Photo source: Visual China

Blue Whale financial reporter Xu Xiaochun

After dividing nearly 10 billion dollars of cash in five years, Fangda Special Steel “lost fire” for two consecutive years. Against the backdrop of the company's continuous profits and a balance of 6 billion dollars at the end of 2023, the Shanghai Stock Exchange raised questions about the rationality of Fangda Special Steel's unpaid dividends.

In 2021, Fangda Special Steel borrowed a large amount of money from banks on the grounds of capital reserves, and the company paid large dividends for the last time in the same year. Since then, the steel industry has entered a downward cycle, but Fangda Special Steel still has a large investment demand. In 2023, Fangda Special Steel even raised 3.1 billion yuan of convertible bonds to repay the debt. By the end of 2023, more than half of the company's balance of 6 billion yuan was a restricted asset. It is clear that Fangda Special Steel's dividend arrangement has not been approved by regulation or the market.

Fang Da's “extreme dividend” is being questioned

On March 15, Fangda Special Steel disclosed its annual report. The company achieved operating income of about 26.507 billion yuan last year, a decrease of 15.75% over the previous year, and achieved net profit of 689 million yuan during the same period, a year-on-year decrease of 35.16%. In 2023, the steel industry was still operating in a weak cycle. Most steel mills showed high costs and loss of performance. Fangda Special Steel faced a slight decline in profits in the special steel industry, resulting in a year-on-year decline in overall net profit.

Fangda Special Steel believes that in 2024, the international and domestic situation facing the steel industry is still complex and serious. Growth momentum is insufficient, supply issues are still prominent, and currently the company also needs capital to implement the company's various plans, so Fangda Special Steel decided not to distribute profits in 2023. To this end, on the evening of March 29, Fangda Special Steel received an inquiry letter from the Shanghai Stock Exchange.

In September 2009, Jiangxi Metallurgical Group publicly listed and transferred 57.97% of its state-owned shares in Nangang Steel. At this time, Fangda Group took over the shares of Nangang Steel Company and became the new controlling shareholder of Changli Co., Ltd. At the end of the year, Changli Co., Ltd. changed its name to Fangda Special Steel.

After two consecutive years of sharp increase in net profit, Fangda Special Steel paid a major dividend of 1.3 billion yuan for the first time. Since Fangda Group took over until 2016, Fangda Special Steel achieved a cumulative net profit of about 3.451 billion yuan. The total amount of cash dividends during the period was about 2.9 billion yuan, accounting for 84%.

In 2017, infrastructure investment in the main downstream consumer market of steel drove demand. Steel prices continued to rise, Fangda Special Steel's profits increased dramatically, and for the first time, the company began a major dividend of more than 2 billion yuan. In the five years from 2017 to 2021, Fangda Special Steel paid 4 dividends, with a total dividend of 9.543 billion yuan.

In 2022, the steel industry entered a downward cycle. According to Wind data, out of 51 listed companies in the A-share steel industry, 11 lost net profit, and 41 companies experienced a year-on-year decline in net profit, accounting for more than 80%. This year, Fangda Special Steel's net profit dropped sharply from 2,732 million yuan in 2021 to 926 million yuan, and Fangda Special Steel's net profit continued to narrow to 689 million yuan in 2023. Fangda Special Steel has also started zero dividends for two consecutive years.

Currently, Jiangxi West Steel Group Co., Ltd. (hereinafter referred to as “Fangda Steel”) is the shareholder of Fangda Special Steel Holdings. It directly holds 31.18% of the listed company's shares and holds 7.54% through its wholly-owned subsidiary Jiangxi Automobile Leaf Spring Co., Ltd., for a total shareholding ratio of 38.72%. At the same time, Fang Wei, the founder of “Fangda Series”, is the actual controller of Fangda Special Steel. According to the shareholding ratio calculation, out of the previous dividend of nearly 10 billion dollars, the company controlled by Fangwei took away about 3.7 billion yuan, providing certain benefits to the expansion of its capital map.

In addition to Fangda Special Steel, Fangwei also controls four listed companies held by Fangda Carbon, Northeast Pharmaceuticals, ZTE and HNA. Similar to Fangda Special Steel, the dividend policies of these four companies also have a shadow of Fangda Special Steel. For example, around 2017, Fangda Carbon's net profit continued to increase by three digits, so listed companies paid more than 3.4 billion yuan in cash dividends within two years. After the profit growth rate slowed, Fangda Carbon also had zero dividends in two years, until 2020, once again with a high dividend of 1,903 billion yuan.

