Will the dispute affect the restructuring?

Investor Network Zhang Wei

A lawsuit has once again made Dalian Thermal Power (hereinafter referred to as the 'company', 600719.SH), which is pushing for major asset restructuring, the focus of the market's attention.

At the end of May, Dalian Thermal Power issued a notice stating that it had received legal documents such as the 'Notice of Defense' and 'Civil Complaint' from Beijing High-speed Rail Technology Service Co., Ltd. (hereinafter referred to as 'Beijing High-speed Railway') delivered by the Dalian Railway Transportation Court, notifying the company to participate in the lawsuit as the defendant, with a total involved amount of RMB 60.99 million.

Public information shows that Beijing High-speed has sued Dalian Thermal Power and its parent company Dalian Clean Energy Group Co., Ltd. (hereinafter referred to as 'Clean Energy Group') many times since 2017. Dalian Thermal Power stated that it will actively defend itself. The final result, I believe, will be revealed soon.

The reason Dalian Thermal Power is attracting attention is its asset restructuring.

In September 2023, Dalian Thermal Power announced that it plans to sell all assets and liabilities to its parent company Clean Energy Group, and at the same time plans to purchase a 100% equity stake in Kanghui New Materials held by Hengli Petrochemical (600346.SH) and Hengli Chemical Fibre through the issuance of shares. The transaction is priced at RMB 10.153 billion.

In April of this year, Dalian Thermal Power announced that the major asset restructuring was under review and still required approval from the Shanghai Stock Exchange and registration with the China Securities Regulatory Commission. Whether the transaction can obtain the aforementioned approval, review or registration, as well as the time to obtain the relevant approval, review or registration, are uncertain.

It remains to be seen whether being a defendant will affect Dalian Thermal Power's asset restructuring.

The beginning and end of the dispute with Beijing High-speed.

In fact, the commercial contract dispute between Beijing High-speed and Dalian Thermal Power has been going on for a long time.

According to the announcement, in November 2016, Beijing High-speed and Dalian Thermal Power signed a contract, entrusting Beijing High-speed to be responsible for railway operation management such as coal transportation, railway maintenance, locomotive maintenance and other businesses of North Sea, East Sea and Xianghai Thermal Power Plants on behalf of Dalian Thermal Power.

Due to changes in transportation volume and changes in fuel prices, the comprehensive transportation cost of the arriving goods was agreed to be RMB 15/ton for the first year of the contract. Afterward, when the changes in transportation volume and fuel prices exceeded the changes set out in 2016 by more than 20%, the two parties made adjustments to the comprehensive transportation cost for the next year, based on the calculation method of Dalian Thermal Power's comprehensive transportation cost (per ton) in 2015 and 2016.

It is reported that the actual transportation volume between the two sides in 2016 was 1.1118 million tons, 74% of the contract's agreed 1.5 million tons (the basic annual transportation volume), and transportation volume has declined every year thereafter, with changes exceeding 20% each year. Afterwards, Beijing High-speed sent 5 letters urging Dalian Thermal Power to adjust the comprehensive transportation cost, but Dalian Thermal Power always settled at RMB 15/ton.

According to media reports, Beijing High-speed stated that, without modification of the contract by Dalian Thermal Power, and due to issues such as heating for residents, Beijing High-speed did not unilaterally reduce its transport capacity and cut investment in personnel and equipment maintenance, resulting in annual cost expenditures exceeding the freight paid by Dalian Thermal Power, ultimately causing huge losses.

As a result, Beijing High-speed initiated legal proceedings requesting Dalian Thermal Power to compensate it for its losses totaling RMB 60.49 million, plus an interest loss of RMB 0.5 million, totaling RMB 60.99 million. At the same time, Beijing High-speed requested that Dalian Thermal Power bear the litigation costs.

Public information shows that since 2017, Beijing High-speed has sued Dalian Thermal Power and its parent company Clean Energy Group many times. However, this time, Beijing High-speed's lawsuit target does not include Clean Energy Group, but only Dalian Thermal Power. As of the end of 2023, Dalian Thermal Power's net assets were RMB 548 million. Since the amount involved in the case (RMB 60.99 million) exceeds 10% of the company's net assets, it touches on the standard of disclosure for major lawsuits, and therefore the company issued a notice.

