The performance of Zhejiangs largest construction company in accelerating its landing in capital market is questioned

category:Finance
 The performance of Zhejiangs largest construction company in accelerating its landing in capital market is questioned


Huaying Group failed to submit materials three times before. Its parent company, Zhejiang Construction Group, is also haunted by the restructuring plan. On April 30, Zhejiang Construction Group announced the statement of correcting accounting errors in its annual report for 2017, which claimed that the annual report for 2017 was 7.9 billion yuan underreporting of accounts receivable and 5.8 billion yuan false increase of income. On June 17, Shenzhen Stock Exchange issued a letter questioning its revenue recognition for 2018.

Huang Lichong, co-founder of Co-ordinated Strategic Management Group, has been engaged in investment banking in Hong Kong for more than 20 years. He thinks: It is generally difficult for construction companies to land in the capital market. In the Hong Kong stock market, many construction companies are undervalued, purely for shelling. In order to avoid risks, the main measures taken by HKEx are delays. It is difficult for domestic construction companies to apply for listing in the Hong Kong market, mainly because domestic construction companies are too chaotic, long accounts receivable, and mostly cooperate with local public, the repayment cycle is longer, and the financial data are confused.

Temporary Adjustment Scheme to Accelerate Listing

In March 2016, Zhejiang Construction Group, with real estate construction as its main business, stripped out the equity of its real estate company and the creditors rights and assets of related real estate companies.

Then in 2017, the environment of capital market changed. The listing plan of Zhejiang Construction Group once ran aground. In January 2019, Zhejiang Construction Groups overall listing plan entered the guidance period, and CICC acted as the listing guidance institution.

However, two months later, Zhejiang Construction Group finally chose to borrow the shell love more. How fond of the announcement reveals the three steps of the transaction:

First, the controlling shareholders of Zhejiang Construction Group prefer the shares of 29.83% of the listed companies that the actual controllers have transferred to them.

Secondly, listed companies dispose of all their assets and liabilities except retained assets. All shareholders of Zhejian Group put 100% of Zhejian Groups shares into listed companies. The consideration of the assets and the assets can be paid by means of asset replacement and stock issuance.

Thirdly, most of the remaining shares held by actual controllers are paid by Zhejiang Construction Group or its controlling shareholders in cash or invested assets or withdrawn by way of targeted capital reduction of listed companies.

At present, the first step of Zhejiang Construction Group has been completed. The controlling shareholders of Zhejiang Construction Group hold more than 29.83% of the shares they like. Shen Defa, chairman of Zhejiang Construction Group, has become more and more fond of the new chairman. The latter two steps are currently awaiting approval from the shareholdersgeneral meeting and the SFC.

Why do you change your mind temporarily and choose backdoor listing instead of direct IPO?

At present, the regulatory standards for backdoor listing are becoming stricter, and the standards converge with the IPO standards, which should also be examined by the merger and acquisition and reorganization committee. But in general, backdoor listing is faster than IPO. According to an investment banker in Beijing.

According to the backdoor listing process, after signing the Draft Report on Major Asset Replacement (Draft) and Summary and submitting it to the SFC, the review period of the SFC will be three months, during which relevant comments and amendments will also be made within three months. After the approval of the audit, the publicity period is one month. This also means that from the release of the plan to the final listing, the time can be completed in four months.

Accelerating the Hong Kong Project

Before 2016, the construction business of Zhejiang Construction Group was mainly in Zhejiang Province. The turning point of overseas business is to acquire 100% of Huaying Construction Co., Ltd. (hereinafter referred to as Huaying Construction) by investing HK$250 million from Huarun Group in 2014. The latter is an old construction company in Hong Kong, which has a history of more than 50 years.

Huaying Architecture is not only the main company of Zhejiang Construction Group in Hong Kong since then, but also the largest and fastest growing company in overseas business. In December 2017, Shen Defa, chairman of Zhejiang Construction Group, attended the 50th Anniversary Conference of Huaying Architecture. At the meeting, he introduced that with the support of the Group, Huaying Construction has developed rapidly, with the number of employees growing from more than 200 in 2014 to more than 750 in 2017, business income from HK$11.1 billion in 2014 to more than HK$3 billion in 2017, and the amount of winning contracts from HK$2.8 billion in 2014 to over HK$4.5 billion at present.

Zhejiang Construction Group has signed many large orders since it became the owner of Huaying Architecture. In 2016, we signed several new projects, such as the superstructure of Huarun Building Hotel, 26 Wanchai Harbour Road, Wanchai, the superstructure of No. 1 Hennessy Road, Wanchai, and the residential development projects of No. 21 and No. 23 Bolao Road.

In September 2017, Huaying Architecture submitted materials to the Hong Kong Stock Exchange. But it has not been passed. Over the next two years, many submissions to the HKEx failed.

According to the latest submission in April 2019, in 2018, Huaying construction revenue is highly dependent on the top five customers. The top five customers recognized revenue of 3.09 billion yuan, accounting for 64% of the revenue in that year. The same problem also exists in 2016 and 2017.

Although the new submission does not disclose the specific customer name, it can be confirmed by inquiring the public information and disclosed contract signing time and amount data that the top five customers signed projects for Zhejiang Construction Group.

The first major project is the hotel development project in Block 38, Shangchung, Lantau. The opening ceremony was held in September 2017, and the revenue of HK$988 million was confirmed in 2018 (equivalent to RMB 837 million according to the data disclosed by Zhejiang Construction Group).

