Lianhong Xinke's 2 billion yuan fixed increase: the management took a "hitchhiker" gamble

Cai Zhong She, Zhao Yibo/text

Even the poor performance in the first half of the year did not stop the management of Lianhong Xinke (003022) from betting on EVA, PO and other fundraising projects, because, if the bet is right, the management can get 25% profit sharing from this project, and if the bet is wrong, the price of the huge investment failure will be paid by the shareholders of the listed company.

In mid-August, after announcing the semi-annual report with a significant negative profit growth, Lianhong Xinke updated the declaration draft for non-public issuance of shares, planning to raise no more than 2.02 billion yuan, and invest in new energy materials and biodegradable integration projects after deducting related expenses, with a total investment of 12.5 billion yuan.

However, unlike the raised funds, which are mostly invested by wholly-owned subsidiaries or the parent companies of listed companies, Lianhong Xinke will hand over the 2.02 billion yuan from the fixed increase to a holding subsidiary established by a joint venture with the management, which is not only the risk of the project itself, but also a project that does not match the risk and return for the shareholders of the listed company.

The registered capital is 500 million yuan, and the investment of 10 billion yuan is leveraged

After the completion of the private placement, the funds were handed over to the holding subsidiary, Lianhong Gerun, which will pay the cost of funds at the level of the reference market interest rate, and the management did not provide loans and guarantees with the same conditions in proportion, and the regulator also inquired whether this method harmed the interests of the listed company. In this regard, Lianhong Hi-Tech replied that minority shareholders are the management, and through the binding of interests, the interests of all shareholders can be maximized in the end; In addition, after communicating with the cooperative banks, the follow-up loan is intended to be in the form of credit loans, which does not involve guarantees; moreover, the interest payment is fairly priced, and there is no loss of the interests of the listed company.

Founded in September 2021, Lianhong Gerun is a new business development platform of Lianhong Xinke, which was invested by 643 backbones including the management of 125 million yuan in December 2021 to increase its capital at par value, and the registered capital is 500 million yuan after completion.

From the perspective of capital contribution, in addition to the 70.45 million yuan contributed by the employee partnership, the core executives also subscribed separately, of which Zheng Yueming, chairman and president, subscribed 1.5 million yuan, the vice president level contributed 4 million to 4.5 million yuan, and the rest of the executives contributed 800,000 to 4 million yuan.

Of course, these funds are not much of a problem for Lianhong Xinke executives. Compared with other A-share chemical companies, Lianhong Xinke executives have an enviable high salary in the industry, Chairman and President Zheng Yueming's salary in the past three years was 10.3834 million yuan, 8.6 million yuan and 7.0196 million yuan respectively, although the performance has been adjusted year by year, but it is still maintained at a high level, and the rest of the vice presidents are maintained at more than 2 million yuan.

According to the draft of the fixed increase declaration, the executive remuneration of private enterprises such as Dongfang Shenghong (000301) and Real Madrid Technology has not exceeded 3 million yuan in the past three years, and most of the executives are below 2 million yuan.

According to the annual report of Lianhong Xinke, from 2021 to 2023, Lianhong Gerun did not disclose revenue, did not disclose profit in 2021, and the net profit in 2022 and 2023 was zero yuan and 87,000 yuan respectively, and in the first half of 2024, Lianhong Gerun still did not disclose revenue, with a net profit of 1.78 million yuan. Tianyancha shows that the number of people who pay social security in Lianhong Gerun is 399, and the company with nearly 400 people can maintain a small profit without revenue, while the number of employees in Lianhong Xinke at the end of 2023 is 2,447.

In December 2022, Lianhong Xinke disclosed a fixed increase plan, planning to raise no more than 2.02 billion yuan for the holding subsidiary to invest more than 10 billion yuan in the integration project of new energy materials and degradable materials. Lianhong Gerun, which has a registered capital of only 500 million yuan and less than 400 social security contributors, wants to gamble on a project of more than 10 billion yuan, which seems a bit incredible from the perspective of financial constraints.

