A subsidiary acquired many years ago has become the source of Kehua's troubles.
On January 19, after two postponements, Kehua Bio finally replied to the Shenzhen Stock Exchange's letter of concern on the issue of its subsidiary Tianlong Company. The company said that at present, there are difficulties in actively leading the operation and financial activities of Tianlong Company, and the possibility that the company has lost control of Tianlong Company cannot be ruled out for the time being.
Affected by this news, as of the close of trading on January 19, the stock price of Kehua Bio closed at 15.67 yuan / share, down 2.43%.
Parent-child relationships collapse
In June 2018, Kehua Biotech announced that the Company had acquired 62% of the equity of Xi'an Tianlong and Suzhou Tianlong (hereinafter collectively referred to as "Tianlong Company") for 554 million yuan in cash. The company said that Xi'an Tianlong and Suzhou Tianlong have certain technical advantages in the field of molecular diagnosis, and their acquisition will further enrich the company's molecular diagnostic product line and improve the layout of the company's molecular diagnostic testing instruments.
Under the severe situation of the global epidemic, the originally unpopular molecular diagnosis has become hot. Tianlong's net profit increased significantly, making great contributions to the performance of its parent company, Kehua Biotech.
According to the data, in 2020, Tianlong Company deducted non-net profit of 1.106 billion yuan, and the net profit attributable to Kehua Bio in 2020 was 675 million yuan, it can be said that most of the high growth of Kehua Bio's performance is due to Tianlong Company. In the reply letter, Kehua Biotech split the main financial data of the company's consolidated financial statements for the third quarter of 2021, from which it is not difficult to find that Tianlong Company has in fact occupied a core position within Kehua Biotech.
For example, in the data of monetary funds, accounts receivable, construction in progress, and total assets, Tianlong Company accounted for 77%, 51%, 93% and 44% of the consolidated statements respectively; in addition, Tianlong Company's operating income and net profit attributable to the mother accounted for 53% and 85% of the listed company's consolidated statements, respectively.
In this regard, Kehua Bio explained that Tianlong Company mainly sells nucleic acid extraction, amplification instruments and supporting reagents, and since 2020, the prevention and control of the new crown epidemic has brought significant growth to Tianlong's operating performance, and the proportion of Tianlong Company in the company's consolidated financial statements in the relevant accounts of operating income, profit contribution and cash flow from operating activities has increased significantly.
There is frequent friction in acquisitions
Originally able to work together to create wealth, why did Kehua Bio and its subsidiary Tianlong Company turn against each other?
The problem lies in the acquisition of Kehua Biologics.
Kehua Biologics was listed in 2004, and its main business is the research, production and sales of in vitro clinical immunodiagnostic reagents, in vitro clinical chemical diagnostic reagents, nucleic acid diagnostic reagents, genetic engineering drugs and automated testing and diagnostic instruments supporting in vitro diagnostic reagents.
After acquiring 62% of Theronalon's shares for RMB554 million, the parties also agreed to dispose of the remaining shares in 2021. The listed company can request that all the shares be acquired at a price of 1.2 billion yuan and 30 times the PE, or other shareholders can request that the remaining equity be sold to the listed company at a price of 900 million yuan and 25 times the PE high.
The performance of Tianlong Company exceeded expectations, so that the follow-up agreement signed at the time of the acquisition became a constraint on the continued cooperation between the two sides.
According to the agreement, the listed company should acquire the remaining 38% of the equity of Tianlong at a price of 10.504 billion yuan, far exceeding the 554 million yuan when the 62% equity was acquired.
In the face of the huge price difference, After receiving the application for the acquisition letter, Kehua Bio said that the explosive growth in performance due to the epidemic has constituted a "change of circumstances" situation stipulated by law, and proposed to renegotiate.
In addition to the subsequent acquisition negotiations, Tianlong Company made a fuss about not cooperating with the consolidated statements of the listed company.
On December 27, 2021, Kehua Biotech announced that Li Ming, director and general manager of Tianlong Company, a holding subsidiary, clearly stated in the "Reply Letter for Audit Work" that it is currently unable to cooperate with Kehua Bio's pre-audit accounting statements and subsequent audit work.
