Super-high Valuation of Huichuan TechnologiesHigh Premium Acquisition of Play Signs Companies

category:Finance
 Super-high Valuation of Huichuan TechnologiesHigh Premium Acquisition of Play Signs Companies


In the merger and acquisition plan issued in April, Huichuan Technologies put forward: the first step is to purchase 51% of Bests equity legally held by Zhao Jinrong, Zhu Xiaodi and Wang Jianjun by paying cash. (According to the announcement issued by Huichuan Technologies in July this year, 51% of Bests equity has fulfilled the formalities of industrial and commercial change registration and completed. Best has become a controlling subsidiary of listed companies and has been included in the scope of consolidated financial statements since July 2019. The second step is to purchase 49% of Best legally held by the counterparty by issuing shares, which is to be implemented after the above-mentioned approval procedure has been passed and approved by the SFC.

At the beginning of May, Huichuan Technology further released the revised draft of M&A plan and the draft of M&A, which accelerated the process of M&A. The reporter of Red Week carefully combed the draft of M&A disclosed by the company and found that there were many things worth discussing in the information disclosed by the company, such as the purpose of step-by-step M&A is not simple, the content of gambling agreement is contrary to reason, and there are doubts in financial data, etc. The existence of these problems makes people worry that listed companies are completing M&A. Later, it is inevitable that investors will be too optimistic and unfortunate to step on the thunder.

The Routine of Step-by-Step Mergers and Acquisitions

Unlike the traditional step-by-step mergers and acquisitions of listed companies, Huichuan technology regards this step-by-step mergers and acquisitions of Best as a package deal.

The draft discloses that Huichuan Technologys purchase of 51% of Bests equity in cash is the premise of issuing shares to buy 49% of Bests equity; whether the subsequent issuance of shares to buy 49% of Bests equity is approved by the securities regulatory authorities is not a prerequisite for purchasing 51% of Bests equity in cash. In addition, Huichuan Technologys two purchases are based on the same pricing criteria, using the results of the income method as the final evaluation conclusion. Bests 100% equity valuation value is 2.494 billion yuan on the base day, which is 2.227 billion yuan higher than the book value of parent companys shareholdersequity of 4.6 billion yuan on December 31, 2018, and the increment rate is 43.394%. The fixed transaction price is 2.487 billion yuan. This means that whether it buys 51% equity in the first step or 49% equity in the second step, the final transaction price is 2.487 billion yuan.

Such operation seems to have many benefits for Huichuan technology. Usually, after the first merger and acquisition, the listed company has a relationship with the standard company, which makes the subsequent merger and acquisition become related merger and acquisition, which will make the premium part of the latter transaction no longer recognized as goodwill, reduce capital reserve and retained earnings, and Huichuan Technology will include two-step merger and acquisition in a package. After the sub-plan, the premium part of the step-by-step acquisition will be recognized as goodwill in the consolidated statements, which will increase the intangible assets value of listed companies and enhance the overall asset size of the company.

At the same time, because the first acquisition takes the form of cash acquisition, it is easier to implement both in examination and approval and in operation, so that the revenue and performance of the target company will be incorporated into the consolidated statement very soon. In this way, whether the acquisition of the remaining 49% equity by issuing shares in the second step can be completed in the year or not, by the end of 2019. The underlying companies will contribute a lot to the performance of listed companies, making the annual report data that might otherwise be poor not too ugly.

However, the problem is that although Huichuan technology step-by-step mergers and acquisitions play smart and can improve the fundamentals of enterprises in the short term, the increased goodwill in the future will inevitably have the risk of significant impairment once the performance of the target company fails to meet the standards. Whether this method of neglecting long-term risks for immediate interests is appropriate or not is necessary. Listed companies weigh well. After all, there are many companies that suffer a great loss of performance due to the impairment of goodwill in the A-share market every year. Whether the result of Huichuan Technologys step-by-step acquisition and the adoption of a package deal will also have this risk in the future needs constant vigilance.

