Insight Into Huayi Brothers' Dilemma

Both Huayi Brothers, a listed company, and Wang Zhongjun and Wang Zhonglei, the major shareholders, are all in short of money.

On the evening of May 12, Huayi Brothers (300027. SZ) announced that, according to the actual situation and actual needs of the company's development, the company submitted to the Shenzhen Stock Exchange on May 11, 2021 the application of Huayi Brothers Media Co., Ltd. for suspending the examination of issuing shares to specific objects and listing on the gem. The application suspension time is no more than three months, And on May 11, 2021, the Shenzhen Stock Exchange agreed to suspend the audit.

This means that the process of "invigorating blood" is temporarily suspended.

Just before that, on May 10, Huayi Brothers and Huayi Brothers (Tianjin) Investment Co., Ltd. were exposed to be enforced for 300 million yuan.

The financial problems of Huayi Brothers have aroused concern again.

What has Huayi Brothers experienced from the "A-share film and television first share" to the frequent financial problems now and again?

Brother is short of money

Huayi Brothers have been in constant news recently.

On May 10, a news report that Wang Zhongjun and Wang Zhonglei were forced to pay 300 million yuan was widely spread.

On May 7, Wang Zhongjun, Wang Zhonglei and Huayi Brothers (Tianjin) Investment Co., Ltd. under their control were listed by the Beijing Second Intermediate People's court as the subject of execution, with a target of 304 million yuan, according to the China executive information disclosure network.

Huayi Brothers are short of money, which is not news in the cold winter of film and television. Previously, it was reported that Wang Zhongjun sold paintings and houses, but this time it was forced to be enforced, which aroused more concerns from the outside world.

On the evening of May 10, Huayi Brothers issued a risk warning announcement, saying that after understanding the situation between the company and the actual controller, the item was derived from the personal investment of the actual controller and had no connection with the listed company. The actual controller has not yet received the specific documents served by the court. At present, the actual controller is communicating with relevant parties to negotiate solutions. As of the disclosure date of this announcement, there is no judicial freezing of the shares of the listed company held by the actual controller.

Although the listed companies emphasize that the forced execution of 300 million yuan by Wang Zhongjun and Wang Zhonglei has nothing to do with the listed companies, a hidden worry is that the two brothers are the first and third largest shareholders of Huayi Brothers, and their capital status will inevitably affect the stability of the listed company's stock rights. Another fact mentioned again is that both listed companies and Huayi Brothers are in a tight money situation.

On May 11, Huayi Brothers issued a risk warning progress announcement, saying that as of the date of this announcement, through communication and consultation between the actual controller and the relevant parties, both parties have signed a settlement agreement and submitted it to the Beijing Second Intermediate People's court for filing. Party B Wang Zhongjun, Wang Zhonglei and Huayi Brothers (Tianjin) Investment Co., Ltd. confirm and voluntarily promise to pay Party A China Minsheng Trust Co., Ltd. according to the repayment plan agreed by both parties, and increase the provision of credit enhancement measures. If Party B fails to make full payment in accordance with the agreement, Party A shall have the right to require Party B to bear the liability for breach of contract and continue to resume the execution of the court.

However, on May 12, Huayi Brothers issued an announcement to suspend the audit of the fixed increase of RMB 2.29 billion.

The announcement said that Huayi Brothers' application for issuing shares to specific objects was accepted by Shenzhen Stock Exchange on December 31, 2020. According to the actual situation and actual needs of the company's development, the company submitted to the Shenzhen Stock Exchange on May 11, 2021 the application of Huayi Brothers Media Co., Ltd. on issuing shares to specific objects and listing on the gem. The suspension time of the application is no more than three months, and the reply of Shenzhen Stock Exchange on May 11, 2021 agreeing to suspend the examination was received.

Huayi Brothers said that the company is actively promoting the handling of issues related to the issuance, and exploring solutions more in line with the company's long-term strategic deployment and sustainable development on the premise of fully protecting the interests of all shareholders of the listed company. After the completion of relevant work, the company will apply to Shenzhen stock exchange for resumption of audit.

The fixed increase plan dates back to April 28, 2020. On the same day, Huayi Brothers issued a plan for non-public offering of A-shares, saying that it planned to issue 2.78 yuan per share, with a total of 824 million shares, and the total amount of funds raised would not exceed 2.29 billion yuan, which would be used to supplement working capital and repay loans after deducting the issue expenses. The issuing objects are Ali pictures, Tencent computer, sunshine life insurance, Xiangshan Dacheng Tianxia, Yuyuan shares, Minghe group, Xintai life insurance, Sanli Jingkong and Shandong Jingda. All the issuing objects are subscribed in cash. Alibaba pictures and Tencent computer's subscription for the shares of the non-public offering constitutes related party transactions.

