Xiangxue Pharmaceutical received an inquiry letter from the Shenzhen Stock Exchange's annual report, and there were three major doubts in the financial data

Interface News Reporter | Li Kewen

Interface News Editor | Xie Xin

On May 16, Xiangxue Pharmaceutical received an inquiry letter from the Shenzhen Stock Exchange due to the issuance of a qualified opinion on its annual report.

It all started in 2016 when Xiangxue Pharmaceutical acquired the Bio Island project. Since then, Xiangxue Pharmaceutical and its controlling shareholder, Kunlun Investment, have turned the project from left to right with the help of its subsidiary Concord Precision. This also makes it impossible for the accountants to obtain sufficient and appropriate audit evidence on the accuracy of some of Xiangxue Pharmaceutical's fixed assets and balances of projects under construction, and it is impossible to determine whether there is any related party capital occupation.

Xiangxue Pharmaceutical also had to make error corrections to the statement items related to the construction in progress, fixed assets, other receivables, and other payables related to the biological island in the 2021 annual financial statements, 2021 and 2022 annual financial statements, and 2023 1 to 3 quarterly reports.

Although after the retrospective adjustment, Xiangxue Pharmaceutical said that it will not lead to a change in the nature of profit and loss in the company's disclosed financial statements for 2021 and 2022, the Shenzhen Stock Exchange still has doubts about the abnormality of Xiangxue Pharmaceutical's "construction in progress", "other receivables" and "fixed assets".

Bio Island Hotel is a questionable acquisition by Xiangxue Pharmaceutical.

In 2016, Xiangxue Pharmaceutical intends to acquire the land use rights of No. 1 and No. 2 plot AH0915002 s located north of Line A of Guangdong Qide Hotel Co., Ltd. in the north of Line A of Guangzhou Bio Island, as well as the superstructure building and its supporting properties, projects, equipment and facilities, as well as the overall assets such as equipment and facilities, decoration, decoration, furniture, and articles attached to it.

This is the Bio Island project, which has been hanging on the accounts of Xiangxue Pharmaceutical since then.

In May 2017, after the completion of the acquisition of the Bio Island project, Concord Precision, a subsidiary of Xiangxue Pharmaceutical, was established. Xiangxue Pharmaceutical divided the newly acquired Bio Island project into two, of which Lot 2 and related hotel assets were transferred to Concord Precision. After that, in less than half a year, in December 2017, Xiangxue Pharmaceutical sold 100% of the equity of precision medicine (including No. 2 plot and related hotel assets) to the controlling shareholder Kunlun Investment for 1.62 billion.

During the period, Xiangxue Pharmaceutical also paid 326 million yuan for the project of precision medicine. The 326 million yuan payment was mistakenly listed as a project under construction by Xiangxue Pharmaceutical.

This raises doubts, what are the specific facts of Xiangxue Pharmaceutical's precise advance payment for the project on behalf of Xiehe? Among them, it includes the payer, payment time, payee, payment amount, and cumulative amount, and clarifies whether the relevant circumstances constitute the occupation of non-operating funds, and whether the relevant funds flow to other customers such as the company's upstream suppliers or downstream distributors.

It should be noted that the Bio Island project is an unfinished project. On May 18, 2023, Xiangxue Pharmaceutical said that the No. 1 and No. 2 plots of Bio Island are expected to complete the right confirmation procedures in 7 months and 6 months respectively, and there is no obstacle to the completion of the property right certificate. But in fact, as of April 30, 2024, the property title certificate of the bio island house is still being processed.

In 2021, Xiangxue Pharmaceutical will invest 1.5 billion yuan from the controlling shareholder Kunlun to repurchase Concord Precision.

In particular, it should be noted that at this time, Xiangxue Pharmaceutical also needs to bear the other 928 million yuan payable by Concord Precision's investment in Kunlun. In other words, five years have passed, and Xiangxue Pharmaceutical has instead paid 2.429 billion yuan to the controlling shareholder.

