Earlier, on June 28, Dongfeng Science and Technology held a shareholdersmeeting to consider and adopt the plan of absorbing and merging Dongfeng Parts Group. The scheme shows that Dongfeng Science and Technology intends to absorb and merge Dongfeng Components Group by issuing shares to Dongfeng Limited, the shareholder of Dongfeng Components Group, and Southern Industries, with a transaction consideration of 4.743 billion yuan. Meanwhile, Dongfeng Science and Technology intends to raise matching funds of not more than 500 million yuan to no more than 10 specific investors.
On the day that the aforementioned shareholdersmeeting deliberated on the adoption of the merger plan, Dongfeng Science and Technology announced that the company had convened a board of directors and decided to reduce the issuance price to 6.59 yuan per share according to the profit distribution plan for 2018. As a result, the number of shares issued under the merger scheme has been adjusted from 704.7 million to 777 million. If the transaction is completed, 65% and 203 million shares of Dongfeng Technologies will be cancelled. Dongfeng Technologiescontroller, Dongfeng Limited, will become a direct controlling shareholder. Dongfeng Limited and its controlling subsidiary, Nanfang Industries, will go public. The share-holding ratio of the company is 86.68% and 0.09% respectively. The total share-holding ratio of the two companies will increase from 86.53% to 86.77% of the original plan.
This also means that after the completion of the transaction, the proportion of minority shareholders in Dongfeng Science and Technology will further decrease from 13.47% to 13.23%. This issue price adjustment makes Dongfeng Technologies closer to the delisting line of less than 10% shareholders of the public in this transaction. If placed before the shareholdersmeeting, this price adjustment may affect the voting choice of more shareholders.
Asked about the price adjustment mechanism
Generally speaking, the issue price is the cash exercise price of dissident shareholders, which is sensitive information affecting the small and medium-sized shareholdersvoting willingness to absorb the merger scheme. Only the dissenting shareholders who voted against it at the shareholdersmeeting can exercise their cash option. If the dissenting shareholders cash exercise leads to the public shareholdersshare-holding ratio less than 10% after the transaction is completed, Dongfeng Science and Technology has the risk of delisting.
Reporters noted that in Dongfeng Technologys aforementioned shareholdersgeneral meeting resolution, the proportion of negative votes of shareholders under 5% to issue price sub-bills was 11.42%, totaling 562,000 shares, which was higher than the proportion of negative votes of these shareholders to other sub-bills such as trading methods, trading targets and so on, which was 8.05%. This means that the small and medium shareholders of Dongfeng Science and Technology have higher objections to the issue price than other factors.
From the stock price performance, does Dongfeng Technologys previous sustained stock price rise touch the price adjustment mechanism? In this regard, the first question in the feedback document of the SFC requires Dongfeng Science and Technology to supplement and disclose whether the conditions for price adjustment of issuance price and cash option have been met, and also requires Dongfeng Science and Technology to explain the proposed price adjustment arrangements.
Because the issuance price is the exercise price of cash options of dissenting shareholders. With the recent rise of Dongfeng Science and Technology share price, the gap between exercise price and secondary market share price is widening. Low issuance price and exercise price are equivalent to a psychological line, which will prompt more small and medium shareholders to vote for the scheme. But at the same time, the low issuance price also means that Dongfeng Limited can obtain more shares of listed companies under the condition that the underlying asset transaction consideration remains unchanged. Dongfeng Technologies will reduce the issue price immediately after the shareholdersmeeting passes the bill, which will enable Dongfeng Limited to obtain more shares of Listed Companies in this transaction.
In fact, June 19 is the date of cash dividend payment for Dongfeng Technologys profit distribution scheme, that is, the profit distribution scheme was completed before the shareholdersmeeting. When the stock price keeps rising, the issuance price is not raised. After the shareholdersmeeting passes the bill, the issuance price is lowered on the basis of profit distribution scheme, and Dongfeng Limited is allowed to obtain more shares of listed companies. Does Dongfeng Science and Technology harm the interests of small and medium shareholders?
Feedback from the SFC mentioned that Dongfeng Science and Technology was requested to supplement the disclosure of the maximum cash payment by the cash option provider to the dissident shareholders and the limited performance capacity of Dongfeng, and whether the design of the relevant disclosure mechanism could effectively protect the rights and interests of the dissident shareholders.
Focus on profitability
According to the plan of absorption and merger, the operating income of Dongfeng Components Group in 2017, 2018 and January-March 2019 were 13.155 billion yuan, 12.865 billion yuan and 2.915 billion yuan respectively, and the combined gross interest rate was 16.66%, 15.50% and 14.43% respectively, which means that both revenue and gross interest rate showed a downward trend. During the same period, the net profit attributable to the shareholders of the parent company was 227 million yuan, 181 million yuan and 240 million yuan, respectively. That is to say, the net profit index in the first quarter increased against the market, and even the net profit in the single quarter was higher than the annual net profit in the past two years.
But in fact, the first quarter net profit index of Dongfeng Components Group mainly relies on non-recurring profit and loss support. The data show that the non-recurring profits and losses of Dongfeng Components Group in 2017, 2018 and January-March 2019 are 91.71.31 million yuan, 52.69.58 million yuan and 205 million yuan respectively. If this factor is excluded, the net returns of Dongfeng Components Group in the first quarter of this year after deduction of recurring gains and losses are only 35.793 million yuan.
