Mergers & Acquisitions

China’s cash-starved companies offer their prized assets at garage sales to dress up their books and avoid stock market expulsion

  • As many as 72 companies have warned investors to expect net profit to plunge by more than 100 per cent
  • Another 10 of these said they’re likely to face more than 1 billion yuan in losses
PUBLISHED : Tuesday, 18 December, 2018, 1:37pm
UPDATED : Wednesday, 19 December, 2018, 10:24am

Dozens of Chinese companies, pressed by a slowing economy and tighter bank loans, are putting their prized assets on sale to raise money to dress up their books as the year end approaches, in a desperate move to avoid expulsion from the stock exchanges.

Hunan TV & Broadcast Intermediary, the operator of China’s second-most watched television network, last week sold an oil painting for a record 208.8 million yuan (US$30 million) to its largest shareholder, raising enough cash to cover a nine-month loss of 130 million yuan and avoid a designation for possible expulsion from the Shenzhen Stock Exchange.

The broadcaster, whose coverage extends to 1 billion people, wasn’t alone in holding a garage sale of assets, as a US-China trade war disrupted profit prospects amid the slowest economic growth pace in decades, making 2018 one of the worst years in the Chinese capital market.

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The economy’s M2 money supply has fallen every month since March 2017, while November’s total lending grew by a mere 9.9 per cent, the slowest year-on-year increase on record, as banking regulator continued to crack down on risky loans.

As many as 72 of China’s 3,550 listed companies have warned investors to expect net profit to plunge by more than 100 per cent. Another 10 of these said they’re likely to face more than 1 billion yuan in losses.

“The priority for A-share companies is still to avoid delisting, because the listing status is a precious resource that could be monetised,” said Guo Shiliang, a financial columnist based in Guangzhou.

Hunan TV last week sold Xu Beihong’s 1940 “Foolish Man Removes the Mountain” to its largest shareholder, six months after a June auction failed to fetch enough bids to meet a 190 million yuan reserve.

Hainan Airlines, China’s fourth-largest carrier, last week sold two aircraft to its tourism associate for 1 billion yuan as its nine-month profit plunged 73.6 per cent to 729 million yuan.

HNA Tourism, the buyer of the aircraft, is a unit of Hainan Airlines’ parent HNA Group.

HNA’s debt declines for the first time, shrinking by US$8.3 billion

At least 33 listed companies are turning to selling property for cash, according to stock exchange filings.

Huaxi Securities, a Chengdu-based broker and investment bank, last week told the Shenzhen bourse that it plans to put a property project up for sale for 817 million yuan.

Central China Securities said it plans to raise 68.4 million yuan by selling a real estate project, while Guoyuan Securities in the Anhui provincial capital of Hefei put a for-sale sign on a property for 15.7 million yuan.

To maintain the listed status, some companies are even spinning off their core business, just to stay afloat.

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Tianjin FAW, an automobile assembler that was at risk of being expelled from the Shenzhen exchange, had to ask its parent FAW Group for help for the second time since 2016.

The maker of Toyota Vios compact cars said it’s planning to sell a second 15 per cent stake in its venture with Toyota Motors to FAW Group for 2.92 billion yuan.

An earlier sale of 15 per cent stake to FAW in 2016 raised 2.56 billion yuan, keeping Tianjin FAW in the black for a year. Last year, the company returned to the red with a loss of 1.6 billion yuan.

To be sure, the bailouts by related parties, or controlling shareholders, have not gone unnoticed.

That is particularly so in the case of Hunan TV, where the price of art is subjective at best.

Shenzhen’s Stock Exchange on Monday issued a query as to how Hunan TV’s shareholder was willing to part with more than 200 million yuan, when the very same painting failed to fetch the minimum 190 million yuan at auction six months earlier.

The transaction price set a record for the most expensive oil painting ever sold in China, surpassing the 198 million yuan record set in 2016 by Wu Guanzhong’s “Zhouzhuang”.

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In its response, the broadcaster said the sale was approved by a minority of the listed company’s board, with five directors recusing themselves while four voted in favour.

“A listed company has the right to dispose of assets to dress up its annual report,” said Guo. “It becomes tricky when the deal is done with a related party, because it often becomes a question as to whether the deal was done at fair value, and whether minority shareholders were going to be ripped off, or misguided.”

China’s securities regulators must improve the rules for making material disclosures on the Shanghai and Shenzhen exchanges, Guo said. Until then, minority investors can only fend for themselves to discern that these year-end asset sales portend, he said.