On July 24, Caixin reported that Huayi Brothers (300027.SZ) sold Zhejiang Dongyang Meila Media Co., Ltd. (hereinafter referred to as 'Dongyang Meila') it had acquired for 1.05 billion yuan nine years ago to affiliated Beijing Alibaba Pictures Culture Limited (hereinafter referred to as 'Ali Pictures') for only 0.35 billion yuan in debt-to-equity swap.

Huayi Brothers announced last night that it plans to sign an agreement with Ali Pictures to transfer 70% of the equity of its subsidiary Dongyang Meila, and will no longer hold the shares of Dongyang Meila after the transfer, with the equity transfer price at 0.35 billion yuan. It is worth noting that the goodwill balance of Dongyang Meila's account reached 1.047 billion yuan by the end of 2023, which is close to the purchase price paid by Huayi Brothers before.

Huayi Brothers stated that this transaction is a prudent decision made by the company based on its actual operating conditions and aims to further optimize the allocation of company resources. The transaction price of 0.35 billion yuan is based on the current reasonable market valuation and the future development prospects. The company believes it is fair and reasonable, and the transaction will not have a significant adverse impact on the company's finance and operating conditions.

It is worth noting that Ali Pictures is also facing financial difficulties. According to financial data, the net income of Ali Pictures was a loss of 71.438 million yuan in 2023. By the end of the first quarter of this year, the company's losses further expanded to 1.33 billion yuan. At the same time, Ali Pictures had a negative net asset value of 324 million yuan.

According to previous announcements, in 2019, Ali Pictures provided Huayi Brothers with a loan of 0.7 billion yuan, with a loan term of five years. The latter provided mortgage guarantees with the 70% equity of Dongyang Meila it held and the self-owned real estate and state-owned land use rights held by its wholly-owned subsidiary Beijing Huayi Brothers Jiali Culture Development Co., Ltd.

On July 8 this year, Huayi Brothers announced that after mutual agreement, the remaining 0.35 billion yuan loan would be extended for another three months from the maturity date of the original loan agreement until October 24, 2024. Two weeks later, the two parties signed a 'Credit and Debt Offset Agreement', and Ali Pictures planned to acquire Huayi Brothers' 70% equity in Dongyang Meila.

It is worth mentioning that Feng Xiaogang, the second largest shareholder of Dongyang Meila, currently holds 30% of the shares. In November 2023, Feng Xiaogang resigned as manager of Dongyang Meila, and was succeeded by Liu Yan.

Caixin reporters found that Huayi Brothers had long planned to transfer Dongyang Meila. The promotion materials at the Shanghai International Film Festival this year for 'Special Agent' by director Feng Xiaogang showed that the production company of the film was Ali Pictures and China Film.

In June of this year, an investor asked Huayi Brothers on the interactive platform why the producer of Feng Xiaogang's latest film 'Special Agent' did not include the long-term cooperation partner of the company, and how the company planned to boost its box office revenue after losing this important director. Huayi Brothers replied that 'Special Agent' was a film project in which the company participated.

In November 2015, Huayi Brothers announced the acquisition of Dongyang Meila. Up until then, Feng Xiaogang held 99% of the equity, while Lu Guoqiang held the remaining 1%. The two transferred 69% and 1% of their shares respectively to Huayi Brothers, which paid a lump-sum transfer price of 1.05 billion yuan.

According to public information, Dongyang Meila was established on September 2, 2015, and was only just over two months old when it was sold. The company's registered capital was only 5 million yuan, of which Feng Xiaogang invested 3.5 million yuan. Its main business includes investment and production of film and television projects, original creation, planning, and transaction of film and television scripts, and other related businesses.

According to the 'Wager Agreement' in the 'Equity Transfer Agreement' between the two parties that year, Feng Xiaogang promised that Dongyang Meila's audited after-tax net profit for 2016 would be no less than RMB 100 million, and from 2017 to December 31, 2020, the annual performance target would increase by 15% on the basis of the net profit target promised in the previous year. If the target is not met, Feng Xiaogang needs to make up for the shortfall in cash.

According to financial data, after being acquired, Dongyang Mela's performance has been up and down. From 2016 to 2020, its net income was 55.1139 million yuan, 0.117 billion yuan, 65.015 million yuan, 0.164 billion yuan, and 5.6043 million yuan respectively.

According to the announcement, affected by the COVID-19 pandemic, Dongyang Mela failed to achieve its performance target in 2020. As of May 24, 2021, Feng Xiaogang and Lu Guoqiang have, in accordance with the agreement, paid the performance compensation of 0.168 billion yuan in cash on schedule. According to Huayi Brothers' 2018 annual report, the company received performance compensation of 68.2115 million yuan from Feng Xiaogang.

According to this calculation, Feng Xiaogang has already paid Huayi Brothers about 0.236 billion yuan in the past five years.