Strange betting agreements

In this merger and acquisition, the counterparty does not take the net profit of the company as the promised goal, nor the gross profit of the company as the goal, but very strangely chooses the gross profit of transnational enterprise business and overseas business as the promised goal, which makes people very puzzled. In this regard, Huichuan Technology has given several explanations in the draft: multinational brand elevator manufacturers have long dominated the Chinese and global elevator market, representing the mainstream value market and development trend of the industry; the growth of overseas emerging elevator market and the continuing demand for after-sales service in mature markets have brought important effects to domestic superior component enterprises. Growth opportunities; the company will actively grasp the trend of large supporting demand of mainstream elevator manufacturers to further expand the development space; the company strives to take the elevator industry as the benchmark to achieve world first, promote the development of other product lines and business lines, and ultimately realize the strategic vision of becoming a world-class industrial automation supplier.

However, according to the data disclosed in the draft, Bests income came mostly from domestic sources, and its overseas income accounted for less than 14% in the reporting period. Although the income from multinational enterprises accounts for a high proportion of its domestic income, the income from non-multinational enterprises also accounts for a low proportion. In 2017, the company disclosed that the revenue from transnational business and overseas business was 1.335 billion yuan, accounting for 61.18% of the total income, and in 2018, the income amount was 1.551 billion yuan. It accounted for 63.97% of the total business income in that year, that is to say, its non-transnational business and overseas business income accounted for 3-40%. Since a large part of the assets it acquires are from domestic business, it is obviously debatable that performance commitments should only choose so-called transnational business and overseas business.

From the product point of view, elevators are widely used in residential buildings, commercial buildings, public places and other buildings. The industry is greatly influenced by the national macroeconomic policy and social fixed assets investment, especially with the prosperity of the real estate industry. Influenced by the national macroeconomic and real estate policy, the output growth rate of Chinas elevator industry has declined in recent years, and transmitted to the upstream elevator parts field. The decline of the growth rate of the industry will affect the development speed of the target company and increase the operating pressure. At the same time, in view of the international situation, in recent years, Sino-US trade frictions have been intensifying, which does not exclude the possibility that the transnational business and overseas business of the target company will be greatly affected. In this case, once the industry elevator output is too low, triggering its non-industry performance gambling clause, and the target company has a huge performance loss, then the listed company may have to swallow the bitter fruit.

Although in the performance commitment, there are also some assessment indicators, such as large supporting centers and core staff turnover rate, it should be noted that even if the compensation clause is triggered, the amount involved is only tens of millions of yuan, and the amount is not large. But the real reason why Huichuan chose to buy Best at a high premium and create such a strange betting agreement is a mystery, which does not rule out the possibility of other drawer agreements in private.

Best has the phenomenon of confusion in fund management

The draft discloses that Bests receivables include other receivables of Bests electronic components, amounting to $2002.44 million. The draft explains that at the end of 2017, Bests balance of other receivables to the affiliated party is the interest income generated by the previous years affiliated fund lending, which was recovered in 2018. That is to say, in 2017, the interest cost of Bests electronic components owed to Best was as high as $2002.44 million. According to the benchmark interest rate of bank loans adopted by the companys related parties during the same period, the corresponding loan amount of the interest cost was as high as $489 million. According to the draft, the total amount of Bests disbursement to Best Electronics in 2017 is only 120 million yuan. Assuming that all the funds it lends to the company every year are 120 million yuan, it means that the funds it borrows have not paid interest for four years.

In addition, the other receivables of Zhao Jinrong, Bests actual controller, in 2017 are 960,000 yuan, which should exceed 22 million yuan when calculated at the benchmark interest rate of 4.35% of the same-period bank loans. Interestingly, however, this is not the case from the companys disclosure data. The draft discloses that in January and April 2017, Best disbursed a total of 13.1 million yuan to Zhao Jinrong. It is strange that in 2017 Best borrowed tens of millions of dollars from the major shareholder Zhao Jinrong. Why did the major shareholder owe Best 960,000 yuan in interest instead? Since Zhao Jinrong, the major shareholder, has the money to lend to the company, why not pay the hundreds of thousands of yuan interest owed first? In this way, Bests capital management situation is quite chaotic. It is not excluded that after the completion of the M&A, Huichuan technology may bring some operational risks.

Doubts about debt reduction

According to the draft merger and acquisition, Bests total purchasing amount for the top five suppliers in 2018 was 414 million yuan, accounting for 18.77% of the total purchasing amount. According to this ratio, the total purchasing amount in that year reached 2.205 billion yuan. By checking this data with purchasing expenditure and liabilities, the reporter of Red Week found that there were abnormal checking situations in its financial data.

