Huacai Tiandi only earns 260 yuan in a quarter, Contemporary Oriental acquires it at a loss or obtains it for Hongge Theater Line license

Recently, Contemporary Oriental was inquired by the Shenzhen Stock Exchange for acquiring Huacai Tiandi at a high price and making a commitment to increase net profit by more than 70 times. In response to the inquiry letter, Contemporary Oriental stated that if the target party can achieve 60% of the promised profit, it will be completed as a result of performance. Even so, Huacai Tiandi will have to complete revenue of approximately 150 million yuan in 2016.

Original title: Contemporary Oriental's acquisition target earns 260 yuan in a quarter and promises an annual net profit of 30 million yuan. The

performance commitment of the listed company's reorganization and acquisition has always been the focus of inquiries from the exchange. Recently, Contemporary Oriental was inquired by the Shenzhen Stock Exchange for acquiring Huacai Tiandi at a high price and making a commitment to increase net profit by more than 70 times.

In mid-May, Contemporary Oriental announced that it planned to increase its capital by 127 million yuan in cash and 15 million yuan in debt-to-equity swaps, and acquire 51.13% of Huacai Tiandi. Huacai Tiandi promises that the net profit for the three years in 2016, 2017 and 2018 will not be less than 30 million yuan, 37.5 million yuan and 48.5 million yuan respectively.

In fact, Huacai Tiandi's net profit in 2015 was only 422,000 yuan. Evaluation data from China United Appraisal Asset Group Co., Ltd.(hereinafter referred to as China United Appraisal) shows that in 2013, Huacai Tiandi's main business income was 34.7453 million, and net profit was 4.1743 million; in 2014, its main business income was 52.2977 million, and a loss was 3.4380 million; in 2015, its main income was 69.1086 million, and its net profit was 4221 million.

If calculated based on the highest profit margin of 12.01% in 2013, Huacai Tiandi's main business income needs to reach 250 million yuan if the promised performance is to be completed in 2016. For a company with a maximum annual revenue of less than 70 million yuan, it is really a long way to go.

The huge gap between the actual profitability and performance commitment of contemporary Oriental's acquisition targets has also attracted the attention of the Shenzhen Stock Exchange. In response to the inquiry letter, Contemporary Oriental stated that if the target party can achieve 60% of the promised profit, it will be completed as a result of performance. Even so, Huacai Tiandi will have to complete revenue of approximately 150 million yuan in 2016.

In reality, Huacai Tiandi's operating conditions in 2016 were very bleak. According to Contemporary Oriental's disclosure, the first-quarter financial statements (unaudited) provided by Huacai Tiandi show that from January to March 2016, Huacai Tiandi achieved a cumulative operating income of 2,316.94 yuan and a net profit of 262.90 yuan.

Why does Contemporary Oriental favor companies that have only earned 262 yuan in three months? Some analysts believe that Contemporary Oriental is interested in the theater license of "Shanghai Hongge" in Huacai Tiandi, and "performance commitments are not very important."

In response, the reporter called the Secretary Office of the Contemporary Oriental Board of Directors, but no one answered the other party's phone.

The bills before and after the audit of Huacai Tiandi did not match.

Reporters found that there were certain gaps before and after the audit of Huacai Tiandi's report data.

On China Merchants Bank One Netcom, Huacai Tiandi released the 2013 annual report data showing that the company's operating income was 34.7453 million yuan, a year-on-year 25.67%; the net profit attributable to the parent company was 3.5224 million yuan, a year-on-year increase of 4.20%; and the net profit after deduction of non-profit was 1.7768 million yuan, a year-on-year decrease of 45.15%.

According to 2014 annual report data, Huacai Tiandi achieved revenue of 57.7332 million, a year-on-year increase of 66.16%; total profit of 3.9747 million, a year-on-year decrease of 29.10%; net profit attributable to ordinary shareholders of 3.7015 million, a year-on-year increase of 5.09%; net profit after deduction of non-profit was 3.5659 million, a year-on-year increase of 100.40%.

