Producer: Sina Finance Listed Company Research Institute
Author: IPO Refinancing Group/Qin Mian
In the IPO review, the payment of "five insurances and one housing fund" for employees has always been the focus of attention, and the recent IPO company Dingmei Technology has also been rejected due to social security issues.
According to the statistics of the prospectuses disclosed on the official website of the Shanghai Stock Exchange, as of December 20, among the 239 companies under review by the Shanghai Stock Exchange (starting from acceptance, excluding terminated and issued enterprises), 37 companies had more than 200 employees who had not paid social security at the end of the last reporting period, or the number of employees who had not paid social security exceeded 10% of the total number of employees.
Among the 239 companies planning to IPO, the highest proportion of non-payment of "five insurances and one housing fund" is Cherry Valley Breeding Technology Co., Ltd. (hereinafter referred to as "Cherry Valley"), with the proportion of payment below 50%. More importantly, the gross profit generated by Cherry Valley's related-party transactions may touch the red line of review, and there is also the problem of related parties disbursing costs and expenses for the company. In addition, the company's net profit deducted from non-attributable to the parent company in the latest year fell by more than 50%, and the net profit of less than 50 million yuan did not meet the conditions for listing on the main board under the registration system, especially the company's unusually small performance scale or difficult to meet the positioning of the main board.
In the last three years, there have been two years of net profit declines of about 50%, or it is not in line with the positioning of the main board
According to the prospectus, Cherry Valley is mainly engaged in the genetic breeding of white-feathered broiler ducks, providing breeding ducks and service integration for the broiler duck industry, and the varieties mainly include the "Cherry Valley Duck" supporting line, the "Nankou No. 1 Beijing Duck" supporting line and the "Jingdian Beijing Duck" supporting line.
As of June 30, 2022, Cherry Valley had a total of 395 employees, including 306 domestic employees, of which 152 (49.67%) had paid five social insurances in full, and 136 (44.44%) had paid the housing provident fund in full, ranking the lowest among the 239 IPO companies under review by the Shanghai Stock Exchange.
Cherry Valley's large amount of non-payment of "five insurances and one housing fund" is obviously illegal, or does not meet the review requirements of "compliance operation" of the IPO. According to the relevant provisions of the Social Insurance Law, employers and employees shall participate in social insurance and pay social insurance premiums in accordance with the law. According to the Regulations on the Administration of Housing Provident Fund, the unit shall pay the housing provident fund on time and in full, and shall not pay late or underpaid.
According to the details disclosed in the Cherry Valley prospectus, as of June 30, 2022, the number of employees who voluntarily gave up paying social insurance for other reasons was 90, and the number of people who voluntarily gave up paying housing provident fund was 108.
Source: Prospectus
Voluntary waiver by employees does not relieve Cherry Valley of its responsibilities and obligations. The Ministry of Human Resources and Social Security and local human resources and social security bureaus in many provinces and cities have stated that social insurance is a social security system enforced by the state, and that it is not only the legitimate right and obligation of employers and employees to participate in social insurance and pay social insurance premiums in full and on time, but also their obligations, and cannot be exempted according to the wishes of employees or employers.
In addition, Cherry Valley's small earnings may hit another red line - the risk of material misstatement in financial statements. From 2020 to the first half of 2022, Cherry Valley achieved net profit of 64 million yuan, 84 million yuan and 41 million yuan respectively, an increase of -48.59%, 30.21% and -50.78% year-on-year, respectively.
Recently, the main board IPO company Ding Magnesium Technology was rejected. The Listing Committee held that Dingmei Technology failed to pay social insurance premiums and housing provident fund in full in accordance with the law, and the financial statements during the reporting period did not fairly reflect the issuer's financial position and operating results in all material respects, which did not meet the IPO requirements.
According to the prospectus, the proportion of Dingmei Technology paying five insurances and one housing fund for employees during the reporting period was more than 96%, while the proportion of Cherry Valley paying five insurances and one housing fund in full for employees during the reporting period was less than 40%, which was significantly inferior to Dingmei Technology, which was rejected. So, is Cherry Valley also at risk of material misstatement in its financial statements?
In addition, Cherry Valley, which has a small performance scale, may not be in line with the positioning of the main board of the large-cap blue-chip. The Administrative Measures for the Registration of Initial Public Offerings of Shares issued by the China Securities Regulatory Commission in February this year stipulate that issuers applying for initial public offerings and listing should comply with the positioning of relevant sectors. The main board highlights the characteristics of "large-cap blue chips", and focuses on supporting high-quality enterprises with mature business models, stable operating performance, large scale and industry representativeness.
Compared to comparable companies in the same industry, Cherry Valley's revenue is unusually small. Taking 2022 as an example, Cherry Valley's revenue is only 227 million yuan, while the revenue of comparable listed companies Sunner Development, Lihua Shares, Xiantan Shares, Xiangjia Shares, Yisheng Shares, Minhe Shares, and Xiaoming Shares in 2022 will be 16.817 billion yuan, 14.447 billion yuan, 5.102 billion yuan, 3.823 billion yuan, 2.112 billion yuan, 1.609 billion yuan, and 786 million yuan respectively.
Even Xiaoming shares, a comparable listed company with the least performance, will have a revenue of 3.46 times that of Cherry Valley in 2022, while Xiaoming shares are listed on the GEM.
