Hawkeye core view: two hidden reefs of goodwill, that is, earnings management is easy to manipulate and credit risk is easy to underestimate. In the case of low growth or deterioration of performance, high goodwill is easy to trigger earnings management motivation, impairment of goodwill or increase the uncertainty of performance; goodwill does not have the ability to realize, and high goodwill is easy to underestimate the level of debt.
Listed companies with high goodwill may become the focus of regulatory risk management.
Recently, the Shenzhen Stock Exchange issued the "measures for the classified Management of listed companies" (hereinafter referred to as the "measures"), in which the high goodwill of listed companies is listed as a risk concern category to attract market attention. The measures require that companies whose goodwill accounts for more than 50% of their net assets at the end of the period or whose performance commitments have not been completed during the performance commitment period or whose performance has fallen sharply in the year after the performance commitment period shall not be classified as normal companies.
As of August 31, 2020, 3977 A-share listed companies have released their interim reports for 2020, with a total goodwill of 1.3 trillion at the end of the reporting period. In terms of absolute value, the absolute goodwill of the pharmaceutical and biological industry, the media industry and the computer industry are 147.351 billion yuan, 118.716 billion yuan and 107.47 billion yuan respectively. According to the ratio of goodwill to net assets, the highest proportion of business is in case-level media industry, leisure service industry, computer industry, household appliance industry and pharmaceutical and biological industry. The proportion of net assets of goodwill is 18.03%, 17.54%, 16.14%, 12.27% and 10.22%, respectively.
Source: wind Research Institute of Sina Financial listed companies
Two hidden reefs of goodwill: easy manipulation of earnings management and easy underestimation of credit risk
The issue of goodwill has also become a long-standing problem for investors and regulators in recent years. Under the trend of mergers and acquisitions in 2015, the goodwill of A-share listed companies has increased significantly, from 211.1 billion yuan at the end of 2013 to 642.7 billion yuan at the end of 2015, breaking through trillion yuan in 2016.
With the expiration of performance commitments, the impairment of goodwill has become the fuse of listed companies' performance. According to relevant statistics, in 2014GemOnly 8.6 per cent of listed companies failed to meet their performance commitments, rising to 23.8 per cent in 2015. Subsequently, the proportion of acquired companies that failed to fulfill their performance commitments became higher and higher. In 2017, the proportion of growth Enterprise Market performance commitments that fell short of expectations rose to 49.5%.
With regard to the possible problems of goodwill impairment, the CSRC also issued Accounting Supervision risk Tip No. 8-Goodwill impairment on November 16, 2018, prompting the accounting regulatory risks of goodwill impairment and giving seven signs of goodwill impairment. The main contents of the tips are as follows:
(1) the cash flow or operating profit continues to deteriorate or significantly lower than expected at the time of the formation of goodwill, especially the performance of the acquiree that has not fulfilled its promise; (2) overcapacity in the industry, obvious adverse changes have taken place in related industrial policies, market conditions of products and services, or the degree of market competition. (3) the related business has low technical barriers or rapid technological progress, products and services are easy to be imitated or upgraded, and the profit status quo is difficult to maintain; (4) obvious adverse changes have taken place in the core team, and it is difficult to recover in the short term. (5) Goodwill, which is closely related to specific administrative license, franchise qualification, specific contract project and other qualifications, the market practice of the relevant qualifications has changed, such as liberalizing the administrative license of operating qualifications, franchising or the expiration of specific contracts, etc. (6) due to the change of objective environment, the rate of return on market investment has been significantly increased in the current period, and there is no evidence that it will decline in the short term. (7) the risks of the countries or regions where they operate are prominent, such as foreign exchange control, hyperinflation, macroeconomic deterioration and so on.
The above guidance may be relatively suitable for accounting firms and other professional institutions, because of information, professional and other threshold, there seems to be some barriers for general investors. So how can ordinary investors identify goodwill risk in advance? We may be able to identify the possible risks of listed companies in advance from the goodwill measurement methods and attributes.
