Image credit: Visual China

On December 2, Blue Whale News reported (by reporter Wang Xiaonan) that after a month and a half, Guangdong Songfa Ceramics (603268.SH) has released its restructuring proposal, aiming to become the "first privately-owned shipbuilding stock".

On December 2, Guangdong Songfa Ceramics released a restructuring proposal, planning to achieve a major asset swap and issuance of shares to purchase assets, with a price of 8.006 billion yuan for the 100% equity of Hengli Heavy Industries, which is controlled by the actual controller. The company also plans to issue shares to no more than 35 specific investors to raise matching funds. This proposal represents not only another transformation for Guangdong Songfa Ceramics but also an internal reallocation within the capital structure of the actual controllers, Chen Jianhua and Fan Hongwei.

After Guangdong Songfa Ceramics disclosed its restructuring plan on October 17, its stock price hit the limit up 14 times in a row, rising from 14.35 yuan per share to 54.53 yuan per share, a staggering increase of 2.8 times. However, on December 2, following the announcement of the proposal, Guangdong Songfa Ceramics opened at the limit down, closing at 48.08 yuan per share.

With the release of the restructuring proposal, it is proposed to invest 8.006 billion yuan into Hengli Heavy Industries.

According to the proposal, Guangdong Songfa Ceramics plans to swap all assets and operational liabilities it holds as of the evaluation base date (hereinafter referred to as "disposed assets") for the equivalent portion of the 50% equity of Hengli Heavy Industries held by Zhongkun Investment. As of September 30, 2024, the assessed value of the disposed assets is 0.513 billion yuan, with an appreciation rate of 12.63%; simultaneously, the assessed value of the assets being acquired, the 100% equity of Hengli Heavy Industries, is 8.006 billion yuan, with an appreciation rate of 167.84%.

At the same time, Guangdong Songfa Ceramics plans to purchase assets from the counterparty by issuing shares, specifically acquiring the gap portion of the major asset swap from Zhongkun Investment, and buying the remaining 50% equity of Hengli Heavy Industries from Suzhou Hengneng, Hengneng Investment, and Chen Jianhua, with this corresponding transaction priced at 7.493 billion yuan. Based on the share issuance price of 10.16 yuan per share, the total number of shares Guangdong Songfa Ceramics will issue this time is 0.738 billion shares.

Additionally, guangdong songfa ceramics plans to issue shares to no more than 35 specific investors to raise no more than 5 billion yuan in supporting funds. Of this, 3.5 billion yuan will be used for hengli petrochemical (dalian) co., ltd.'s green high-end equipment manufacturing project, 0.5 billion yuan will be used for hengli heavy industry group co., ltd.'s international ship research and development design center project (phase one), and 1 billion yuan will be used to repay debts to financial institutions.

This draft is not only another transformation of guangdong songfa ceramics but also an internal reallocation of assets by the actual controllers, Chen Jianhua and Fan Hongwei.

In 2018, hengli group acquired 37.428 million shares of guangdong songfa ceramics for a price of 0.82 billion yuan, becoming the controlling shareholder of the listed company. Chen Jianhua and Fan Hongwei directly and indirectly control all the shares of hengli group, making them the new actual controllers of guangdong songfa ceramics. As of September 30, hengli group holds 30.14% of guangdong songfa ceramics' shares.

Among the counterparts of this restructuring, Zhongkun Investment, Suzhou Hengneng, and Hengneng Investment are enterprises controlled by the actual controllers of guangdong songfa ceramics, Chen Jianhua and Fan Hongwei. After this transaction is completed, the controlling shareholder of guangdong songfa ceramics will change to Zhongkun Investment, holding 39.86%; Hengneng Investment, Suzhou Hengneng, Chen Jianhua, and hengli group will hold 15.24%, 15.24%, 15.24%, and 4.34% of the shares, respectively. The aforementioned entities will hold a total of 89.93% of guangdong songfa ceramics' shares, with Chen Jianhua and Fan Hongwei remaining the actual controllers, further strengthening their control.

Currently, guangdong songfa ceramics is primarily engaged in the research and development, production, and sales of daily ceramic products, with main products including daily porcelain, high-quality porcelain, and ceramic wine bottles. Through this transaction, it will strategically exit the daily ceramic product manufacturing industry, with hengli heavy industry becoming a wholly-owned subsidiary of the listed company, focusing on the research, production, and sales of ships and high-end equipment.

Established in July 2022, hengli heavy industry has not yet demonstrated the economies of scale in its ship manufacturing business, with relatively low and unstable profitability. From 2022 to September 2024, the revenues of hengli heavy industry were 19.5147 million yuan, 0.663 billion yuan, and 3.306 billion yuan, respectively; the net income was -26.1084 million yuan, 1.1371 million yuan, and 0.134 billion yuan.

Chen Jianhua once mentioned in an interview that the shipbuilding business will support hengli's crude oil product, coal, and finished product transportation. In July 2022, hengli group spent 2.11 billion yuan to acquire STX (dalian) assets, which was once the largest foreign-invested shipyard in china. Subsequently, in 2024, the ship manufacturing business led by Chen Jianhua gradually got on track. On July 7 this year, hengli group signed a relevant agreement with liaoning dalian to build the hengli heavy industry (dalian changxing island) industrial park, spending a total of 11.2 billion yuan to develop the shipbuilding business.