This must have been adjusted. On the evening of December 7, 2020, Huayi Brothers announced that the company has adjusted the pricing method and issue price, number of issues, issuance objects and subscription methods, lock-in period and use of raised funds. After the adjustment, Huayi Brothers will lock the price to bid. Before the adjustment, the issue price was 2.78 yuan / share, and the adjusted issue price was "no less than 80% of the average trading price of the company's stock 20 trading days before the pricing benchmark date". The number of a shares issued before the adjustment is no more than 824 million shares, and the number of issued shares after adjustment is no more than 833 million shares.

The suspension of fixed increase means that Huayi Brothers' long-awaited "blood tonic" will be forced to delay, and Huayi Brothers' debt repayment pressure is imminent.

According to the first quarter report, as of the end of the first quarter of 2021, Huayi Brothers had a monetary capital of 644 million yuan. At the same time, it had short-term loans of 1.915 billion yuan, non current liabilities due within one year of 46 million yuan, long-term loans of 1.171 billion yuan, and bonds payable of 222 million yuan, with a total of 3.354 billion yuan of long-term and short-term debts.

Why are Huayi Brothers in such a financial dilemma?

Huayi's "deformation"

On May 13, Huayi Brothers closed at 3.68 yuan per share, with a total market value of 10.2 billion yuan. During the bull market in 2015, as the first listed company in A-share film and television industry, "big brother" Huayi Brothers had a market value of more than 80 billion yuan.

In the ten years of wild growth in the mainland film and television industry, the short-term and high return characteristics of film and television works made Huayi, an early entrant, catch up with the first batch of film and television dividends.

In 2009, Huayi Brothers passed the examination and approval of the China Securities Regulatory Commission's gem, becoming the first film and television industry stock to be listed and issued in China. In the year of listing, the company realized operating revenue of 604 million yuan and net profit of 85 million yuan. By 2015, the operating income and net profit reached 3.874 billion yuan and 976 million yuan respectively, with an increase of 5.41 times and 10.48 times in six years.

However, since 2016, Huayi Brothers' operating performance has declined significantly. From 2018 to 2020, Huayi Brothers has made huge losses for three consecutive years, with a total loss of 6.195 billion yuan.

Among them, in addition to the overall change of the film and television industry, there are two factors worthy of attention.

One is the deep binding of stars and the large-scale merger and acquisition of its shell companies. Recently, the gambling results between Huayi Brothers and Feng Xiaogang have attracted much attention. Feng Xiaogang needs to compensate Huayi Brothers for his gambling failure, but this is not good news for Huayi Brothers. This means that Huayi Brothers' biggest "cash cow" is not up to expectations. Moreover, the end of the bet period also means greater variables in the future.

Second, Huayi Brothers in recent years to carry out real entertainment business layout. The cold winter of the industry, coupled with the high investment of live entertainment, and the long-term return of investment cost of more than 10 years, add to Huayi Brothers' difficult cash flow.

Lose the game

"Half of Huayi's world was won by Feng Xiaogang." Wang Zhonglei once said.

Recently, the gambling results between Huayi Brothers and Feng Xiaogang have aroused concern. According to the annual report, Zhejiang Dongyang Meila Media Co., Ltd. (hereinafter referred to as "Dongyang Latin America") under Feng Xiaogang's banner needs to compensate Huayi Brothers by 168 million yuan according to the agreement due to its failure to fulfill its performance commitment.

This money is very important to Huayi Brothers, who are short of cash flow. However, Feng Xiaogang's failure in gambling is not good news for Huayi Brothers.

Five years ago, Huayi Brothers purchased 70% of Feng Xiaogang's Dongyang Latin America shares for 1.05 billion yuan, and signed a gambling agreement. According to the agreement, even if Dongyang Meila is completely unprofitable within five years, Feng Xiaogang "only" needs to compensate 674 million yuan, which is lower than the purchase amount of Huayi Brothers.

In the past five years, Feng Xiaogang failed to meet the net profit requirement for two years, and accumulated compensation of 235 million yuan. According to this calculation, Feng Xiaogang "made" 800 million.

For Huayi Brothers, the market value has evaporated by more than 80% since the peak in 2015, and the accumulated net profit loss of parent company in recent three years has exceeded 6 billion yuan, which has been in operation difficulties.

"Deep binding" Feng Xiaogang, which is the most widely watched merger and acquisition of Huayi Brothers, is not the only one.

In October 2015, Huayi acquired 70% equity of Zhejiang Dongyang Haohan film and television entertainment company with a premium of 756 million yuan. At that time, the company was only established for one day, with a registered capital of 10 million yuan, which was a typical "shell company".