In addition, in addition to Xiaoming shares, the other 6 comparable companies in the same industry, especially Sunner Development and Lihua Co., Ltd., have revenues of more than 10 billion yuan, and they have landed on the former small and medium-sized board and gem, and none of them have landed on the main board. It can be seen that it is difficult for Cherry Valley to meet the conditions for the issuance of a large scale of performance on the main board.
Does it not meet the listing conditions of the main board of the registration-based system, and the related party disbursements the cost and expense beautification statement?
Not only is the revenue scale small, but the net profit of Cherry Valley in 2022 is also small, less than 50 million yuan, which does not meet the conditions for listing on the main board under the comprehensive registration system (Criterion 1). In addition, the company's revenue in 2022 is less than 600 million yuan, and the listing standard 2 and 3 are not applicable.
Source: SSE Listing Rules
Interestingly, however, Cherry Valley's gross and net profit margins far outperform those of its peers. From 2019 to 2021, the gross profit margins of Cherry Valley were 62.4%, 43.59%, and 44.76%, respectively, far exceeding the average of 41.99%, 18.23%, and 12.9% of comparable companies in the same industry, all of which were more than 20 percentage points higher.
Wind shows that Cherry Valley's net profit margin in 2021 was 29.83%, while comparable companies in the same industry all had net profit margins of less than 11.5%, and were basically single-digit or even negative.
Cherry Valley said that the company's comprehensive gross profit margin is higher than the average level of comparable listed companies in the same industry, mainly because the company's main products are grandparent duck seedlings and parent duck seedlings, and the listed companies in the same industry are mostly based on the introduction of grandparents, production and sales of parent products or commodity products, and the company's sales of grandparent breeding poultry due to higher technical thresholds, gross profit margin is also higher.
But in fact, Cherry Valley's high gross profit is inseparable from the help of the controlling shareholder. During the reporting period, Cherry Valley mainly sold Cherry Valley duck grandparent ducklings to Guiliu customers, which were enterprises controlled by Shounong Co., Ltd., the controlling shareholder of Cherry Valley. From 2020 to 2022, the transaction amount of the company's sales of Cherry Valley duck grandparent ducklings to Guiliu customers accounted for 54.5%, 76.61% and 67.08% of the revenue of similar products, respectively, and the gross profit amount generated by the above transactions accounted for 55.01%, 77.37% and 68.13% of the gross profit of similar products, respectively.
In addition to contributing to Cherry Valley's high gross profit through related sales, the controlling shareholder Shounong Co., Ltd. also helped Cherry Valley pay for costs. According to the announcement, during the reporting period, a number of directors, supervisors, senior executives and core technical personnel in Cherry Valley received a total salary of 10.1713 million yuan in affiliated enterprises.
In these directors, supervisors, and high schools, there are a number of senior executives who only receive salaries from related parties and not from Cherry Valley, such as Chairman Wang Kai, Director Xu Ruizhao, Chairman of the Board of Supervisors Zhang Zhanyong, and Supervisor Li Gang.
In addition to the remuneration of most directors and senior supervisors of Cherry Valley on behalf of related parties, there are also 5 companies such as Xianghe Company that pay for Cherry Valley, with a cumulative amount of nearly 6 million yuan from 2020 to 2022.
It is the high gross profit contribution of the controlling shareholder and the disbursement of related parties that make the profit data of Cherry Valley, which has a smaller profit scale, look better and better meet the listing conditions.
Huge related-party transactions may touch the red line of review
Not only is the scale of performance very small, but Cherry Valley's annual revenue of more than 200 million yuan requires a large number of related party transactions.
From 2019 to 2021 and the first half of 2022, the proportion of Cherry Valley's related sales revenue to total revenue was 18.27%, 25.01%, 17.93% and 14.41% respectively, and the gross profit accounted for 22.18%, 41.6%, 31.15% and 672.72% respectively.
It is worth noting that the related-party transactions of Cherry Valley largely come from the Guiliu customers under the controlling shareholder.
The Guidelines for the Application of Regulatory Rules – Issuance No. 4 stipulates that if the proportion of operating income, costs or total profits corresponding to the related party transaction between the controlling shareholder, the actual controller and the issuer accounts for a relatively high proportion of the issuer's corresponding indicators (if it reaches 30%), the issuer should fully explain and summarize whether the related party transaction affects the issuer's operational independence based on the financial status and operation of the relevant related party, the reasonableness of the operating income and total profit generated by the related party transaction, etc. Whether it constitutes a reliance on the controlling shareholder or actual controller, and whether there is a situation in which the issuer's income, profits, costs and expenses are adjusted through related party transactions, and whether the interests of the issuer are transferred.
Judging from the relatively high proportion of related party transactions, Cherry Valley is more dependent on the controlling shareholder, and its business independence is debatable. Without a related party, Cherry Valley's earnings will shrink significantly or will not be eligible for issuance. In particular, there are traces of beautifying profits by related parties in many places on behalf of Cherry Valley.
To sum up, Cherry Valley has touched five red lines for review, one is that the performance scale is difficult to match the positioning of the main board, the second is that the non-net profit deducted in the latest year is less than 50 million yuan, which does not meet the conditions for listing on the main board under the registration system, the third is that the non-net profit deducted in the last year has decreased by more than 50%, and the sustained profitability remains to be examined, the fourth is that the gross profit generated by related party transactions accounts for a relatively high proportion of more than 30%, and the fifth is that more than half of the employees have not paid "five insurances and one housing fund", which does not meet the IPO conditions for compliance operation.