There is a mismatch between risk and return in highly debt investments

The investment in the new chemical materials industry is huge, with a high capital threshold, and a production line often invests tens of billions of yuan, so private capital adopts the method of joint investment, but the investment model of Lianhong Xinke is not the case.

From the perspective of the industry, Lianhong Xinke said that it has invested in EVA, PPC and PO integration projects, of which PPC is a new generation of "environmentally friendly" biodegradable materials with excellent performance, and EVA and PO are new energy materials.

EVA is the main material of photovoltaic film materials, in addition to facing the hidden concern of overcapacity in the photovoltaic industry in the downstream final demand area, its own industrial environment is also changing. Previously, due to the rapid development of global photovoltaics, the domestic photovoltaic film with EVA materials in short supply, the need for a large proportion of imports, public data show that in the past three years, China's EVA imports were 1.2 million tons, 1.11 million tons and 1.39 million tons, however, in the first half of this year, even in the case of a nearly 30% increase in global photovoltaic installations, EVA imports showed negative growth. According to customs data, China's EVA imports in June 2024 were 63,300 tons, a year-on-year decrease of 47.73%; The cumulative import volume from January to June was 521,200 tons, down 20.01% year-on-year. One of the important reasons is that the production capacity release of domestic EVA is accelerating, including Dongfang Shenghong and other industry leaders are accelerating the production capacity launch. According to the three-year construction period of the project, the industry competition after the approval of the fixed increase and the construction period may usher in greater uncertainty.

According to the latest application draft, according to the historical data of the last three years (2021-2023), the fundraising project will be updated and calculated, which can achieve an average annual revenue of 7.573 billion yuan and an average annual net profit of 1.514 billion yuan during the production period. For the management, after investing 125 million yuan, in addition to the normal high salary, if the above goals are successfully achieved, they will be able to share 300 million profits per year, which is definitely a big profit. If the project does not make money or fails, it will not affect its labor salary, which can be called a profitable business.

For listed companies, if they succeed, they can share more than 1 billion yuan of profits, but if they fail, their funds of more than 2 billion yuan may not be returned.

As for the management's statement that the project of more than 10 billion yuan can rely on credit loans, it is also doubtful. For example, Lianhong Xinke and Wison CIC established a joint venture company in August 2023, with a registered capital of 700 million yuan, and the two hold 65% and 35% of the shares respectively. It is estimated that the total investment of the first phase is 1.968 billion yuan, and according to the announcement, in March 2024, in order to speed up the progress, Lianhong Wison plans to apply for a comprehensive credit line of no more than 1.4 billion yuan from financial institutions, and finally the two companies will bear no more than 910 million yuan and no more than 490 million yuan respectively according to the proportion of shareholdings.

Considering that the registered capital of Lianhong Gerun is only 500 million yuan, and the 2 billion yuan raised cannot be counted as equity capital, considering the total investment of its project of 12.5 billion yuan, the actual asset-liability ratio will exceed 95%, and the asset-liability ratio of Lianhong Wison does not exceed 70% and still needs a guarantee, and the possibility of Lianhong Gerun relying on credit loans with a higher debt ratio is questionable.

Once the bank needs to provide a guarantee, if the management does not participate in the guarantee, the project of more than 10 billion yuan will eventually be guaranteed by the listed company, and the final financing risk of the project failure will be borne by the listed company?

In addition, the investment of 10 billion yuan, in addition to the 2 billion yuan of raised funds, will inevitably need to borrow, which will lead to a sharp increase in the company's asset-liability ratio. As of the end of June 2024, the asset-liability ratio of Lianhong Xinke was 58.03%, a new high since the end of 2020, and although the monetary funds at the end of the period were 2.914 billion yuan, the sum of short-term borrowings, interest-bearing liabilities due within one year, and long-term liabilities reached 8.719 billion yuan.