Bankruptcy and reorganization of listed companies AB side: the password of win-win and the enlightenment of multiple losses

Fan Luyuan/Tabulation Times Financial Gallery/Courtesy photo

Securities Times reporter Fan Luyuan

Editor's note: Since 2020, nearly 60 A-share listed companies have completed bankruptcy reorganization, and after the implementation of the registration system, the number of listed companies entering the bankruptcy reorganization procedure has risen rapidly, and bankruptcy reorganization has become an important way for listed companies to clear their risks and regain their lives. In the long run, whether the reorganization plan takes into account the interests of all parties, whether all kinds of governance risks are cleared, the management level of the introduced industrial investors, and the profitability of the newly injected assets are the key to determining whether the company can "live well" and "live long".

Usually, it takes at least two or three years for a listed company to complete a fundamental repair after a reorganization. In this process, some companies have successfully thrown off their burdens and gradually recovered their blood; some companies have always been stuck in the quagmire and their performance has not improved for a long time; and some companies have quickly encountered a "black swan" after the completion of the reorganization and have once again moved towards the fate of delisting.

Looking back at the original reorganization plan, it is not difficult to find that the rotation of the gears of fate has already laid the groundwork. The revelations and reflections are worth summarizing.

Side A: Reborn in adversity

According to the statistics of the Securities Times reporter, 14 of the listed companies that have completed bankruptcy reorganization since 2020 have completed the reorganization for 3 years. Excluding Deao, which has been delisted in June 2022, among the remaining 13 companies, compared with the completion of the reorganization, the market value of 8 companies has increased and 5 have declined, and in the first three quarters of 2023, 8 companies have made profits after deducting non-profits and 5 have lost money. At the same time, there are four companies that meet the market value rise, the latest quarterly report and the 2023 performance forecast to be profitable, including Zhongnan Culture, Yongtai Energy, Salt Lake and Lotus Health.

Among them, Yongtai Energy and Salt Lake are resource-based listed companies with strong liquidity of core assets, and no new investors have been introduced in the reorganization process. In contrast, Lotus Health and Zhongnan Culture introduced new investors through bankruptcy reorganization, and it is more representative and meaningful to discuss these two cases.

Lotus Health:

Old domestic products have been reborn

Lotus Health, which was the "first share of monosodium glutamate" in the past, and had landed in the capital market in 1998, once fell into a debt crisis due to the failure of industry competition and diversification transformation. In 2017 and 2018, Lotus Health lost money and became insolvent for two consecutive years, and was put on delisting risk alert by the exchange in 2019.

In July 2019, Guohou Assets, a creditor of Lotus Health, applied to the court for bankruptcy reorganization of Lotus Health, and in October of the same year, the reorganization application was accepted by the court. During the negotiation stage, the listed company introduced three reorganization investors, Lotus Investment, Runtong No. 2 and Xiangcheng State Holding Group, paid a total of 540 million yuan in investment funds and obtained 318 million shares, accounting for 23.04% of the total share capital after the conversion.

The three investors introduced by Lotus Health are all very strong. Behind Lotus Tai Investment is the well-known Anhui AMC Guohou Assets, which is a frequent visitor to participate in the bankruptcy reorganization of listed companies, and can be seen in the bankruptcy reorganization of listed companies such as ST Zhong'an, *ST Mingcheng, ST Kangmei, and Zhongnan Culture in the following years. RML No. 2 is an investment fund set up by the state-owned enterprise China Resources, while the state-owned holding group is a state-owned platform affiliated to the local government.

The entry of several powerful investors has provided a guarantee for the success of Lotus Health's reorganization. In addition to the investment of 540 million yuan paid by the transferred equity, Lotus Investment, Guohou Asset Management and State Holding Group also provided additional financial support to Lotus Health in the form of loans, land acquisition and storage.

After the completion of the reorganization, Lotus Investment became the controlling shareholder of Lotus Health, directly involved in the company's production and operation, and the new business plan retained the company's main business such as monosodium glutamate, chicken essence and flour, divested inefficient assets, and solved the company's debt crisis.

