Zhonghua Geotechnical Restructuring Plan Disclosed, Acquiring Construction Engineering Bridge And Road To Improve Asset Quality And Performance

Recently, Sinochem Geotechnical disclosed its restructuring plan. The announcement states that the company plans to purchase 100% of its equity in Chengdu Construction Engineering Road and Bridge Construction Co., Ltd. (hereinafter referred to as "Construction Engineering Road and Bridge") from the Construction Engineering Group controlled by the controlling shareholder Xingcheng Group.

It should be pointed out that due to the incomplete audit and evaluation work of Jiangong Road and Bridge, the consideration for this transaction has not been determined yet.

Asset injection after controlling

As of the signing date of the contingency plan, Xingcheng Group holds 29.28% of the shares of Sinochem Rock and Soil, which is its controlling shareholder.

At the same time, Xingcheng Group holds 73.41% of the equity of the seller, Construction Engineering Group, and Construction Engineering Group holds 100% of the equity of Construction Engineering Road and Bridge. Therefore, this transaction constitutes a related party transaction. That is to say, this restructuring and acquisition is actually another injection of assets from Xingcheng Group into Sinochem Rock and Soil.

It should be pointed out that Xingcheng Group has only held a controlling stake in Zhonghua Rock and Soil for less than a year.

According to public information, on November 18, 2018, Wu Yanwei, Liang Fuhua, Song Weimin, Liu Zhongchi, Yang Yuanhong and Xingcheng Group signed a Share Transfer Agreement. Wu Yanwei and other transferors agreed to transfer their 9.9% stake in Zhonghua Rock and Soil to Xingcheng Group. At this point, it is officially announced that Xingcheng Group has invested in Zhonghua Rock and Soil.

In January 2019, Wu Yanwei and others signed a share transfer agreement with Xingcheng Group, intending to transfer 19.29% of their total equity in Sinochem Rock and Soil to Xingcheng Group through an agreement transfer. After the transaction was completed in March this year, Xingcheng Group became the largest shareholder of China National Chemical Engineering Corporation and officially controlled China National Chemical Engineering Corporation. This restructuring is less than three quarters away.

It should be pointed out that the payment method for the above-mentioned restructuring and acquisition is stock based payment. The plan shows that as of September 30, 2019, the net assets of Jiangong Road and Bridge were 76.17873 million yuan.

Meanwhile, as of November 12, 2019, the closing price of Zhonghua Rock and Soil was 3.99 yuan. If the above transfer is at a fair price and at a price of 3.99 yuan per share, Sinochem Geotechnical will issue an additional 191 million shares in this restructuring. As of the signing date of the contingency plan, Xingcheng Group holds a total of 529 million shares of Sinochem Rock and Soil. That is to say, if the transaction is completed, Xingcheng Group will further expand its control over Zhonghua Rock and Soil.

 The target asset liability ratio is high

It is understood that China National Chemical Engineering Corporation's main business focuses on engineering services, including geotechnical engineering, municipal engineering, airport runway engineering, underground engineering, and engineering consulting

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Zhonghua Geotechnical Restructuring Plan Disclosed, Acquiring Construction Engineering Bridge and Road to Improve Asset Quality and Performance

The main business of Jiangong Road and Bridge is construction general contracting and professional contracting, specializing in municipal engineering, including urban roads, bridges, tunnels, embankments, rivers, landscapes, and various urban pipeline networks. It is a municipal state-owned enterprise specialized in municipal and road and bridge infrastructure construction in Chengdu.

The injection of assets by Xingcheng Group into Zhonghua Rock and Soil not only consolidates its controlling stake, but also helps to solve the dilemma of listed companies only increasing income but not profits.

According to Wind, from 2016 to 2018, Sinochem Geotechnical achieved operating income of 2.307 billion yuan, 2.793 billion yuan, and 3.564 billion yuan respectively, with net profits of 248 million yuan, 239 million yuan, and 221 million yuan, respectively. It is not difficult to see that in the past three complete financial years, Sinochem Rock and Soil has only increased revenue without increasing profits, and its net profit has shown a continuous downward trend. In the first three quarters of this year, the net profit of Sinochem Geotechnical was 168 million yuan, a year-on-year increase of 3.27%.

How is the performance of the target party, Jiangong Qiaolu, this time? Can we optimize the performance of the listed company?

From 2017 to 2018, Jiangong Road and Bridge achieved operating revenue of RMB 94.99336 million and RMB 26.205635 million, respectively, with net profit of RMB 41.0337 million and RMB 86.2393 million. Both revenue and net profit showed an upward trend, demonstrating good sustained profitability and growth potential. In the first nine months of 2019, the operating income of Jiangong Road and Bridge was 2938.735 million yuan, and the net profit was 90.8843 million yuan. The company's current performance has exceeded the full year performance of 2018, and there is a high possibility of achieving performance growth.

In response, Zhonghua Rock and Soil stated that the underlying assets of this transaction have good profitability. After the relevant assets enter the company, they will help improve the asset quality and operating performance of the listed company, creating higher returns for shareholders of the listed company.

It is worth noting that the asset liability ratio of Jiangong Road and Bridge is relatively high. The plan shows that as of the end of 2017, the end of 2018, and September 30, 2019, the total assets of Jiangong Road and Bridge were 223217300 yuan, 3036836900 yuan, and 43379436 yuan, respectively, and the total liabilities were 1648.3112 million yuan, 236.61501 million yuan, and 3576.1563 million yuan, respectively. Therefore, it can be calculated that their asset liability ratios are 73.84%, 77.91%, and 82.44%, respectively.

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