Although state-owned capital had already "stepped in to help" two months ago, the overdue debt situation of Lingnan Shares is still deteriorating. On October 14th, following the announcement that the expected 156 million yuan of raised funds could not be returned on schedule, Lingnan Shares once again disclosed the verification opinion of the sponsoring agency. The agency further confirmed that the company has temporarily experienced situations where some debts could not be repaid as scheduled, and the specific repayment time for the idle raised funds used for supplementary liquidity this time is uncertain.
Since August of this year, Lingnan Shares has been deeply involved in a convertible bond payment crisis, and its stock price has also been hovering on the brink of the delisting red line. Although Zhongshan state-owned capital previously purchased some default bonds from Lingnan convertible bond holders, judging from the current situation, it is only a temporary solution to an urgent problem.
In the secondary market, the stock price of Lingnan Shares has been fluctuating and falling. On October 15th, Lingnan Shares reported 1.94 yuan per share, a decrease of 3.96%, with a total market value of 3.411 billion yuan.
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Convertible bond default
Public information shows that Lingnan Shares was established in 1998 and later listed on the Shenzhen Stock Exchange main board in 2014. The company mainly engages in ecological environment construction and restoration business, water affairs and water environment management business, as well as cultural tourism business. Since its listing, Lingnan Shares has successively raised more than 3.4 billion yuan through IPOs, corporate bonds, additional issues, and convertible bonds, among which a convertible bond issued in 2018 has caused a major setback for Lingnan Shares.
At that time, Lingnan Shares publicly issued convertible bonds with a total par value of 660 million yuan, with a term of 6 years. It is reported that the net actual raised funds from this convertible bond were 648 million yuan, planned to be used for the construction of "Rushan City Urban Greening Landscape Construction and Upgrade Transformation PPP Project" and "Linshui County Yulin River Guanmen Stone to Caojia Beach and Its Tributaries Comprehensive Management PPP Project" (hereinafter referred to as "Linshui Project").
However, the Linshui Project, which was originally scheduled to be completed in October 2019, has been delayed multiple times, and the total investment scale was also reduced in December last year. A portion of the remaining raised funds, 184 million yuan, was used to permanently supplement the working capital of Lingnan Shares. As of October 11, 2024, the cumulative investment progress of the Linshui Project was only 50.23%, and the day of completion seemed to be far away. Lingnan Shares also disclosed in the 2024 interim report that the company's cumulative benefits of convertible bond investment projects and the promised benefit amounts were significantly different.
Similar to the situation of the investment projects, this convertible bond also has the possibility of "incomplete". Since August this year, Lingnan Shares has repeatedly announced that Lingnan convertible bonds cannot be redeemed on schedule. As of August 14th (the maturity date of the convertible bond), the remaining amount of "Lingnan convertible bond" was about 456 million yuan, and the company's existing monetary funds could not be paid. At the same time, the stock price of Lingnan Shares continued to be sluggish, always hovering around 1 yuan per share.
Faced with the predicament of Lingnan Shares, Zhongshan state-owned capital chose to take action. On August 17th, Lingnan Shares announced that Zhongshan City Talent Innovation and Entrepreneurship Eco-Park Service Co., Ltd. planned to partially purchase bonds from Lingnan convertible bond holders. So far, Zhongshan City Talent Innovation and Entrepreneurship Eco-Park Service Co., Ltd. has completed the relevant purchases, with a total purchase amount (including tax) of 146 million yuan.According to the information displayed on the Qichacha APP, Zhongshan Talent Innovation and Entrepreneurship Eco-Park Service Co., Ltd. is actually controlled by the State-owned Assets Supervision and Administration Commission of Zhongshan City. Meanwhile, the actual controller of Lingnan Shares is the Management Committee of Zhongshan Torch High-tech Industrial Development Zone (hereinafter referred to as "Zhongshan Torch Management Committee"), which also has a background in state-owned assets in Zhongshan.
With the support of state-owned capital assistance news, the stock price of Lingnan Shares has also been significantly boosted, with multiple days of trading at the upper limit, temporarily bidding farewell to the risk of delisting.
However, the crisis continues. On the evening of October 11th, Lingnan Shares announced that the company has used 156 million yuan of idle funds raised from the public issuance of convertible corporate bonds for temporary supplementation of working capital, which is due on October 16, 2024. The company is currently facing tight working capital and is expected to be unable to return it to the fundraising account on schedule.
Lingnan Shares also stated that, in view of the above situation, there may be bond investor litigation in the future. The company's debt overdue matters may affect the confidence of other creditors in the company, thereby further weakening the company's financing ability and exacerbating the company's capital tightness.
In fact, the crisis of Lingnan Shares is not a "cold day". 2018 was the beginning of the company's decline. Before 2018, Lingnan Shares expanded its main business from garden landscape to water affairs and water environment, ecological environment restoration and other fields, and the company's performance continued to grow, with net profit attributable to the mother company reaching a historical high of 779 million yuan in 2018.
However, affected by the tightening of the financing environment, the standardization of PPP projects and other factors, the performance of Lingnan Shares turned sharply downward. From 2019 to 2023, Lingnan Shares achieved operating income of 7.957 billion yuan, 6.651 billion yuan, 4.799 billion yuan, 2.569 billion yuan, and 2.13 billion yuan, respectively, with net profit attributable to the mother company of 328 million yuan, -4.6 billion yuan, 47 million yuan, -1.509 billion yuan, and -1.096 billion yuan. Asia Pacific (Group) Accounting Firm (Limited Liability Partnership) also issued a non-standard audit opinion on its financial report for 2023.
