In April this year, due to the needs of business integration and risk control, Huamao announced that it would dispose of its 30% equity of Lihua cotton by means of directional capital reduction. The audit and evaluation benchmark date of the directional capital reduction is September 30, 2019.
According to the public information, Lihua cotton industry is engaged in seed cotton planting, processing and related product sales. Its main product is lint. It has more than 1.5 million mu planting bases at home and abroad, and operates 69 cotton processing plants and 1 cotton textile mill. At that time, Huamao Co., Ltd. held 30% equity of Lihua cotton industry, Zhang Qihai, founder of Lihua cotton industry, held 30% equity. Xinjiang Zhongtai (Group) Co., Ltd. (hereinafter referred to as Zhongtai group) under Xinjiang SASAC held 34% equity, which was the controlling shareholder of Lihua cotton industry.
According to the audit report, as of September 30, 2019, the total assets of Lihua cotton were 13.4 billion yuan, the net assets were 294 million yuan, and the asset liability ratio was as high as 98%; from January to September in 2019, the net profit fell into a large loss, specifically -440 million yuan. After evaluation, the appraisal value of 100% equity of Lihua cotton industry is 700 million yuan, and the value-added rate is 136%. The corresponding value of Huamaos 30% equity is 210 million yuan, and the disposal of the above equity is expected to bring 3.72 million yuan to the listed company.
It is natural for this business to clear up the equity of the loss making subsidiary and obtain certain disposal income. However, a few months later, Lihua cotton industrys annual financial data is a surprise profit reversal, so that the transaction Dun Doudou.
In July this year, Zhongtai group, the controlling shareholder of Lihua cotton industry, issued the seventh issue of ultra short-term financing bonds in 2020, and released the audited financial data of Lihua cotton industry in 2019 in the prospectus: as of the end of 2019, the total assets of Lihua cotton industry were 12.483 billion yuan, and the net assets were 1.204 billion yuan; in 2019, the operating income was 10.066 billion yuan, and the net profit was 406 million yuan.
Comparing the two audit results, it means that in the short three months from September to December 2019, the net assets of Lihua cotton industry increased by more than 900 million yuan and the net profit increased by more than 800 million yuan. This is not convincing. We have reason to suspect that Lihua cotton Co., Ltd. has concealed relevant financial data in the audit process of our disposal of equity in the early stage, and violated our legitimate rights and interests as shareholders. Huamao shares said in the lawsuit.
In addition, Lihua cotton also announced its IPO in July this year and signed cooperation agreements with Shenwan Hongyuan, KPMG and Beijing Kangda law firm. As early as October this year, Huamao shares had submitted a request to consult the accounting books of Lihua cotton industry, which was rejected by the latter and decided to resort to law. According to the litigation request, Huamao shares required to consult the accounting books and accounting documents of Lihua cotton in 2019 to restore the truth of financial data and safeguard the legitimate rights and interests of listed companies. If there is something wrong with our audit data at that time, the other party is suspected of deliberately concealing it; if the original audit information provided by the other party is accurate, then the audit data of 2019 disclosed by them is far from our audit results at that time. Huamao securities department related people told reporters, if it is due to the other partys deliberate concealment, leading to the audit evaluation deviation when we disposed of the equity, theoretically, we have the right to recover losses through judicial procedures. Although the process may be more tortuous, we will try our best to protect the rights and interests of the company and shareholders.
In response to this, the reporter tried to contact the relevant responsible person of Lihua cotton industry, up to the time of publication, there was no response. Industry insiders said that the companys net assets and profit levels will directly affect the evaluation results, and the good expectation rate of launching IPO will probably bring certain premium space to the companys valuation. If according to the audit results in the prospectus of Zhongtai group, the valuation of Lihua cotton industry should be higher obviously. However, the results of the two audits are quite different. It should be that there is something wrong with one audit.
Is the risk already apparent?
Lihua cotton Co., Ltd. is located in the upstream of Huamao Co., Ltd., and has strong synergy with Huamao Co., Ltd., which is the main textile industry. The two sides got together in 2010.