First of all, in the follow-up measurement of goodwill, A-share listed companies adopt the impairment test method, which stipulates that the enterprise should test the goodwill impairment at the end of each fiscal year, and calculate the impairment loss to the impairment part. Companies generally have greater discretion on whether, when and how much goodwill is impaired, at the same time, goodwill is different from amortization, and the loss of impairment only reflects the current year, while amortization will have an impact on the profits and losses of several years in the future, so goodwill has become a means for listed companies to manipulate earnings. If the performance of the listed company has deteriorated, the listed company has a great motivation for earnings manipulation, that is, the company can smooth the future performance risk and "reduce the burden" of the company's future performance by "leading" the impairment risk of goodwill.
Secondly, from the perspective of asset realization, goodwill is not a real asset, it can not be sold or realized alone, and can not be used for real debt repayment. But in general, we use the asset-liability ratio to evaluate debt, and assets include unrealisable assets such as goodwill. Therefore, excessive goodwill may pose a challenge for companies to repay high debts. Goodwill does not have the ability to realize and is listed as an asset item, to some extent, it will underestimate the company's debt level overestimated is the ability to repay debt. It is worth mentioning that for the classification of goodwill assets, some scholars believe that the value of goodwill assets is reflected in that it can bring future cash inflows for enterprises, so it is reasonable to define goodwill as the discounted value of future excess profits.
To sum up, goodwill may have two major reefs, namely, earnings management is easy to manipulate and credit risk is easy to underestimate. For high goodwill listed companies whose performance has deteriorated, we may need to beware of substantial impairment of corporate goodwill based on earnings management motivation; for high goodwill listed companies with low debt, we may need to update and evaluate their real debt repayment ability to avoid debt undervaluation.
Characteristics of high goodwill companies:Purple optics is big、The public should be connected.、Huayi Jiaxin(rights protection) and other goodwill account for more than 100%.Beautiful year and good health、Easton.May be listed as a risk concern by the Shenzhen Stock Exchange.
As of August 31, 3977 A-share listed companies have announced their 2020 interim reports. Based on the above risk perspective, in the case of excluding ST or * ST companies, we will calculate the ratio of goodwill to net assets based on the latest semi-annual report data, and select the top 100 listed companies with "high goodwill" characteristics in the order from large to small. The specific list is as follows:
Source: wind Research Institute of Sina Financial listed companies
Source: wind Research Institute of Sina Financial listed companies
Source: wind Research Institute of Sina Financial listed companies
Among the above 100 listed companies, the total goodwill is 257.055 billion yuan, accounting for 19.84% of the goodwill at the end of the reporting period. In other words, the number of companies accounts for only about 3% of the Shanghai and Shenzhen stock markets, but goodwill accounts for nearly 20% of the sum of the two markets.
Among the 100 lists, the media industry has the largest number of companies, including Violet Optics, Zhongying Interconnection, Huayi Jiaxin, etc., followed by 14 medical biology and mechanical equipment.Yingkang life、Blue sail medical treatment、Yifeng pharmacy, Mei Nian Health and so on are on the list, and the machinery and equipment areHuatie co., Ltd., Easton,Sanfeng intelligenceAnd other companies; and the computer industry hasNasta、Run smoothly、Nanyang co., Ltd.Wait for 11 to be on the list.
Judging from the goodwill-to-net asset ratio of more than 100%, Violet Optics, Zhongying Interconnection, Huayi Jiaxin,Hua Changda、Jiawo shares, Nasdaq,Jilin Pharmaceutical Holdings(rights protection) were 1115%, 867%, 791%, 266%, 226%, 128% and 117%, respectively. It should be pointed out that the Shenzhen Stock Exchange, in accordance with the guidelines for risk management of the Shenzhen Stock Exchange, is high-risk, second-highest, concerned and normal, among which Zixue Everbright,Wanda movie, Mei Nian Health,Century HuatongThe proportion of goodwill net assets of 72 companies listed on the Shenzhen Stock Exchange, such as Eston, triggered a 50% red line, which may not be classified as a normal category.
Source: wind Research Institute of Sina Financial listed companies
Wanda Movie: performance growth fades, superimposed epidemic shock Asset Bubble finally bursts
By the end of the 2020 semiannual report, the final value of Wanda's film goodwill period was 8.114 billion yuan, accounting for 65% of the net assets of goodwill. Hawkeye early warning gives a risk hint to its higher proportion of goodwill.