Dalian Thermal Power stated that the company's board of directors and management attach great importance to the lawsuit and are discussing defense schemes with lawyers. Since the case has not yet been heard, the impact of this lawsuit on the company's current or future profits is uncertain. The company will disclose the relevant information in a timely manner based on the progress of the lawsuit.

Asset restructuring is in progress.

In addition to the lawsuit with Beijing High-speed, the major asset restructuring of Dalian Thermal Power is also attracting attention.

According to the data, Dalian Thermal Power was established in 1993 and is the earliest enterprise in Dalian and even Northeast China to engage in combined heat and power generation and centralized heating, that is, to provide centralized heating through pipeline network while generating electricity. The company's products are divided into two categories: electricity and heat, including electricity, industrial steam, high-temperature water and residential heating, among others.

In July 1996, Dalian Thermal Power was listed on the Shanghai Stock Exchange and its main business has remained unchanged since then.

In September 2023, Dalian Thermal Power announced that it plans to sell all its assets and liabilities to Clean Energy Group; plans to purchase 100% equity of Kanghui New Materials from Hengli Petrochemical and Hengli Chemical Fiber by issuing shares; intends to privately issue shares to no more than 35 designated investors to raise no more than 3 billion yuan in matching funds.

It is reported that the transaction price for Dalian Thermal Power to sell all its assets and liabilities to its parent company, Clean Energy Group, is 652 million yuan, and the transaction price for purchasing Kanghui New Materials from Hengli Petrochemical and Hengli Chemical Fiber is 10.153 billion yuan. At the same time, the private placement of 3 billion yuan is used for the project of "annual production of 600,000 tons of functional polyester film, functional film".

According to the equity structure, before this transaction, Clean Energy Group was the largest shareholder of Dalian Thermal Power, holding 32.91% of the shares, and the remaining 67.09% belonged to the public shareholders. After this transaction, Hengli Petrochemical's shareholding in Dalian Thermal Power was 56.4%, Hengli Chemical Fiber's shareholding was 28.63%, Clean Energy Group's shareholding dropped to 4.93%, and the remaining 10.05% belonged to the public shareholders.

Enterprise search information shows that Hengli Petrochemical and Hengli Chemical Fiber respectively hold 66.33% and 33.67% of Kanghui New Materials' equity, with corresponding transaction prices of 6.735 billion yuan and 3.419 billion yuan, totaling 10.153 billion yuan. After the completion of the transaction, Hengli Petrochemical became the controlling shareholder of Dalian Thermal Power, and Chen Jianhua and Fan Hongwei became the actual controllers.

According to Wind information, Hengli Petrochemical is an international enterprise that develops full industry chains in refining, petrochemicals, polyester new materials and textiles. In 2023, Hengli Petrochemical's revenue reached 234.9 billion yuan, with a net income of 6.9 billion yuan.

Kanghui New Materials, 100% owned by Hengli Petrochemical and Hengli Chemical Fiber, is a high-tech enterprise focused on functional film materials, engineering plastics and biodegradable materials, with products including BOPET, PBT engineering plastics, functional polyester, among others. In 2023, Kanghui New Materials' revenue and net income were 6.9 billion yuan and 240 million yuan, respectively.

Currently, Hengli Petrochemical is still pushing forward the plan to list Kanghui New Materials through the restructuring with Dalian Thermal Power. In April of this year, Dalian Thermal Power announced that the major asset restructuring is under review and still needs to be approved by the Shanghai Stock Exchange and registered with the China Securities Regulatory Commission. The uncertainty exists in whether the transaction can obtain the above-mentioned approval, review or registration, and the time to obtain relevant approval, review or registration.

In the secondary market, the stock price of Dalian Thermal Power has fluctuated greatly recently. From the lowest point of 6.71 yuan in April, it has risen to 12.30 yuan within a month, nearly doubling, and has even got listed on the “Three Boards in a Row” on May 24th, 27th, and 28th. It fell for two consecutive days under the influence of being sued by Beijing Expressway, and then fell to the limit down on the 30th and continued to fall on the 31st. (Produced by Thoughtful Finance) ■