Since cash expenditure includes VAT sales tax, we need to consider the VAT amount of its purchases, that is, from May 1, 2018, the VAT tax rate was reduced from 17% to 16%. After calculating the input tax before and after the monthly average purchase amount, Bests taxed purchases in 2018 totaled about 2.565 billion yuan. Over the same period, the cash flow statement shows that its cash for purchasing goods and receiving services is 1.608 billion yuan. Because this item is affected by the advance payment, the effect of the reduction of the advance payment of nearly 4.6 million yuan in the current year should also be taken into account. After the overall accounting, the cash expenditure is 953 million yuan less than the 2.205 billion yuan tax-based purchasing, which means that 953 million yuan of new liabilities will be generated that year.

According to the financial report, Bests notes payable and accounts payable at the end of 2018 only increased by less than 3.8 million yuan compared with the initial amount, that is to say, its new debt increased by 949 million yuan less than the theoretical amount of 953 million yuan in that year. So how did such a huge difference come about?

Generally speaking, many enterprises will use acceptance draft for endorsement purchase, so will Bests huge difference be caused by endorsement purchase of acceptance bill? In this regard, we further test its possibility by accounting its income, that is, in 2018 Best Acceptance Bill of Exchange, the possible amount of revenue can reach 949 million yuan.

According to the draft, Bests business income mainly comes from domestic sources, of which 2.424 billion yuan was realized in 2018, of which only 316 million yuan was obtained from overseas. Because we need to account for the amount of acceptance bills received in theory through its cash income and operating creditors rights, we need to account for the business income which includes VAT in that year.

Since the tax rate of value-added tax is adjusted on May 1, 2018, as mentioned above, the tax-bearing business income in 2018 is estimated to be about 2.769 billion yuan, according to the same principle as that used in the purchase accounting above.

During the same period, cash received by selling goods and providing services, reflecting revenue, was 2.328 billion yuan, excluding less than 3 million yuan in advance receipts, and 2.331 billion yuan in cash related to operating income in that year. The tax revenue is 438 million yuan more than the cash income. In theory, it will form a corresponding amount of operational liabilities in the current year, which will lead to an increase in the same amount of receivables in the balance sheet. However, it should be noted that the total amount of notes receivable and accounts receivable at the end of 2018 increased by less than 94 million yuan compared with the beginning of the period, that is, the companys income of about 344 million yuan in that year was neither recovered in cash nor formed new liabilities. In theory, the difference of 344 million yuan, even if all the bills of exchange received were accepted and used for endorsement purchase, is still 600 million yuan different from the purchase difference of 949 million yuan calculated above. So how did such a huge purchase come about? If the cash figures disclosed by the company are correct, Best is likely to have a suspicion of reducing the size of its liabilities, because it can make its asset valuation false and sell higher prices in mergers and acquisitions. Of course, in many cases, in order to cope with the false increase in revenue, it also does not rule out the possibility of false increase in the purchase amount. What is the specific reason? The company itself needs to give a reasonable explanation. Source: Yang Qian_NF4425, Responsible Editor of Stock Market Weekly

During the same period, cash received by selling goods and providing services, reflecting revenue, was 2.328 billion yuan, excluding less than 3 million yuan in advance receipts, and 2.331 billion yuan in cash related to operating income in that year. The tax revenue is 438 million yuan more than the cash income. In theory, it will form a corresponding amount of operational liabilities in the current year, which will lead to an increase in the same amount of receivables in the balance sheet. However, it should be noted that the total amount of notes receivable and accounts receivable at the end of 2018 increased by less than 94 million yuan compared with the beginning of the period, that is, the companys income of about 344 million yuan in that year was neither recovered in cash nor formed new liabilities. In theory, the difference of 344 million yuan, even if all the bills of exchange received were accepted and used for endorsement purchase, is still 600 million yuan different from the purchase difference of 949 million yuan calculated above. So how did such a huge purchase come about?

If the cash figures disclosed by the company are correct, Best is likely to have a suspicion of reducing the size of its liabilities, because it can make its asset valuation false and sell higher prices in mergers and acquisitions. Of course, in many cases, in order to cope with the false increase in revenue, it also does not rule out the possibility of false increase in the purchase amount. What is the specific reason? The company itself needs to give a reasonable explanation.