In addition, Huayi Brothers also paid 252 million yuan in cash to purchase 70% of the equity of Zhejiang Changsheng, which is only three months old. This is also a super high premium transaction, with a premium rate of nearly 36 times.

Behind Huayi Brothers' expensive acquisition of these shell companies, it is aimed at the operators behind these companies - famous directors and actors Li Chen, Feng Shaofeng, angelababy, Du Chun, Zhang Guoli, etc. The binding of the company with famous directors and actors means close cooperation in film production, exchange of resources and, more importantly, financial interests.

The above-mentioned acquisition has signed a performance gambling agreement. However, with the tax storm in the film and television industry caused by "mobile phone 2" and the suspension of the film industry caused by the epidemic situation, the income of the subsidiary is also under pressure. The substantial impairment of goodwill and other assets caused by the breach of the target performance has also pushed Huayi into an immeasurable financial dilemma.

The deep binding with famous directors and actors is an adventure game, which brings glory and challenges to Huayi Brothers.

The value of a movie is not only judged by the box office, but for the listed companies, it needs to rely on the profits from the box office. From the box office results, Feng Xiaogang seems to be gradually losing the appeal to the box office.

Dispute on "live entertainment"

At the celebration of the 20th anniversary of its establishment in 2014, Wang Zhonglei proposed that Huayi Brothers should "go to film simplification", and Feng Xiaogang coaxed: "I decided not to be a director, but to follow the Chinese army to engage in real estate."

In some people's opinion, this decision has become the key turning point of Huayi Brothers' films from prosperity to decline - Huayi Brothers began to lose the basic film and television disc.

Before that, the company was positioned as a "film and television entertainment" company. After 2014, film and television entertainment, internet entertainment and brand authorization have become the new "troika" of Huayi Brothers. Correspondingly, films and derivatives, TV series and derivatives, entertainer agents and cinemas have become sub items of "film and television entertainment", and the revenue and cost will not be disclosed separately.

Wang Zhongjun's dream is to create a Chinese Disney.

In the same year, FengXiaogang film commune, the first real-life entertainment project built by Huayi Brothers with 5.5 billion yuan, was put into operation. The project covers an area of 1400 mu, and the company indirectly holds 18.9% of the shares. The scenic spot takes the classic movie scene directed by Feng Xiaogang as the architectural planning element, and is committed to building a comprehensive entertainment commercial block. Since then, the company began large-scale equity pledge operation, and through capital operation, wantonly acquired other enterprises and built film town.

At the same time, the company's film and television sector is on a "downhill road.". In 2014, Huayi Brothers lost the title of box office champion, and in the field of film distribution, Huayi fell from the traditional top three to eighth.

Since 2014, Huayi Brothers' TV series revenue began to be lower than that of games. During the three years from 2015 to 2017, Huayi Brothers' net profit began to decline as a whole.

But the big investment in live entertainment continues.

In August 2018, Huayi Brothers film world (Suzhou) opened with a total investment of 3.5 billion yuan; In December 2018, Huayi Brothers film town (Changsha) also opened to the outside world, with a total investment of more than 3 billion yuan.

From the financial data, in 2018, the revenue of brand authorization and live entertainment of the company was only 150 million yuan, accounting for 3.84% of the revenue, with a year-on-year decrease of 42%.

Perhaps it was the decline in performance that made Wang Zhongjun reconsider his decision. In 2018, Wang Zhongjun sent an open letter saying that he would participate in all the film projects of the company and comprehensively strengthen the control over the film business, so as to announce that Huayi Brothers will return to the main film industry.

However, in 2018, "black swan" came. With Cui Yongyuan questioning the "yin yang contract" of Feng Xiaogang and Fan Bingbing caused by "mobile phone 2", the tax storm swept through the whole film and television circle, and Huayi Brothers, the main controller of mobile phone 2, was in the center of the storm. In 2018, Huayi Brothers ushered in its first loss in 10 years of listing.

In the interview program, Wang Zhongjun admitted that this is an important turning point for Huayi Brothers.

Since then, in 2019, the box office of Feng Xiaogang's film "only Yun knows" was less than 200 million, and the other major projects were zero. CEO Wang Zhonglei named and criticized relevant responsible persons: such a mistake can be called fatal.

With the outbreak of the epidemic in 2020, the global film and television industry has suffered heavy losses. "Eight hundred" won the first place in the global box office, but for Huayi Brothers, who have already suffered huge losses, this is just a drop in the bucket.

"Feng Xiaogang effect" weakened, Huayi Brothers film business has not yet recovered, and large investment in real entertainment projects, can not bring much profit in the short term.

In an interview program earlier this year, Wang Zhongjun still said that he did not regret the decision to invest in live entertainment projects.

However, the cash flow problem is imminent. If the situation becomes more severe, the question before us may be "whose Huayi Brothers.".

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