In 2018 and 2019, Fangwei joined Northeast Pharmaceutical and ZTE. In recent years, Northeast Pharmaceuticals' net profit has re-entered growth. The company has accumulated dividends of 316 million yuan for four consecutive years. ZTE Commercial also mainly paid dividends during the profit growth period. Even in years of decline in profits, most of them had zero dividends.

Recently, regulatory requirements for listed companies not only give back to investors through cash dividends, but also require stable and predictable dividend policies. On March 15, the Securities Regulatory Commission issued “Opinions on Strengthening the Supervision of Listed Companies (Trial)”, which clearly requires listed companies to formulate active and stable cash dividend policies to promote dividends more than a year and enhance investor returns.

Obviously, Fangda Special Steel's dividend plan has not been regulated or approved by market investors.

Forefoot borrows money to pay dividends, backfoot raises capital to repay debt

As of December 31, 2023, Fangda Special Steel's cumulative undistributed profit was about 3,857 billion yuan, while the company had monetary capital of about 6.045 billion yuan on its books. In the context of high cash balances and many years of profit, Fangda Special Steel received zero dividends for two consecutive years after receiving 10 billion dollars, which was the main reason for regulatory inquiries. The Shanghai Stock Exchange mentioned in the inquiry letter whether the company had large sums of money idle.

However, while paying large dividends, Fangda Steel also increased bank loans due to capital reserve requirements. At the end of 2021, Fangda Steel's monetary fund balance was about 10.246 billion yuan, an increase of more than 58% over the previous year.

In March of last year, the board of directors of Fangda Special Steel reviewed and approved a plan to issue convertible bonds. The company plans to raise 3.1 billion yuan by issuing convertible bonds. Among them, 1,183 million yuan is planned to be used for energy saving and carbon reduction upgrading projects for ultra-high temperature subcritical power generation, about 303 million yuan for smart factory construction and transformation projects, and 684 million yuan for ultra-low emission environmental protection transformation projects. In addition, Fangda Special Steel earmarked an amount of 930 million yuan to repay debts.

According to Fangda Special Steel's forecast, the company will set aside 4 billion yuan for the acquisition of shares in Pinggang Steel and Dazhou Steel in the next three years. Currently, both companies are actually controlled by Dongfang Steel, the holding stock of Fangda Special Steel. Combined with the company's actual disposable capital and estimated net cash inflow, Fangda Special Steel has a capital gap of nearly 3.9 billion yuan.

Over the next six months, Fangda Special Steel received three letters of inquiry. Without exception, the Shanghai Stock Exchange raised questions about the company's need for financing. In September, Fangda Special Steel removed the fund-raising use of 930 million yuan to repay debts and lowered the amount raised to 1,796 billion yuan. However, in November, Fangda Special Steel's convertible bond program was aborted.

In the third round of inquiries, the Shanghai Stock Exchange raised questions about Fangda Special Steel's establishment of Nanchang Huxu and Huxu Investment. In this inquiry letter, the Shanghai Stock Exchange once again requested the company to explain issues such as the flow of capital invested in Nanchang Huxu.

In the first half of 2022, after borrowing money to complete a large dividend, Fangda Special Steel invested 4 billion yuan to jointly establish Nanchang Huxu with Fangda Carbon and other related parties. According to Fangda Special Steel's plan, the target assets were first purchased by private equity funds such as Nanchang Huxu in the early stages, and the underlying assets were transferred to the listed company at a fair price within 36 months, so as to avoid risks while at the same time achieving the goal of expanding the company's steel production capacity or improving the company's raw material procurement and channels. In 2022, Fangda Special Steel invested close to 5 billion yuan in cash.

By the end of 2023, out of Fangda Special Steel's 6 billion yuan monetary capital, 3.197 billion yuan was restricted assets. Among them, 3.197 billion yuan was pledged as security deposit for notes, and another 265,200 yuan was judicially frozen. At the same time, Fangda Special Steel's long-term and short-term debt has been reduced, but due to a decrease in cash received from selling products and providing labor services, the company's operating cash flow shrank by about 84% last year, which also caused the company to be unable to support the implementation of large dividends.