After the completion of the restructuring, Lotus Health's asset structure, profitability and operating efficiency have all improved significantly. In 2021, Lotus Health's asset-liability ratio dropped to below 50%, and the non-net profit after deduction turned positive since 2020 and has continued to this day, while Lotus Health's inventory turnover and accounts receivable turnover ratio increased by 9.35% and 25% respectively in 2022 compared with three years ago, and the expense ratio during the period decreased significantly to 8.29% from 23.49% in 2019.

From the perspective of secondary market performance, the market value of Lotus Health has increased by 78.75% since the completion of the reorganization, and the stock price has risen by 51.57%, and the return on investment of investors is 165% based on the latest stock price and the stock price of investors.

Central and South Culture:

State-owned assets bailed out to resolve the debt crisis

Zhongnan Culture, formerly known as Zhongnan Heavy Industry, has been renamed Zhongnan Culture since 2014 and renamed Zhongnan Culture from metal products industry to large cultural industry. In the process of transforming to the entertainment track, Zhongnan Culture launched mergers and acquisitions with large debts to increase its market value and revenue scale. However, with the tightening of regulatory policies in the film and television industry after 2018 and the cooling of the industry, the performance of the assets acquired by the company in the early stage changed face, causing a large impairment, and the company fell into an operational crisis. At this time, the company also has a large amount of illegal guarantees and funds are occupied, which further increases the financial burden.

On May 25, 2020, Zhongnan Culture applied to the Wuxi Intermediate People's Court for reorganization, and under the guidance of the Wuxi Intermediate People's Court, the pre-reorganization was launched. In the past two years, pre-reorganization, as a bridging procedure between out-of-court reorganization and judicial reorganization, has been increasingly applied to listed companies to solve their difficulties.

Through recruitment and selection, Zhongnan Culture introduced three investors, Jiangyin Chengbang, China Merchants Ping An Asset Management and Guohou Assets, in the form of converting capital reserve into shares. Among them, the main shareholder of Jiangyin Chengbang is Jiangyin State-owned Assets, and China Merchants Ping An Asset Management and Guohou Asset Management are financial investors. The investors contributed a total of 800 million yuan, and were required to bear the responsibility or repayment obligation for some of the violations.

On March 30, 2021, Zhongnan Culture completed bankruptcy reorganization and officially became a listed company controlled by Jiangyin State-owned Assets. In the reorganization plan, Zhongnan Culture expects the company to achieve operating income of 540 million yuan, 650 million yuan and 800 million yuan from 2021 to 2023, and net profit of 50 million yuan, 60 million yuan and 80 million yuan respectively.

From the perspective of performance, Zhongnan Culture's operating income in 2021 and 2022 will grow steadily, and the non-net profit deducted in 2022 will achieve a turnaround of 64 million yuan, and the operating income will reach 656 million yuan, achieving the predicted level in the reorganization plan, and the performance repair speed is faster than that of listed companies that completed reorganization in the same period.

Side A Revelation:

Five factors to achieve a win-win situation

Although Lotus Health and Zhongnan Culture are located in different regions and industries, it is not difficult to find many similarities after reviewing the causes and processes of the bankruptcy and reorganization of the two companies.

First, the reason why the company is moving towards bankruptcy reorganization is that the original actual controller has poor operation and management, major shareholders have illegally occupied funds, and the capital chain has been broken, and the company's main business still has reorganization value.

For example, Lotus Health is the leader of the food subdivision industry, the manufacturing sector of Zhongnan Culture still has profitability, and the potash fertilizer and lithium ore of Salt Lake are all profitable assets.

Second, the reorganization investors with state-owned assets and professional investment backgrounds will be introduced, and the control of the company will be changed to more powerful investors. Excellent restructuring investors not only bring financial support to listed companies, but more importantly, they can bring more industrial and financing resources, improve corporate governance, and formulate more scientific business strategies.

Third, a reasonable business plan is conducive to maintaining the effect of bankruptcy reorganization. In the case of the reorganization of Lotus Health and Zhongnan Culture, the reorganization and operation plan of the listed company seems to be relatively conservative, but in fact, it helps the company to better focus on its main business, and at the same time invest more time and resources to improve corporate governance and recuperate. When the company's performance gradually improves, the actual controller will consider developing new businesses and looking for new performance growth points.