In response, the SFC Feedback Document asked about the reason and rationality of the disposal of large non-current assets in Dongfeng Components Group this year, and the impact of this matter on the future profitability of Dongfeng Components Group. At the same time, additional disclosure is required on the sustainability of government subsidies and their impact on Dongfeng Parts Groups sustained profitability.
Feedback documents also require Dongfeng Science and Technology to supplement and disclose the rationality of the transaction price, whether it fully protects the interests of small and medium-sized shareholders and listed companies, in the light of transaction pricing, evaluation of value-added rate, P/E ratio and P/E ratio, future earnings forecasts and industry trends. On these issues, the reporter has not yet contacted Dongfeng Science and Technology for comment.
In addition, the related transaction of Dongfeng Parts Group is also the focus of the feedback document. Dongfeng Science and Technology is required to supplement and disclose whether Dongfeng Parts Group and other enterprises controlled by Dongfeng Limited constitute competitive business, as well as the necessity and price of related related transactions.
The data show that the top five customers of Dongfeng Parts Group are all related parties, and the top five buyers are mostly related parties. Dongfeng Commercial Vehicle is not only the largest customer but also the largest supplier of Dongfeng Parts Group. At the same time, Dongfeng Parts Group and related enterprises exist in terms of patents, trademarks, plant rental, etc. In a large number of related party transactions.
Specifically, in the first quarter of 2017, 2018 and 2019, the top five customer sales of Dongfeng Components Group (except listed companies) accounted for 41.67%, 49.03% and 45.82% of the companys business income in the same period, respectively. The top five customers in the first quarter of this year are Dongfeng Commercial Vehicle, Dongfeng Limited, Dongfeng Automobile Co., Ltd., Dongfeng Cummins and Dongfeng Honda.
Dependence on affiliated transactions
In fact, such an indicator of related party transactions is contrary to the original intention of Dongfeng Components Group when it was founded in 2010. Back to historical data, listed company Dongfeng Technologies was Dongfeng Limiteds direct holding company before 2010. In September 2009, Dongfeng Limiteds board of directors agreed that Dongfeng Limited would invest 65% of Dongfeng Technologiesequity to establish Dongfeng Automobile Parts Co., Ltd. (the predecessor of Dongfeng Parts Group); in 2010, Dongfeng Limiteds board of directors agreed to establish Dongfeng Automobile Parts Co., Ltd. Limited will directly hold 65% of Dongfeng Technologies equity pricing agreement to transfer 252 million yuan to Dongfeng spare parts.
It is precisely because of this adjustment that the ownership hierarchy relationship of Dongfeng Limited - Dongfeng Parts Group - Dongfeng Science and Technology has been formed. Dongfeng Technologies, a subsidiary of Dongfeng Automobile Parts Supplying Factory, has changed from a company directly controlled by Dongfeng Limited to a second-class subsidiary company. For the reason of adjusting the equity hierarchy at that time, Dongfeng Science and Technology said that it was for customer diversification, Dongfeng spare parts will seek external capital, strengthen cooperation with international capital, establish a diversified equity structure and so on.
However, in terms of the amount of related party transactions and other indicators mentioned above, in the past ten years, Dongfeng Components Group started with 65% of Dongfeng Technologiesequity. There has not been much progress in customer diversification. On the contrary, many subsidiaries of listed companies have been set up outside the company and separated from the related businesses that might have belonged to Dongfeng Technologies. This period is also the same. The ten-year golden period of the automotive industry.
The data show that the top five shareholders of Dongfeng Science and Technology in 2018 are all related parties. In 2018, the related transactions of Dongfeng Science and Technology and OEM are 4991 million yuan, accounting for 74.79% of business income. The target of Dongfeng Components Group is 9.068 billion yuan. If the merger transaction is completed, the proportion of sales and services provided by Dongfeng Science and Technology related parties in business income is still as high as 70.49%. Accordingly, Dongfeng Components Group started 10 years ago with 65% equity of Dongfeng Science and Technology, which was priced at 252 million yuan at that time. The establishment of the group lowered the status of Dongfeng Science and Technology, but did not achieve customer diversification. Instead, it diverted a large number of related businesses that might have belonged to Dongfeng Science and Technology. Now that the 10-year golden period of the automotive industry has passed, the automotive industry as a whole has fallen into negative growth. Dongfeng Technologies will buy back Dongfeng Parts Group at a price of 4.743 billion yuan. Does such holistic listing damage the interests of small and medium-sized shareholders of Dongfeng Technologies? Source: Responsible Editor of Securities Times: Yang Bin_NF4368
The data show that the top five shareholders of Dongfeng Science and Technology in 2018 are all related parties. In 2018, the related transactions of Dongfeng Science and Technology and OEM are 4991 million yuan, accounting for 74.79% of business income. The target of Dongfeng Components Group is 9.068 billion yuan. If the merger transaction is completed, the proportion of sales and services provided by Dongfeng Science and Technology related parties in business income is still as high as 70.49%.
Accordingly, Dongfeng Components Group started 10 years ago with 65% equity of Dongfeng Science and Technology, which was priced at 252 million yuan at that time. The establishment of the group lowered the status of Dongfeng Science and Technology, but did not achieve customer diversification. Instead, it diverted a large number of related businesses that might have belonged to Dongfeng Science and Technology. Now that the 10-year golden period of the automotive industry has passed, the automotive industry as a whole has fallen into negative growth. Dongfeng Technologies will buy back Dongfeng Parts Group at a price of 4.743 billion yuan. Does such holistic listing damage the interests of small and medium-sized shareholders of Dongfeng Technologies?