balance sheet items
- Contingent liabilities
Cash Flow:
- Operating CF reconciliation
- CapEx sustainability
- Free cash flow calculation
- Working capital trends
- Non-recurring CF items
3. Legal DD
Corporate:
- Business license validity
- Articles of association
- Shareholding structure — clean cap table
- Corporate history — any irregularities
- Subsidiaries/branches — complete list
- External investments
Compliance:
- Tax compliance — past 3 years
- Social insurance compliance
- Environmental compliance
- Industry-specific licenses
- Import/export licenses
- Quality certifications
Contracts:
- Material contracts (>5% revenue)
- Customer contracts (concentration risk)
- Supplier contracts
- Loan agreements
- Lease agreements
- IP licensing agreements
- Joint venture agreements
- Guarantees and commitments
Litigation:
- Pending litigation
- Arbitration cases
- Administrative penalties
- Labor disputes
- IP disputes
IP:
- Patent portfolio
- Trademark registrations
- Copyright registrations
- Domain names
- Software licenses
4. Tax DD
| Area | Checklist |
|---|---|
| Corporate income tax | Filing compliance, deductions, incentives |
| Value-added tax | Filing compliance, input VAT |
| Surcharges | Surcharges compliance |
| Individual income tax | Withholding compliance |
| Social insurance/housing fund | Payment compliance |
| Tax incentives | Qualification for high-tech enterprise etc. |
| Transfer pricing | Related party pricing |
| Historical tax arrears | Outstanding tax disputes |
5. HR DD
| Area | Checklist |
|---|---|
| Labor contracts | Employment agreements standard |
| Social insurance/housing fund | Compliance and amounts |
| Equity incentives | ESOP schemes, vesting, dilution |
| Key employees | Key person dependencies |
| Non-compete restrictions | Non-compete agreements |
| Layoff history | Any mass layoffs or disputes |
| Labor union/associations | Union affiliations |
6. Environmental DD
| Area | Checklist |
|---|---|
| Environmental impact assessment approval | Environmental impact assessment |
| Pollutant discharge permit | Discharge permits |
| Environmental penalties | Past violations |
| Soil/groundwater | Contamination risk |
| Energy consumption indicators | Energy consumption, efficiency |
| Carbon neutrality | Carbon footprint, compliance |
7. IT / Cybersecurity DD
| Area | Checklist |
|---|---|
| System architecture | IT infrastructure overview |
| Data security | Data protection measures |
| Cybersecurity | Cybersecurity assessment |
| Multi-level protection scheme compliance | Level of protection compliance |
| Data privacy | PIPL compliance |
| Business continuity | Disaster recovery plans |
8. Industry-specific DD
| Industry | Special DD Items |
|---|---|
| Pharmaceutical | GMP, clinical trial data, drug approvals |
| Financial | Regulatory licenses, capital adequacy |
| Real estate | Land ownership, pre-sale permit, land reserves |
| New energy | Technology patents, subsidy dependency |
| Internet | ICP license, data compliance, user agreements |
| Manufacturing | Quality certifications, supply chain |
China-Specific DD Considerations
Regulatory Environment
| Regulation | DD Relevance |
|---|---|
| Company Law | Corporate governance |
| Securities Law | If considering public listing |
| Anti-Monopoly Law | M&A approval thresholds |
| Data Security Law | Data handling compliance |
| Personal Information Protection Law | Privacy compliance |
| Environmental Protection Law | Environmental liability |
| Tax Law | Tax compliance and optimization |
Common Red Flags
| Red Flag | Investigation Required |
|---|---|
| Unclear actual controller | Ownership verification |
| Large number of related-party transactions | Related party transaction analysis |
| High proportion of shares pledged by major shareholders | Share pledge risk |
| Frequent auditor changes | Accounting quality concern |
| Dependence on large government subsidies | Earnings quality concern |
| Goodwill accounts for >30% of net assets | Impairment risk |
| Frequent administrative penalties | Compliance culture |
| Loss of core personnel | Management stability |
Quality Checks
Before delivering DD report:
- All categories addressed
- Sources verified (巨潮, filings)
- Red flags identified and investigated
- Material risks quantified
- Recommendations clear
- All findings documented