Fourth, local governments have played a pivotal role in the bankruptcy and reorganization of many listed companies. For example, for the bankruptcy reorganization of Lotus Health, the local government promised to coordinate and provide loan support for the part of the estimated debt repayment funds, and use the land acquisition and storage policy to use the collection and storage funds to protect the legitimate rights and interests of employees and the repayment of creditor's rights.

Fifth, the main investor has an early layout, which is conducive to fully understanding the quality of the target. Although Lotus Health only started the reorganization in July 2019, Guohou Assets began to acquire Lotus Health's claims in 2018, and in 2019, it filed for bankruptcy reorganization against the company as a creditor, and it was planned to intervene in the reorganization. In 2018, when Zhongnan Culture first disclosed that the company's controlling shareholder and actual controller had capital occupation and illegal guarantee problems, it actively sought the help of government agencies, and the local government had gradually participated in the company's management and risk disposal before the bankruptcy reorganization began.

Side B: Gloomy exit

In the past two years, there have been more cases of listed companies moving towards the final delisting after completing bankruptcy reorganization. Deao Delisted, which completed the reorganization in 2020, was delisted in June 2022, Pangda, which completed the reorganization in 2019, was delisted in 2023, *ST Potian, which completed bankruptcy reorganization in 2022, was found to have committed financial fraud in 2023 and delisted in 2024, and *ST Guiren, which completed the reorganization in 2021, was delisted in 2024...... After the disclosure of the 2023 annual report, this list may continue to expand. From the successful reorganization to the delisting of listed companies, the time is getting shorter and shorter, and the risk exposure speed is getting faster and faster.

The success paths of the "top students" in bankruptcy reorganization are generally similar, but the stories of reorganization failures are different.

*ST Nobles:

The new actual controller was filed

On March 29, 2024, the former shoe king Guirenniao was officially delisted because it touched the delisting standard of face value, ending its 10-year listing journey. Previously, the Shanghai Stock Exchange issued a regulatory letter to the company, and issued a notice of criticism to the listed company and the actual controller, making it clear that the listed company concealed a large amount of related party transactions, and the company's controlling shareholders, executives, actual controllers, etc. still have obligations to perform. The actual controller and chairman of the company have been investigated by the China Securities Regulatory Commission.

After its listing in 2014, Guirenniao started a crazy expansion mode, with a market value of more than 40 billion yuan at its peak in 2015. Since 2018, the company's performance has taken a sharp turn for the worse, losing money for three consecutive years and falling into a debt crisis. In August 2020, Guirenniao, which was on the verge of delisting, was filed for bankruptcy reorganization by creditors.

Guirenniao introduced a total of five reorganization investors, and Taifu Jingu invested 420 million yuan and acquired 20.36% of the company's shares. The actual controller of Taifu Jingu is Li Zhihua, and his industries are all agriculture-related companies. Except for Taifu Jingu, the remaining four investors who participated in the bankruptcy reorganization of Guirenniao are all natural persons. After the reorganization was completed, the control of Guirenniao did not change.

According to the reorganization plan, after the completion of the reorganization, Guirenniao will still focus on the design, research and development, production and sales of sports shoes and clothing, and the company promises to deduct non-net profits of not less than 100 million yuan, 150 million yuan and 250 million yuan from 2021 to 2023.

In July 2021, the reorganization of Guirenniao was completed, but only a year later, the shares held by the original controlling shareholder, Guirenniao Group (Hong Kong) Co., Ltd., were auctioned by the judiciary, resulting in Taifu Jingu becoming the new controlling shareholder, and Li Zhihua, the controlling shareholder of Taifu Jingu, became the actual controller of the listed company, and then became the new chairman of the listed company.

After Li Zhihua became the owner, Guirenniao's main business was adjusted from sports shoes and clothing to grain trade, but the company's operation was still hopeless. After a brief turnaround in 2021, in 2022, Guirenniao deducted a non-net profit of 69 million yuan, a decrease of 22.82%, and the profit amount was less than half of the promised in the reorganization, and in the first three quarters of 2023, Guirenniao lost 61 million yuan, and the stock price continued to fall, and it was questioned for a long time about the transfer of interests, and finally came to the end of delisting. Up to now, the company still has the controlling shareholder and directors have not completed the shareholding increase plan, and the actual controller has not returned a large amount of money to the company.

