As the only company in China to list A shares, B shares and H shares at the same time, Chenming Paper has been "a little annoyed" recently. The leading papermaking company, with a market capitalization of about 20 billion and total assets of more than 80 billion, is being filed for winding up by creditors in Hong Kong because of a debt of less than Rmb200m.

What the heck is winding up? Chenming Paper has its place of registration and main business in the mainland, so why should it file a winding-up application in Hong Kong? What kind of situation will investors face once the winding-up application is approved? Will the winding-up application be successful?

With these questions, we might as well "masturbate" about the liquidation. Chenming Paper, which holds tens of billions of dollars in cash, has little chance of eventually being liquidated because of a debt of more than 100 billion yuan. However, in Hong Kong stocks and US stocks, there are not a small number of listed companies that have been wound up for various reasons. once they run into a company that has been wound up, the loss is often comparable to stepping on thousands of shares.

Go south or go out to sea to look for gold, some "tricks" must be known.

Chenming Paper received a winding-up petition, and creditors demanded to repay 170 million of the debt.

Chenming Paper Co., Ltd. was founded in 1958, with papermaking, forestry and finance as its main business, and its main products are coated paper, double adhesive tape and other cultural paper; at present, it is the only listed company in the country that owns A, B and H stocks at the same time. Its actual control is Shandong Shouguang State-owned assets Supervision and Administration Bureau.

To put it simply, Chenming Paper is a domestic company controlled by local state-owned assets. Then why do creditors file winding-up applications in Hong Kong?

This stems from the special laws and regulations of Hong Kong. According to section 178 of the companies (Winding-up and Miscellaneous provisions) Ordinance of the Hong Kong Securities and Futures Commission, within three weeks after the service of the demand, the company still neglects to pay the sum, or to provide security for the money to the reasonable satisfaction of the creditor or to settle it to the reasonable satisfaction of the creditor will be regarded as the company's inability to pay its debts. In such a case, the company may be wound up by the court. In addition, the Ordinance provides that the commencement of a winding up by the court shall be counted from the time when the winding-up petition is presented.

Liquidation is undoubtedly a major blow to a listed company. Chenming Paper shares fell sharply after the announcement of the winding-up petition by creditors.

Chenming Paper's previous announcement showed that the winding-up petition filed by creditors to the court will be heard in the Hong Kong High Court on the morning of August 23, 2017, and it will be up to the court to decide whether the winding-up petition will be approved. After the announcement, Chenming Paper H shares and A shares both fell, of which H shares fell by more than 5%. The following is the trend chart of Chenming Paper's H shares after the news was announced:

It has been more than half a year since Chenming Paper encountered a winding-up application.

On October 18, 2016, the creditor issued a legal claim to Chenming Paper, asking it to pay 167 million of the contract compensation and related legal fees and arbitration fees, with a total amount of about 174 million. As the debt has not been paid more than 21 days after the statutory demand has been issued, the debtor has filed a winding-up petition against Chenming Paper through the High Court of Hong Kong. During this period, Chenming Paper applied for an injunction on November 7, 2016 to prohibit its creditors from filing any potential winding-up petitions. Recently, the notice of Chenming Paper shows that its injunction was rejected and the court will hold a winding-up hearing.

The Chenming Paper notice shows that any disposition of the property of the company after the commencement of the winding up, as well as any transfer of shares or any change in the status of members of the company, shall be null and void unless the court orders otherwise. This also means that once the liquidation of Chenming Paper begins, its current share trading will be null and void.

With plenty of cash in hand, the possibility of liquidation is low.

The stock price performance and operating performance of Chenming Paper in the past two years are quite good.

In the context of the overall downturn of A shares, the stock price trend of Chenming Paper is eye-catching. In the year from June 20, 2016 to June 20, 2017, Chenming A shares rose 70.81%, Chenming B shares rose 85.45%, and Chenming H shares rose 79.37%.

Previously, the paper industry has been in the doldrums as a result of overcapacity. But since the second half of 2016, paper prices have continued to rise. According to the financial report, Chenming Paper's total revenue in the first quarter of 2017 was 6.274 billion, up 26.7% from a year earlier, and its net profit was 702 million, up 74.7% from a year earlier. In fact, the net profit of Chenming Paper in 2016 hit an all-time high in more than a decade. The following picture shows the total revenue and net profit of Chenming Paper over the years drawn by Bread Finance according to the financial report:

Soochow Securities reported that the prices of cultural paper and coated paper continued to rise in the second quarter of this year; by the end of June this year, all paper enterprises need to complete the application for sewage permits, which will speed up the elimination of backward production capacity; the prosperity of the paper industry will continue to improve.

As of the end of March this year, Chenming Paper had a monetary capital of 11.238 billion yuan, total assets of 87.326 billion yuan, a debt ratio of 73.43%, and less than 200 million debts involved in winding-up applications. From a financial point of view, Chenming Paper's current assets and performance are sufficient to cover the debt, which may cause the winding-up petition to be revoked, rejected or permanently shelved. This means that the probability of Chenming Paper being wound up is extremely low.

Even though Hong Kong laws have various provisions for the protection of creditors, it is not easy to wind up or seal up listed companies. When Huishan Dairy was exposed to financial fraud and faced with insolvency, Gopei assets (Huishan Dairy creditors) applied to the Hong Kong court to seize Huishan Dairy, Yang Kai, and other assets were rejected.

Order winding up: this risk of overseas investment must be paid attention to.

But at the same time, there are many cases in which Hong Kong stocks are petitioned for winding up and eventually wound up for various reasons.

On October 24, 2016, Hong Kong-listed Dejin Resources announced that the Hong Kong High Court had ordered it to be wound up. Dejin Resources announced on August 19th that the company controlled by Miu Enlai claimed HK $339 million from it and petitioned it for winding up.

Major shareholders who damage the rights and interests of minority shareholders will also be subject to a winding-up petition. On May 26, China Animal Health products, which is listed in Hong Kong, announced that it had received a winding-up petition from Lilly Nederland Holding BV, alleging that Wang Yangang, chief executive officer and executive director of China Animal Health products, had handled the affairs of the company and its subsidiaries in a manner that unfairly harmed the interests of the company and its minority shareholders, including the petitioner, and the petitioner demanded that the company be wound up.

As early as March 2015, the trading of Chinese animal health products was suspended for a long time because it failed to disclose its annual report on time, and in December of that year, its announcement said that there had been a strange incident in which a truck of financial data was stolen. The company, which had a market capitalization of nearly HK $10 billion before the suspension, is likely to be wound up this time.

In addition, companies listed in Hong Kong will face the fate of long-term suspension or even liquidation once they are found to have made financial fraud. At present, China Optical Fiber and others are being wound up because of financial fraud.

In Europe and the United States and other securities markets, once listed companies are found to have made financial fraud, they will face serious punishment. In 2001, the financial fraud of Enron was exposed, and the Securities and Exchange Commission immediately intervened in the investigation. After the facts were confirmed, Enron paid a heavy price. Enron was fined $500m, its CEO was sentenced to 24 years in prison and fined, and Enron investors received as much as $7 billion in settlement damages through class action.

The probability that Chenming Paper will eventually be wound up is very low, but the volatility of its share price shows that the capital market attaches great importance to this event.

Some risks happen to others is a story, happen to yourself is an accident.

Author of this article: bread Finance

Disclaimer: this article is for information sharing only and does not constitute any investment advice to anyone.