In the first half of this year, Lingnan Shares continued to lose money, achieving a net profit attributable to the mother company of -259 million yuan and a net profit of -258 million yuan after deducting non-recurring gains and losses. Looking at the business in detail, the construction and restoration of the ecological environment, water affairs and water environment management, and cultural tourism business accounted for 52.9%, 44.39%, and 2.71% of the total revenue, respectively, with gross profit rates of -1.55%, 8.44%, and 31.28%, respectively. Obviously, its pillar business is already in a loss state, and the cultural tourism business, which has the best profitability, has not yet grown and developed, and it is difficult to fill the performance gap.The dual pressures of poor performance and convertible bond defaults have exacerbated the financial situation of Lingnan Shares. As of the end of June 2024, Lingnan Shares had only 237 million yuan in book cash, with current assets of 9.424 billion yuan and current liabilities of 12.332 billion yuan. The debt-to-asset ratio has reached 86.43%, compared to 69.92% in the same period of 2018.
According to previous announcements by Lingnan Shares, as of August 16, 2024, the company and its controlling subsidiaries have newly added undisclosed litigation and arbitration matters within a consecutive twelve-month period, with a total case amount of approximately 242 million yuan. The cumulative case amount has reached 11.49% of the company's most recent audited net assets attributable to the parent company.
Who will take the bottom line?
Now, for Lingnan Shares and investors, who will take the bottom line has become the biggest question.
Previously, Lingnan Shares has repeatedly stated that it is seeking various channels and solutions, including collecting receivables, realizing assets, and seeking support and cooperation from shareholders or third parties, to protect the interests of bondholders. It is currently promoting and actively communicating with multiple parties, but the subsequent progress has a high degree of uncertainty.
However, looking at the fundamentals of Lingnan Shares and the current progress, it may be difficult for the company itself to get out of the crisis. From the market feedback, investors are pinning their hopes on the first major shareholder and the actual controller to provide assistance.
Public information shows that Yin Hongwei is the founder and original actual controller of Lingnan Shares. He has led Lingnan Shares through multiple mergers and acquisitions and led Lingnan Shares to a peak of performance. In September 2022, Yin Hongwei and others suddenly decided to transfer the control of Lingnan Shares to Zhongshan Huaying Industrial Investment Partnership (Limited Partnership) (hereinafter referred to as "Huaying Investment"), which is actually controlled by the Zhongshan Torch Management Committee.
It should be noted that Huaying Investment only accepted a 5% equity stake, and Yin Hongwei entrusted the voting rights corresponding to his remaining 17.32% equity to Huaying Investment. As of the end of June 2024, Yin Hongwei is still the first major shareholder of Lingnan Shares, with a shareholding ratio of 17.33%; Huaying Investment is the controlling shareholder of Lingnan Shares, with a controlling ratio of 22.85%.
iFinD data shows that the pledge ratio of Lingnan Shares held by Yin Hongwei has reached 93.2%. In addition, according to Lingnan Shares, all of Yin Hongwei's Lingnan Shares have been judicially frozen in rotation. From this perspective, Yin Hongwei's own situation is not optimistic.
So, will Zhongshan state-owned assets take action again? The answer is still unknown.In May of this year, during a performance briefing, Lingnan Shares indicated that to meet the company's operational working capital needs, Hua Ying Industrial Investment provided a total of 1 billion yuan in financial support to the company. Of this amount, 900 million yuan was originally scheduled to mature by the end of 2023, and 100 million yuan was set to mature in mid-2024. To further support the company's development and provide sufficient working capital, Hua Ying Industrial Investment not only agreed to extend the repayment deadlines for the two loans to the end of 2024 and mid-2025, respectively, but also proposed to offer an additional loan of up to 100 million yuan to assist the company in repaying bank loans.
On September 25th, Lingnan Shares announced again that Hua Ying Investment, a person acting in concert with Hua Ying Industrial Investment, had cumulatively increased its holdings in the company's shares by 14.7384 million shares through concentrated bidding transactions, accounting for 0.81% of the company's total share capital. Overall, the state-owned background may become a significant opportunity for Lingnan Shares to weather the crisis.
However, the reporter also noted that the initial equity transfer agreement included performance commitments. It mentioned three performance assessment indicators: first, the listed company's audited net profit attributable to the parent company, excluding non-recurring gains and losses, should not be less than 100 million yuan for the year 2023; second, the cumulative audited net profit attributable to the parent company, excluding non-recurring gains and losses, from 2023 to 2025 should not be less than 500 million yuan; third, the net cash flow from operating activities audited from 2023 to 2025 should be positive cumulatively. If the listed company fails to meet the above three assessment indicators, Yin Hongwei and others should make corresponding compensations in cash, while Lingnan Shares has already suffered a loss of 1.075 billion yuan in net profit excluding non-recurring gains and losses for the year 2023.
Regarding whether investors holding Lingnan convertible bonds can claim compensation, Xu Yuehui, a lawyer from Guangdong Huanyu Jingmao Law Firm, told the reporter that Lingnan Shares has already announced that it is expected to be unable to return to the raised funds account on time, which may constitute a breach of contract. Investors can communicate and coordinate with Lingnan Shares based on the convertible bond contract between both parties. If the coordination is unsuccessful, they can consider claiming compensation.