*ST Potian:

Fly out of the "black swan" of financial fraud

On February 2, 2024, *ST Poten announced that due to years of financial fraud, the Shanghai Stock Exchange made a decision to terminate the listing of the stock, and at present, the company has entered the delisting period.

*ST Poten landed on the A-share market in 2017, and its performance began to take a sharp turn in 2019, with a cumulative loss of 2.364 billion yuan in three years, and it was on the verge of delisting. In April 2022, creditors applied for bankruptcy reorganization of *ST Potian.

In the pre-restructuring stage, *ST Potian's share price rose 265% in 3 months, which was favored by many investors. *The investors in the reorganization of ST Poten are Shenzhen High-tech Investment, Hainan Daily New Energy and China Merchants Ping An Asset Management, all three investors are financial investors, and they paid 180 million yuan, 165 million yuan and 135 million yuan respectively, and received a total of 160 million shares, and became the third, fourth and fifth shareholders of the company respectively after the completion of the reorganization. *During the bankruptcy reorganization of ST Potian, no industrial investors were introduced, nor did it trigger a change of control of the company.

At the end of 2022, *ST Poten completed its bankruptcy reorganization. However, only four months after the completion of the bankruptcy reorganization, the company was investigated by the CSRC for financial fraud for five consecutive years since its listing, becoming the first listed company to be retroactively delisted after a successful reorganization.

*ST Poten has been exposed to financial fraud for five consecutive years since its listing in 2017, which is very bad in nature. From 2017 to 2018, *ST Poten inflated its operating income by 1.445 billion yuan and inflated its profit by 619 million yuan. From 2019 to 2021, the inflated revenue was 29 million yuan and the inflated profit was 459 million yuan.

B-side reflection: Strengthening risk awareness and strengthening two-way due diligence is the key

After bankruptcy and reorganization, a listed company is delisted again, either because the newly introduced investors are not strong and it is difficult to make a profit by injecting assets, or because the reorganization is used as a tool for some major shareholders or investors to seek private interests, or because the listed company itself has a large risk, and the insufficient due diligence of investors will often lead to major investment decision-making errors.

Looking back at the cases where the reorganization went into failure, although the reasons for the delisting were different, the reorganization process still showed some similarities.

From the perspective of investors, most of the companies that are delisted after the reorganization lack the participation of industrial investors. Industrial investors usually have a more professional judgment on the prospects of the industry and the authenticity of the company's finances. However, many financial investors take competing for investment shares and achieving arbitrage goals as their investment philosophy, and lack of attention to due diligence.

In the era of strict supervision, even if ST Poten's financial investors have a deep investment background, they have not escaped the fate of "stepping on thunder". If some small and medium-sized financial investors do not have the ability and professionalism of due diligence, it is more difficult to identify the various risks of the target company. At present, many investors only intervene in due diligence at the public selection stage, which is prone to problems such as short due diligence time, insufficient communication with the management team of listed companies, and hasty formulation of reorganization plans.

Similarly, the reorganization manager should also strengthen the reverse due diligence of industrial investors, and strengthen vigilance against industrial investors who do not have sufficient knowledge of the industry and have doubts about their financial strength.

From the perspective of control, companies with the same actual controller after the reorganization are more likely to encounter crises. If the controlling shareholder may have embezzled the interests of the listed company, even if it can breathe through bankruptcy reorganization, it is difficult to guarantee that the listed company will not repeat the mistakes of the past. For this type of reorganization company, it is particularly important to identify the reasons for the company's business failure and bankruptcy, whether the actual controller has a way to reverse the predicament, and whether the actual controller has achieved the purpose of debt evasion through bankruptcy reorganization.

Finally, judging from the popularity of participation, many companies that exploded after the reorganization had very few applicants in the investor selection stage. With the increasing number of cases in which reorganizations are not accepted or fail after reorganization, investors are becoming more cautious in selecting targets. For example, *ST nobles, only one intending investor signed up in the recruitment stage, which reflects that the reorganization value of the listed company is not favored by investors.