Listed companies require subsidiaries to provide financial information, but there is a situation in which subsidiaries do not cooperate. Tianlong Company's reasons are: 62% of the equity of Tianlong Company held by Kehua Bio has been frozen, the People's Court of Weiyang District of Xi'an City has ruled to prohibit Kehua Bio from exercising all shareholder rights of Xi'an Tianlong's 62% equity, and there is a risk of trade secret leakage in opening financial information to Kehua Biotech.
In response, Kehua Bio responded that the so-called "reasons" of Tianlong Company completely lacked factual and legal basis, and expressed the "strongest" indignation and condemnation.
In the reply letter, Kehua Bio refuted the above-mentioned reasons for Tianlong's non-cooperation. It believes that as of the reply date, Kehua Bio is still the legitimate controlling shareholder of Tianlong Company, which occupies the majority of the board of directors of Tianlong Company, and has the power to approve and make decisions on major matters, and the board of directors of Tianlong Company still has the power to approve major matters of Tianlong Company, so Kehua Bio can still have a decisive influence on the decision-making of the board of directors of Tianlong Company through the directors appointed by it.
However, at the same time, Tianlong Company does not cooperate with listed companies in pre-audit accounting statements. On January 10, 2022, Kehua Biotech sent a letter again, requesting Tianlong to cooperate with the accountant's annual report audit. However, as of the date of reply, SkyLong had no signs of implementing the resolution.
Based on the above reasons, Kehua Bio believes that there are difficulties in actively leading the operation and financial activities of Tianlong Company, and the possibility that the company has lost control of Tianlong Company cannot be ruled out for the time being.
For Kehua Biologics, the consequences of Tianlong's loss of control are also unimaginable. In the reply letter, Kehua Bio said that if it loses control and consolidation of Tianlong Company, it will have a significant impact on the performance of the company's consolidated financial statements.
Actual controllers become uneasy factors
The matter was brought to court or related to the change of the actual controller of Kehua Biologics.
In May 2020, Kehua Biotech announced that its largest shareholder, LAL, transferred its 95.863 million shares (accounting for 18.63% of the total share capital) to Zhuhai Baolian, a wholly-owned subsidiary of Gree Real Estate.
Before and after the transaction, Kehua Bio had no actual controller. In June 2020, after the completion of the above equity transaction, Zhou Qinqin, director and executive vice president of Gree Real Estate, was appointed as the chairman of Kehua Biologics, and Lu Junsi, president of Gree Real Estate, was appointed as the chairman of the supervisory board of Kehua Biologics.
However, the person who decided to acquire Tianlong Company and intended to acquire the remaining equity in the follow-up was not the current helmsman of Kehua Biologics, who believed that the current situation of Tianlong Company constituted a "change of circumstances", which was also based on this point.
What makes Tianlong Company uneasy is that in May 2021, Zhuhai Baolian intends to cede the position of the largest shareholder to Shengxiang Biologics, which will undoubtedly lead to another change in the helmsman of Kehua Biologics. Shengxiang Bio is on the same track as Tianlong Company, and the above-mentioned equity transfer was soon terminated after the founding shareholders of Tianlong Company initiated arbitration.
Pi Haizhou, an independent financial commentator, said in an interview with the International Finance News that in recent years, more and more subsidiaries of listed companies have appeared "out of control". But in fact, as long as the major shareholders are really careful and "iron fist" management, such a phenomenon will not occur at all. As far as the problems faced by Kehua Biotech are concerned, those who occupy more than 60% of the shares can be said to be the absolute major shareholders, and even without legal procedures, they can withdraw control, for example, as long as the shareholders' meeting is held and the management of Tianlong's subsidiary is directly dismissed, the control can be completed. However, such "out of control" problems occur frequently, which is ultimately due to the problem of profit transmission in management, and "out of control" actually benefits some individuals. It is difficult for regulators to intervene in this kind of "infighting" for power and profit.
Reporter Wang Liying Intern Wei Zhenghong
Edited by Hu Xinyu
Editor-in-Charge Sun Xiao
Cover photo by Wu Sijie