After restructuring, related party transactions did not decline, but rose. Shanghai Stock Exchange asked Huaihe Energy about the reasonableness of cash M&A of 4.3 billion yuan

After Huaihe Energy released the draft of cash merger and reorganization of 4.3 billion yuan, the Shanghai Stock Exchange issued an inquiry letter to Huaihe Energy on September 15. The inquiry letter mainly focuses on the transaction necessity, the rationality of cash acquisition, asset valuation and performance commitment, and the compliance of the production and operation of the target asset.

Li Beizhan, partner of Shanghai Shangzheng Hengtai Law Firm, said in an interview with the Securities Daily: "For cash M&A and restructuring, the inquiry of the exchange generally focuses on two aspects: first, transaction compliance, such as the legal compliance of the target company's production and operation, and whether the evaluation method meets regulatory requirements; Second, whether the information disclosure is sufficient, especially whether the risks of this transaction are fully disclosed, and whether there is a drawer agreement or package arrangement. "

Related party transactions and debt ratio increased rather than decreased

According to the draft, the underlying assets of this transaction are 100% equity of Panji Power Generation, 50.43% equity of Huaizhe Coal Power and 49% equity of Huaizhe Power. Taking May 31, 2023 as the base date of evaluation, the corresponding evaluation values of all equities of the three companies mentioned above are respectively 1.181 billion yuan, 4.963 billion yuan and 1.927 billion yuan, with the evaluation appreciation rates of 4.86%, 49.96% and 53.82%. The transaction prices of the corresponding shares of the three companies in this transaction were respectively 1.181 billion yuan, 2.276 billion yuan and 871 million yuan, totaling more than 4.3 billion yuan.

The Exchange found two main problems in the review: first, after the completion of this transaction, Huaihe Energy's related party transactions did not decline but rose. The draft shows that after the completion of the transaction, the proportion of Huaihe Energy related procurement increased from 17.1% to 25.43%, and the proportion of related sales increased from 14.44% to 24.77%. Second, the debt ratio of the restructured Huaihe Energy also increased. The draft shows that the asset liability ratios of the three companies that are the subject of the transaction are 79.89%, 37.44% and 50.06% respectively. After the completion of the transaction, the asset liability ratio of the listed company will rise from 35.81% to 57.65%.

As a result, the Exchange has made key inquiries about the necessity of this transaction and the rationality of cash purchase. Huaihe Energy is required to significantly increase the related party transactions of listed companies after the injection of Huaihe Zhejiang Coal Power and Huaihe Zhejiang Power, the subject of this transaction, to explain the necessity of this transaction and whether it complies with the relevant provisions of the Administrative Measures for Major Asset Restructuring of Listed Companies that restructuring should help the company reduce related party transactions, avoid horizontal competition and enhance independence, Whether there are situations that damage the interests of listed companies.

In addition, the transaction price is 4.327 billion yuan, and Huaihe Energy will pay in cash within one year from the effective date of the agreement. By the end of the middle of 2023, the monetary capital of listed companies is only 2.398 billion yuan, and the capital gap will be obtained by bank loans. In this regard, the inquiry letter requires the company to make supplementary disclosure of the bank loan arrangements formed by the fund gap up to now, and explain whether this transaction will have an adverse impact on the company's normal production and operation, financial stability and liquidity in combination with the company's fund use plan arrangement after the transaction and the specific maturity of debt.

"If cash acquisition occupies a large amount of cash of listed companies, it may increase the asset liability ratio and affect their liquidity. Once liquidity problems occur, it may become the last straw to crush the company," said Li Beizhan.

The valuation of performance commitment assets fluctuates greatly

The draft shows that, as the only performance commitment asset, Gubei Coal Mine of Huaizhe Coal Power Branch participated in the evaluation when Huaihe Energy was listed as a whole in January 2022, and the valuation was 837 million yuan at that time. However, in this transaction, the latest valuation of Gubei Coal Mine was 1.269 billion yuan, and the assessed value-added rate was 155.22%, 51.63% more than the assessed value in January 2022.

From the perspective of specific assessment parameters, the recoverable and assessed recoverable reserves of Gubei Coal Mine have increased from 99 million tons to 175 million tons, the service life of the mine has increased from 19 years to 33 years, and the mining right of Gubei Coal Mine is valid until 2037. According to the performance commitment of this transaction, the cumulative non net profit deduction of Gubei coal mining right from 2023 to 2025 is not less than 1.985 billion yuan, and the non net profit deduction is expected to be 1.215 billion yuan, 385 million yuan and 385 million yuan, respectively, and the annual net profit is expected to be about 380 million yuan until 2056.

In this regard, the inquiry letter requires Huaihe Energy to specifically list the coal varieties, resources, recoverable reserves and current production status of Gubei Coal Mine, specify the differences and reasons of the key evaluation parameters and assumptions of Gubei Coal Mine before and after the two valuations, and quantitatively analyze the reasons and rationality of the differences between the two valuations; At the same time, in combination with the industrial cycle and the current coal price trend, it explains the reason and rationality of the large fluctuation of the performance commitment amount, and whether it can effectively cover the relevant business risks of Gubei Coal Mine.

"Compared with issuing shares to purchase assets, cash M&A is the realization of assets by the original shareholders of the target company rather than obtaining shares of the listed company. Therefore, the correlation between the fundamentals of the listed company and the performance of the secondary market and its interests is weak, and there is uncertainty whether the target company can achieve the expected performance." A professional who did not want to be named told the Securities Daily, Investors should conduct a comprehensive analysis on the valuation, profitability, market prospects, competitive advantages, management team, etc. of the target company in combination with the fundamentals of the listed company and the market environment.

In addition to the above two major issues, the Exchange also inquired about Huainan Mining's change of performance commitment, consolidation of transaction targets, deposits of financial companies, operating data of Panji Power Generation Company, compliance of production and operation of transaction targets, debt repayment arrangements of Huai Zhe Coal Power and other issues.

The above professionals believe that the Exchange conducts self-discipline management by means of inquiry, on-site inspection, on-site supervision, and requiring independent financial advisers and other securities service institutions to conduct supplementary inspection and disclose professional opinions, and finds that the restructuring activities obviously violate the restructuring conditions and information disclosure requirements specified in the Administrative Measures for Major Asset Reorganization of Listed Companies, It may report to the CSRC for taking relevant measures. This also means that although the pure cash acquisition does not need to be reviewed by the CSRC, if there are irregularities in the transaction itself and information disclosure, the regulator may also file a case for investigation and punishment.

key word: Subject Huaihe River transaction listed company