Source: Eagle Eye early warning Research Institute of Sina Financial listed companies
Generally speaking, the activity of epitaxial M & A leads to a large amount of money chasing good assets and pushing up asset prices. The goodwill recognized by M & A contains a higher asset liquidity premium. In the context of market prosperity, this part of asset bubbles are easy to be covered up. However, when the market boom is no longer prosperous and the epitaxial M & A boom cools, the asset bubble hidden in goodwill will have a great impact on the performance of listed companies and make investors suffer losses.
Since its listing, Wanda Film has relied heavily on epitaxial mergers and acquisitions to increase its market share, so goodwill has risen from 23 million yuan in 2014 to 9.799 billion yuan in 2017. In the company's business plan for 2016, the company mentioned that it would formulate and implement a targeted integration plan to complete the team and business integration of the M & A company, and improve the business performance of the M & A company; for the 2017 business plan, the company mentioned that it would continue to accelerate the development of studios, increase the development of studios through self-construction and mergers and acquisitions, increase the target of 100-150 studios, and increase market share and urban coverage.
Source: wind Research Institute of Sina Financial listed companies
From the perspective of the company's performance growth in recent years, after the performance growth slowed down in 2018, it showed negative growth in 2019, and the company's goodwill was greatly impaired.
Before 2017, the company's operating income growth can continue to maintain more than 15%, but after 2018, the company's revenue growth slowed to 6.49%, 2019 turned to negative growth, the growth rate was-5.23%.
The impairment of the company's goodwill is more than 5.5 billion yuan in 2019. For the reasons for the provision, the company explains as follows:
In 2019, with the impact of factors such as the slowdown in the growth of the macro-economy and the film industry, and the continued rapid growth in the number of screens across the country, the number of cinema attendants and box office receipts in M & A studios declined, as well as non-box office receipts. The annual operating performance failed to meet expectations, and the decline was larger than that of the previous year. According to the actual performance of M & A Studios in 2019, the company lowered its future forecast accordingly. The recoverable amount of the asset group of M & A Studios including goodwill is lower than its book value after impairment test. This time, the provision for impairment of goodwill is 2.34 billion yuan.
After the merger and acquisition, the advertising business asset group gives full play to the synergy between cinema business and advertising business. The performance of 2017-2018 has achieved significant growth, and the annual actual business income and pre-tax profits have exceeded the forecast data. In 2019, the performance of the Advertising Business Asset Group declined due to the overall impact of the country's macroeconomic and industry conditions. According to the industry situation and the actual performance of the asset group in 2019, the company lowered its future forecast accordingly. The recoverable amount of the asset group including goodwill after impairment test is lower than its book value. This time, the provision for impairment of goodwill is 1.242 billion yuan.
After the acquisition of Mtime, after 2017-2018 development, Mtime achieved good results in 2018. In 2019, under the influence of the decline in the film and television market, coupled with the adjustment of Mtime's business structure, some of the original businesses were abandoned due to market changes and the company's strategic deployment, and it took time to develop new channels, resulting in revenue and profits falling short of expectations. According to the actual performance of Mtime in 2019, the company lowered its future forecast accordingly. The recoverable amount of the asset group including goodwill after impairment test is lower than its book value. This time, the provision for impairment of goodwill is 1.993 billion yuan.
The company's performance is weak and suffered the impact of the epidemic in the first half of this year, which has a great impact on the company.
Since the outbreak of COVID-19 's epidemic in the first half of 2020, the whole film industry and the company's operation have been seriously affected. Since January 23, 2020, in response to the COVID-19 epidemic, all domestic studios under the company have been closed, and overseas studios affected by the epidemic have also suspended business since the end of March 2020. at the same time, all the films originally planned to be released in the first half of the year failed to be released as scheduled, resulting in large losses in the company's operating performance. During the reporting period, the company achieved operating income of 1.972 billion, a decrease of 73.93% over the same period last year, and the net profit attributable to shareholders of listed companies was-1.567 billion. Investors should note that if the company's performance continues to deteriorate, beware of the risk of further impairment of goodwill accumulated in the previous period.
It is worth mentioning that Hawkeye warning shows that the company's short-term debt pressure, capital chain or pressure. During the reporting period, the broad money fund was 2.72 billion yuan, the short-term debt was 4.35 billion yuan, and the net cash flow of operating activities was 180 million yuan. there was a difference between short-term debt, financial expenses, monetary funds and net cash flow of operating activities. (company Watch / Summer Bug)
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