Xinhuajin (600735): Receive The Supervision Work Letter Of Shanghai Stock Exchange

Xinhua Jin (600735) announced in the evening of June 27, 2023 that the company received the Supervisory Working Letter on the Acquisition of Equity and Related Transactions of Shandong Xinhua Jin International Co., Ltd. (SZGH [2023] No. 0766) (hereinafter referred to as the "Working Letter") from Shanghai Stock Exchange (hereinafter referred to as the "Shanghai Stock Exchange") on June 27, 2023. According to relevant regulations, the contents of the Working Letter are hereby announced as follows:

Your company recently announced that it plans to purchase 100% of the equity of New Material Company held by the indirect controlling shareholder Xinhua Jin Group with cash of 161 million yuan. The new material company, the subject of the transaction, did not carry out production and operation activities, and its main assets were 80% equity of Haizheng Graphite. As of March 31, 2023, the book value of the net assets of New Material Company was 34.06 million yuan, and the evaluation result of the value of all shareholders' equity was 161 million yuan, with a appreciation rate of 373%. In accordance with Article 13.1.1 of the Stock Listing Rules of the Exchange, we hereby request your company and relevant parties to verify and supplement the following matters.

1. The announcement disclosed that Haizheng Graphite is still in the preliminary stage of mine development and construction, and has not yet obtained the safety production license and other qualifications necessary for production and operation. It is expected that the conditions for starting production will not be met until December 31, 2025. The company is requested to make supplementary disclosure: (1) The reason and rationality of this acquisition when Haizheng Graphite has not yet met the conditions for starting production; (2) Whether there are substantial obstacles to the relevant qualification certificates and expected acquisition date that Haizheng Graphite needs to obtain in order to achieve normal production and operation status.

2. The announcement disclosed that the large increase in the evaluation of this transaction was mainly due to the appreciation of the evaluation of the mining right owned by Haizheng Graphite, which was evaluated by the discounted future cash flow method, with an evaluation value of 179 million yuan. According to the mining right evaluation report, the mining right assets owned by Haizheng Graphite are expected to enter the production period in April 2025, and the net profit is expected to be 28.39 million yuan in 2026. The net profit attributable to New Material Company is 22.71 million yuan based on 80% shareholding ratio. In the performance commitment clause set in this transaction, the counterparty, Xinhuajin Group, promised that the net profit of New Material Company before and after deduction of non profits in 2026, whichever is lower, would not be less than 8 million yuan, and the promised performance was far lower than the estimated value.

The company is requested to make supplementary disclosure: (1) the cost of acquiring the target company by the counterparty and the capital investment up to now, and explain the rationality of the transaction price in combination with the difference between the total investment amount and the transaction price; (2) In combination with factors such as the commencement time of mining assets and the acquisition of qualification certificates, it is explained whether the relevant time costs and uncertainties have been fully considered in the evaluation of mining right assets; (3) Explain the main basis for setting the performance compensation index, the reason why the performance compensation index is far lower than the evaluation forecast and its rationality, and fully evaluate whether the relevant performance commitment arrangements match the overvaluation of the underlying assets and whether it is conducive to protecting the interests of listed companies;

(4) In combination with the consideration payment method and the credit and asset status of the counterparty, explain whether the counterparty has the ability to perform compensation obligations.

3. It is disclosed in the announcement that this transaction is subject to equity repurchase terms. If Xinhuajin Group cannot ensure that Haizheng Graphite will obtain all necessary qualification certificates and meet the conditions for commencement before December 31, 2025, the company has the right to require Xinhuajin Group to repurchase 100% of the target company's equity. Please explain whether this transaction constitutes financial assistance to the controlling shareholders in combination with the above issues and the terms of share repurchase.

All directors, supervisors and senior managers of your company are requested to be diligent and responsible, earnestly implement the requirements of this working letter, reply to our department in writing within 5 trading days from the receipt of this letter, and perform the obligation of information disclosure as required.