In addition to heavily investing in shipbuilding, the actual controllers behind hengli heavy industry's indirect entry into the capital markets have also promised performance commitments. In November 2024, guangdong songfa ceramics signed a performance compensation agreement with Zhongkun Investment, Hengneng Investment, Suzhou Hengneng, and Chen Jianhua, with the latter guaranteeing that hengli heavy industry's cumulative net income, excluding non-recurring items, will not be less than 4.8 billion yuan during the 2025-2027 period. If the target is not met, compensation will be prioritized through shares, with any shortfall compensated in cash.

Continued losses pose a risk of delisting for Guangdong Songfa Ceramics, relying solely on the financial support of its controlling shareholder.

After Hengli Group gained control of Guangdong Songfa Ceramics, the latter's performance has been continuously declining, with the company's revenue dropping from 0.591 billion yuan in 2018 to 0.206 billion yuan in 2023. Moreover, since 2021, Guangdong Songfa Ceramics has been in a loss situation, and to date, it has incurred a net income loss for three consecutive years, totaling 0.597 billion yuan.

Regarding the ongoing dismal performance, Guangdong Songfa Ceramics explained that the demand for its mid- to high-end daily porcelain products has been weak, with fewer export orders and severe low stock price competition in the domestic market, resulting in a decline in the company's revenue. The decrease in sales has led to reduced production, which has increased the amortized cost of per-unit product expenses, while product costs have risen.

In the first three quarters of 2024, Guangdong Songfa Ceramics' performance still showed no signs of improvement, with the company again losing 60.31 million yuan. If the audited total profit and loss, net income, or net income after excluding non-recurring gains and losses for the annual report of 2024 is negative and the revenue falls below 0.3 billion yuan, the company's stocks may face delisting risk warnings. Furthermore, this acquisition of 100% of Hengli Heavy Industry by Guangdong Songfa Ceramics might also be a measure to 'save the shell.'

In recent years, Guangdong Songfa Ceramics' ability to repay debts has shown an overall downward trend, with the debt-to-asset ratio rising from 54.19% in 2021 to 97.29% in the first three quarters of 2024. As of September 30, the long-term loss-making Guangdong Songfa Ceramics had only 4.038 million yuan in cash, and it only had 0.149 billion yuan in short-term loans.

Faced with ongoing losses, and a continual decrease in net assets, Guangdong Songfa Ceramics has persistently accepted financial aid from its controlling shareholder, Hengli Group, to maintain daily operations.

In 2021, Guangdong Songfa Ceramics received a total of 75 million yuan in financial aid from Hengli Group on three separate occasions for company working capital turnover. As the net income losses continued to expand, in 2022, Guangdong Songfa Ceramics applied for financial support from Hengli Group to increase to 0.1 billion yuan. After yearly growth, in April this year, the financial aid amount applied for by Guangdong Songfa Ceramics from Hengli Group expanded to 0.3 billion yuan.

At the same time Guangdong Songfa Ceramics launched its restructuring plan, the company also announced its application to its controlling shareholder for the fiscal year 2025 financial aid limit, planning to request a borrowing limit of no more than 0.3 billion yuan from Hengli Group, with an interest rate not higher than the loan market quotation rate, and without the need for the company to provide guarantees.

Although hengli petrochemical directly provided financial support, guangdong songfa ceramics still faces an expanding short-term funding gap. As of September 30, guangdong songfa ceramics had short-term liquid assets of only 0.291 billion yuan, with over half being inventory with a longer monetization cycle. Meanwhile, the company's current liabilities reached 0.507 billion yuan, with over half made up of other payables.

In recent years, hengli group has been frequently engaged in capital operations with its two listed companies.

According to public information, hengli group's industry coverage includes refining, petrochemicals, and polyester new materials, owning one of the largest global capacity PTA plants, as well as one of the largest functional fiber production bases and weaving companies in the world. Currently, hengli group owns listed companies hengli petrochemical and guangdong songfa ceramics, as well as a national equities exchange and quotations company, tongli tourism. Last year, the two subsidiaries of hengli group simultaneously engaged in capital operations.

In June 2023, guangdong songfa ceramics planned to acquire no less than 51% and no more than 76.92% of the equity in anhui liweneng through cash payment, intending to add a lithium battery energy storage business to its existing ceramics business. However, this crossover was terminated four months later. In July of the same year, hengli petrochemical announced plans to spin off its subsidiary, kanghui new materials, and achieve listing through a restructuring with dalian thermal power, but this spinoff plan was terminated in August.

Just a month and a half ago, on October 17, guangdong songfa ceramics disclosed a reorganization plan, and following the review, the company's stock price hit the limit up for 14 consecutive trading days, rising to 54.53 yuan per share, an increase of 2.8 times. However, when guangdong songfa ceramics disclosed the reorganization draft, aiming to become the 'first private shipbuilding stock,' on December 2, the stock opened at its limit down, closing at 48.08 yuan per share, with a total market value of 5.87 billion yuan.