In addition to 928 million yuan of other payables, Xiangxue Pharmaceutical also has 744 million yuan of projects under construction that are suspicious.

Among them, 591 million yuan of the construction in progress part of Concord Precision, and 153 million yuan of interest related to this payment and based on the land value were capitalized, totaling 744 million yuan. However, in fact, the 744 million yuan was used by Kunlun Investment to pay for its expenses for obtaining the biological island project, capital interest, asset transfer litigation enforcement funds and other expenses, not actual project funds.

In 2016, when Xiangxue Pharmaceutical initially acquired the Bio Island project, it announced that the relevant projects only needed to complete the interior decoration before they could be opened. And now in 2014, the successive investment of Kunlun Investment, the controlling shareholder, has generated 928 million yuan of other projects under construction for Xiangxue Pharmaceutical and an inflated increase of 744 million yuan, and the project has not yet been completed.

This raises three questions.

First, Xiangxue Pharmaceutical needs to explain the specific circumstances of the "construction in progress" that does not comply with the relevant provisions of the accounting standards, such as the payment time, payee, payment amount, cumulative amount, final payment flow and purpose of the relevant non-project payment. Whether the controlling shareholder, Kunlun Investment, inflated the debts of the listed company by inflating the projects under construction, and whether the relevant funds flowed to other customers such as the company's upstream suppliers or downstream distributors.

Second, Xiangxue Pharmaceutical needs to explain the source of funds for the above-mentioned non-engineering funds. If it comes from relevant borrowings, it is necessary to clarify the relationship between the relevant creditor's rights and debts, and whether the listed company needs to bear relevant repayment obligations or joint and several liabilities. Whether the rights and interests of minority shareholders will be damaged as a result.

Third, Xiangxue Pharmaceutical needs to explain whether the accurate value assessment of Concord was fair. At that time, Beijing CEA Asset Appraisal Co., Ltd. appraised the project under construction for Concord Precision, with a book of 1.945 billion yuan and an appraised value of 1.842 billion yuan. Is there a scenario where no large amount of inflated construction in progress has been found?

In addition, as of the end of 2023, Xiangxue Pharmaceutical has 1.214 billion yuan of projects under construction, of which the book balances of Ningxia Liupan Mountain Green Traditional Chinese Medicine Industrial Park Project, Shanwei Industrial Park Phase I Project, and Yunnan Shangri-La Health Industrial Park are 267 million yuan, 276 million yuan, and 111 million yuan respectively.

Are these projects also frustrated? Including, whether there is a situation of early payment, the selection procedure of the contractor, whether there is a controlling shareholder through the construction contractor to occupy funds, for a single project amount accounting for more than 10%, the composition of the contract quotation should be separately detailed, whether the relevant quotation is unfair, whether there is a situation of conveying benefits to the controlling shareholder through false reporting of the construction in progress.

Xiangxue Pharmaceutical was also found by the Shenzhen Stock Exchange to be its top five customers and suppliers, China Resources Hunan Shuangzhou Pharmaceutical Co., Ltd. This raises questions about the authenticity of Xiangxue Pharmaceutical's revenue.

Among them, it is necessary to ascertain the overlap between the top 20 suppliers and customers of Xiangxue Pharmaceutical and its reasonableness, including the name of the overlapping entity, registration time, registered capital, number of insured persons, contributing shareholders, directors, supervisors and senior executives, affiliation with Xiangxue Pharmaceutical, respective transaction content, transaction necessity, corresponding purchase amount and recognized revenue amount, advance payment in the reporting period, balance of receivables at the beginning of the period, payment collection, balance of receivables at the end of the period, aging, credit period, and provision for bad debts.

In 2023, Xiangxue Pharmaceutical will achieve operating income of 2.299 billion yuan, of which pharmaceutical circulation income will be 360 million yuan and other business income will be 351 million yuan.