The second largest project is the development project of No. 1 Commercial Building, Hennessy Road, Wanchai. Construction started in November 2016. Revenue was confirmed to be HK$606 million in 2018 (equivalent to RMB 523 million according to the data disclosed by Zhejiang Construction Group).

The third largest project is the residential comprehensive development platform project in the second and third districts of Guantang City Center, which started on July 10, 2017 and recognized revenue of HK$569 million in 2018 (equivalent to RMB 499 million according to the data disclosed by Zhejiang Construction Group).

The fourth major project is the Reggie Hotel in Hong Kong developed by China Resources Group. Construction started in April 2016 and confirmed revenue of HK$467 million in 2018 (equivalent to RMB 420 million according to data disclosed by Zhejiang Construction Group).

The fifth largest project is the Bijiashan residential development project in the NKIL6532 section of Longxiang Road. Construction started in January 2017. Revenue was confirmed at HK$457 million in 2018 (equivalent to RMB 374 million according to the data disclosed by Zhejiang Construction Group).

The revenue of the above five projects also occupies four of the top five projects in the annual report of Zhejiang Construction Group in 2018, and the remaining one is the beautiful Xinchang small town environmental comprehensive management PPP project.

Except for the information disclosed by Zhejiang Construction Group, the information disclosed by Xinchang County has not been inquired about. In 2017, Xinchang County of Zhejiang Province started several industrial park projects, including Xinchang Smart Equipment Manufacturing Town, Xinchai Stock Companys annual production of 300,000 sets of key components of green smart engine construction project, Wanfeng Airport Town construction project, etc. Shao Quanmao, Secretary of the county Party committee, inspected various projects in November 2017. For the slow construction projects, we should speed up the construction progress and establish the project image early.

Most of the top five projects of Zhejiang Construction Group started construction in 2017, with rapid progress and revenue recognition.

Exceptionally high profitability of receivables is suspected

This also means that daily business activities, Zhejiang Construction Group can not form a positive cash inflow.

Another indicator is that receivables are too high. According to the audit report, at the end of 2018, accounts receivable and notes receivable amounted to 25.51 billion yuan, long-term receivables amounted to 10.2 billion yuan, and the combination of the two items amounted to 35.2 billion yuan, an increase of 8.7 billion yuan over the same period of last year.

According to Huang Lichongs analysis, domestic construction companies often have higher accounts receivable due to the slow return of funds due to carrying large-scale project construction, which can easily cause greater pressure on the companys cash flow.

At the same time, a large number of long-term receivables lead to a large number of bad debts. As of December 31, 2018, the book balance of accounts receivable of Zhejian Group Company was 23.3 billion yuan, and the bad debts reserve was 1.4 billion yuan, according to Tianjian Accounting Firm, an audit institution.

Audit institutions regard it as important audit data and disclose relevant test procedures. But this figure far exceeds the profit of 867 million yuan that year.

On the one hand, under the premise of a large number of bad debts, the profitability of Zhejiang Construction Group has been questioned.

In the restructuring plan of backdoor listing, the original shareholders of Zhejiang Construction Group promised to increase their earnings in the next three years, but their net profit was lower than that of 2018.

The disclosed data show that the net profit of Zhejiang Construction Group is 520,730,870 million yuan from 2016 to 2018, while the net profit of the original shareholders after backdoor listing falls to 69,790 and 860 million yuan respectively. Is this change due to asset injection and overvaluation of Zhejiang Construction Group?

According to Zhejiang Construction Group, the abnormal profits and losses of the company in 2018 are 215 million yuan, and the net profit after deduction is 605 million yuan, while the promised performance in the next three years from 2019 to 2021 is not much different from the net profit, which is 69, 790 and 860 million yuan, higher than the performance in 2018.

The above deduction excludes the recurrent gains and losses, including the investment income from disposal of assets of 109 million yuan. According to the data of Zhejiang Construction Investment Group Co., Ltd. in 2017 tracking rating report, the companys profits rose in 2016, mainly due to disposal of available financial assets in that year to obtain investment income of 135 million yuan.

That is to say, it basically relies on the annual disposal of assets to obtain revenue, which makes Zhejiang Construction Group maintain a substantial profit growth. This contradicts Zhejiang Construction Groups self-proclaimed significant increase in profitability in the past three years. Zhejiang Construction Group adopted the income method in backdoor listing. Its assets in 2018 were assessed at 8.26 billion yuan. Compared with 2 years ago, the value of Zhejiang Construction Group was 4.95 billion yuan, an increase of 3.3 billion yuan. According to Zhejiang Construction Group, the main reason is that the net assets scale and profitability of Zhejiang Construction Group increased significantly during the two evaluation benchmark dates due to the different evaluation benchmark dates. The standard of revenue recognition of construction companies is confused, and the outside world is often unable to detect it. Huang Lichong said. Source: Netease Business Responsibility Editor: Yang Bin_NF4368

That is to say, it basically relies on the annual disposal of assets to obtain revenue, which makes Zhejiang Construction Group maintain a substantial profit growth.

This contradicts Zhejiang Construction Groups self-proclaimed significant increase in profitability in the past three years.

Zhejiang Construction Group adopted the income method in backdoor listing. Its assets in 2018 were assessed at 8.26 billion yuan. Compared with 2 years ago, the value of Zhejiang Construction Group was 4.95 billion yuan, an increase of 3.3 billion yuan.

The standard of revenue recognition of construction companies is confused, and the outside world is often unable to detect it. Huang Lichong said.