On December 14, 2010, Huamao shares transferred 35% equity of Xinjiang Korla Lihua Cotton Industry Co., Ltd. (the predecessor of Lihua cotton industry) held by Zhang Qihai with a price of 58.6094 million yuan, aiming to stabilize the raw material supply of high-quality cotton and improve the main textile industry chain. Subsequently, Huamao shares sent directors to Lihua cotton industry to enhance its influence. In 2016, Lihua cotton industry implemented capital increase and share expansion in order to expand and occupy Xinjiang cotton market share. Huamao shares, as an old shareholder, subscribed for 17.61 million new shares with RMB 72.5532 million, with the shareholding ratio changed to 30%; Zhongtai group, as a new strategic investor, subscribed for 53.67 million new shares with RMB 220 million, leaping to become the largest shareholder with 34% shareholding.
As an important state-owned asset operation company under the state owned assets supervision and Administration Commission of Xinjiang, China Thailand groups main business covers chlor alkali chemical industry, textile industry and supply chain trade, and its Zhongtai chemical (002092) is the only listing platform. In 2019, Zhongtai group plans to become the master of St Zhongji (000972), but it is stranded because it fails to meet the requirements for public recruitment of state-owned shareholders. According to the public information, Zhongtai group owns 64% of the voting rights of Lihua cotton industry and is the controlling shareholder. The financial data of Lihua cotton industry are included in the consolidated statements of China Thailand group.
Securities Times u00b7 e company reporter concerned that Lihua cotton industry profit volatility over the years. After realizing the net profit of 66.9726 million yuan and 79.2908 million yuan from 2013 to 2014, in 2015, affected by the decline of cotton price, the revenue and profit both decreased significantly, only the net profit of 2.8296 million yuan was recorded, with a decrease of more than 90%. After Zhongtai group became the owner, Lihua cotton industry realized net profit of 55.6245 million yuan, 22.9607 million yuan and 86.686 million yuan respectively in 2016-2018, with growth rates of - 59% and 278%, still showing a trend of ups and downs.
It is worth mentioning that in recent years, Lihua cotton industry has embarked on the pace of rapid expansion, accelerated the acquisition of local cotton processing plants, and the asset liability ratio increased year by year. According to the review, before the capital increase and share expansion of Lihua cotton industry, as of the end of May 2016, the asset liability ratio was only 56%, and the total debt was only RMB 445 million; by the end of 2016, the data rapidly increased to 79.48%, and the amount of liabilities reached 2.4 billion yuan; in 2017 and 2018, it increased significantly to 91.19% and 90.82%. According to the latest super short-term financing bill raising instructions of Zhongtai group, the total liabilities of Lihua cotton industry by the end of 2019 had reached RMB 11.279 billion, with a compound annual growth rate of 67.5% in the past three years.
In recent years, Lihua cotton industrys high debt expansion has deviated from our previous investment ideas and ideas. Huamao securities department related people told the securities times u00b7 e company reporter, before Lihua cotton industry, all financing was fully guaranteed by Zhongtai group. However, according to the latest regulatory requirements of Xinjiang state-owned assets, while Zhongtai group provides guarantee for Lihua cotton industry, other shareholders are required to provide guarantee in the same proportion. As a public company, the guarantee amount of several billion yuan, we think that the risk is huge, which is also a consideration factor for choosing to withdraw from Lihua cotton industry at that time.
Huamao said that in the audit process of disposal of Lihua cottons equity, it also found that there were significant risks in Lihua cottons operation. It is reported that the net assets of Lihua cotton Co., Ltd. were reduced by 416 million yuan due to such factors as incomplete recording of interest expenses, failure to offset inventory balance by insurance claims, loss of futures trading, and insufficient provision of inventory falling price, resulting in a sharp loss of net profit simultaneously.
In sharp contrast to the risk, Huamao has only obtained 26.9535 million yuan of dividends from Lihua cotton industry in the past 10 years.