Xinhua Jin (600735): Enquiry Letter Was Asked Whether "To Transfer Funds To The Controlling Shareholder".

Recently, Shandong Xinhua Jin International Limited by Share Ltd (Xinhua Jin) has received the inquiry letter from Shanghai Stock Exchange. Prior to this, the Xinhua brocade announced that it intends to acquire 50% stake in Qingdao Sen Hui graphite Co., Ltd. (referred to as "Qingdao Sen Hui"), which is held by Shandong Xinhua Jinxin Mstar Technology Ltd (the "new material company") for 40 million 750 thousand yuan in cash, but the underlying assets will continue to stop production and net assets will be negative.

The Shanghai Stock Exchange calls for the necessity and reasonableness of the transaction in combination with the above situation. The main reason why Qingdao has failed to exploit the mining right since April 2009 is the current mining conditions. If the company still needs to invest the amount after the acquisition, there is still a risk that it will not be able to be exploited for a long time.

In addition, the Shanghai Stock Exchange also asked, "is there any transaction purpose for controlling shareholders' investment in mining negative assets that have not been exploited for a long time?"

According to the announcement, the net assets of the target company on September 2019 30 were audited as -2065 million yuan, and the value of all shareholders' equity was 81 million 590 thousand yuan, the value added amounted to 102 million 240 thousand yuan, and the appreciation rate was 495.07%. Net profit of -814 million yuan and -455 million yuan in 2018 and the first three quarters of 2019 respectively.

Shandong Lu Jin import and Export Group Co., Ltd. (referred to as "Lu Jin group") is the shareholder of Xinhua Jin, and Zhang Jianhua controls the company's actual controller through actual control. According to official website, since the establishment of Xinhua brook in 2002, the total import and export volume has reached 27 billion US dollars, and the annual import and export volume is among the best in Shandong's import and export enterprises. In 2018, the group achieved sales income of 35 billion 100 million yuan, ranking 479th in China's top 500 enterprises.

Song Qinghui, chief economist of Ching Hui think tank, told time finance that related transactions would bring good or bad effects to enterprises. On the beneficial side, the two parties have the existence of related relationship, or will use the power of administration to ensure the effective execution of commercial contracts, thereby saving transaction costs and improving the efficiency of business transactions. From a negative level, the related transactions, because of the use of administrative power to absorb transactions, may be unfair and impartial under the condition of imperfect competition, and infringe upon the legitimate rights and interests of shareholders.

Time and finance contacted the Xinhua office on the above issues, and the staff replied, "we will issue corresponding announcements before this Friday, whichever is based on the announcement information."

The underlying assets of the underlying company are negative.

Qingdao Sen Hui's residence is North Wang Ge Zhuang village, the legal representative Liu Shuwei, the registered capital is RMB 5 million yuan. Since April 2009, Qingdao Sen Hui has acquired mining rights from Qingdao high and rich graphite Co. Ltd. In March 2015, Liu Shuwei, a Qingdao Sen Hui shareholder, transferred its 50% stake in Qingdao SSE to the new material company. The new material company became the controlling shareholder of Qingdao SSE.

In December 2016, after the new mining license was issued by Qingdao Sen Hui, due to the serious drought in Pingdu City, production water could not be supplied in sufficient quantity. At that time, Qingdao Sen Hui did not have on-line circulating water equipment, which led to the failure to start production.

It was not until June 2019 that Qingdao Sen Hui began preparatory work for mining and pre stripped the mine. In order to find the best economic benefit of the concentrate grade, the industrial mineral processing experiment was carried out by using many years of stock ore. In November 18, 2019, Qingdao Sen Hui obtained the "safety production permit" issued by the safety supervision department. Up to now, Qingdao Sen Hui has obtained the "mining license" issued by the land and resources administration department and the "safety production permit" issued by the safety supervision department, which has the basic conditions for commencement of production.

Since the establishment of the target company has been suspended for 11 years, can Xinhua Jinhua take over the production and start production? The Shanghai Stock Exchange also asked for additional disclosures that whether the target companies have environmental penalties and environmental barriers related barriers to work will cause substantial obstacles to their production and operation.

Sky eye showed that in September 10, 2019, Qingdao Sen Hui had a record of environmental protection punishment. Because it did not take effective measures to prevent dust pollution, it was punished by Pingdu Environmental Protection Bureau.

In addition to 11 years of construction, Qingdao Sen Hui's net assets are also negative. According to the announcement, in 2017, 2018 and 2019 1-9, the company achieved operating income of 0 yuan, 1 million 200 thousand yuan, and 18 million 990 thousand yuan respectively, and realized net profit of -913 million yuan, -814 million yuan and -455 million yuan respectively. By the end of 9 2019, the net assets of the underlying company were -2065 million yuan.

The Shanghai stock exchange requires additional disclosures, the main value-added projects and their assessment details, the main basis and assumptions of the project evaluation increment, and whether the relevant assumptions are established. The detailed details of the future cash flow discount methods adopted by mining rights include the main data of the assessment period, mineral status, assumed cash flow and discount interest rate, and their rationality.

How to avoid competition in the same industry?

There is competition between Hai Zheng graphite, graphite technology company and Qingdao Sen Hui, which is controlled by Xinhua Jinhua Group.

However, in order to avoid competition in the industry, Xinhua Jinhui group agreed that within 12 months after the acquisition of "mining license", the company agreed that the new material company would transfer the 80% stake of Hai Zheng graphite to the listed company or no third party concerned, and agreed that the new material company should cancel the graphite technology company within 30 days after signing the Qingdao stock exchange's equity transfer agreement.

The Shanghai stock exchange requires disclosure whether the transaction violates the relevant commitments made by the controlling shareholders and actual controllers of the listed companies to avoid competition in the industry. The transactions and capital transactions between the company and the listed companies in Qingdao are controlled by the company's actual controllers.

It is noteworthy that the new material company made a performance commitment to the transaction. Qingdao Sen Hui realized net profit of 7 million 300 thousand yuan, 8 million 150 thousand yuan and 9 million 100 thousand yuan respectively from 2020 to 2022, and provided compensation calculation and share repurchase provision. Among them, the completion rate of the annual performance compensation in 2020 and 2021 is less than 80%, which will compensate for the difference between the actual net profit and the 80% of the current performance promise.

The Shanghai Stock Exchange requested additional disclosures, the rationality of the performance compensation calculation method in the year 2020 and 2021, combined with the recent financial operation of the target company, and explained the main basis for determining the above performance compensation indicators; whether the two parties agreed on effective safeguards for the parties concerned to perform effective compensation measures, and whether the other party has the ability to compensate.

Xinhua Jin 2019 three quarterly report shows that during the reporting period, the company achieved operating income of 1 billion 77 million yuan, an increase of 6.74% over the same period last year, and realized net profit of 69 million, an increase of 18.97% over the same period and a 0.1835 yuan earnings per share. Up to now, the listed company's controlling shareholder, Shandong Lu Jin import and Export Group Co., Ltd. holds 186 million shares, accounting for 49.34% of the total share capital of the company, and accumulatively pledged 163 million shares, accounting for 87.59% of the shares of its holding company.