According to the 2015 semi-annual report data, Huacai Tiandi's revenue was 28.3026 million, a year-on-year increase of 15.83%; total profit was 967,800, a year-on-year increase of 272.50%; net profit was 273,400, a year-on-year decrease of 7.88%; net profit after deduction of non-profit was 236,600, a year-on-year increase of 63%.

The evaluation results of China United Evaluation show that Huacai Tiandi's main business income in 2013 was 34.7453 million, and its net profit was 4.1743 million; in 2014, its main business income was 52.29787 million, and its net profit was a loss of 3.438 million.

Regarding the gap between the two data, the reporter contacted the Huacai Tiandi Office, and the other staff said that it was "not very clear."

A theater in third-and fourth-tier cities is worth 5 million yuan?

On May 17, Contemporary Oriental's announcement of acquiring the equity of Huacai Tiandi became the focus of heated discussion in the capital market.

Contemporary Oriental announced that the company plans to acquire 51.13% of Huacai Tiandi's shares in a combination of cash capital increase, equity transfer, and creditor's rights transfer.

Among them, Contemporary Oriental plans to increase its capital by 127 million yuan in cash and 15 million yuan in debt-to-equity swaps; at the same time, it will directly pay a share transfer fee of 30.43 million yuan to the original shareholders of Huacai Tiandi. After the transaction was completed, Contemporary Oriental held 27.747 million shares of Huacai Tiandi and became the controlling shareholder. In other words, the overall valuation of Huacai Tiandi this time is 172 million yuan.

What kind of company is Huacai Tiandi?

The company's 2014 annual report and 2015 semi-annual report stated that its main business is mainly sales of digital film projection equipment and equipment and related technical services, as well as theater distribution, film projection, theater advertising and theater construction services. In the future, the company will build into China's largest digital cinema network in third-, fourth-and five-level cities, and become China's largest digital cinema integrated service provider and digital cinema value-added service operator. In the future, its core business will be positioned in cinema distribution, film screening, cinema advertising and cinema construction services.

In the acquisition announcement of Contemporary Oriental, Huacai Tiandi became a company that "uses investment and joint ventures to explore multi-hall digital theaters that meet modern star standards in second-, third-and fourth-tier cities across the country to provide customers with one-stop services from theater site selection, planning, design, construction to film supply, personnel training, and operation management."

At present, Huacai Tiandi has only 17 private-brand theaters and 18 affiliated theaters.

An industry analyst told reporters,"According to the valuation method of movie theaters, the profit cycle of a private brand theater is about 4-5 years." Looking through Huacai Tiandi's 2014 annual report, we found that it has a total of 16 wholly-owned subsidiaries in the current period, the earliest of which was established in 2011; among them, the subsidiaries mainly focusing on film screening business are mostly distributed in Yuyao, Taihe, Ningjin, Rushan, Guannan and other places, and these subsidiaries were also established around 2014.

The 35 theaters, mostly located in third-and fourth-tier cities, have a total valuation of 172 million yuan, and the average price of each theater is about 5 million yuan. Such prices are indeed eye-catching.

Promised performance will increase 70 times a year.

What is more exaggerated than the valuation is performance commitment.

According to the acquisition plan, the transaction target, Huacai Tiandi, promised that the cumulative committed net profit from 2016 to 2018 will be 116 million yuan, of which the net profit for the three years in 2016, 2017, and 2018 will not be less than 30 million yuan, 37.5 million yuan, and 48.5 million yuan respectively.

So, what is the revenue situation of the target party Huacai Tiandi?

On May 17, Contemporary Oriental announced the asset evaluation report of China United Evaluation on the target party.

The announcement shows that the book value of Huacai Tiandi's shareholders 'equity attributable to the parent company on the benchmark date of December 31, 2015 was 84.9116 million yuan. The value of shareholders' equity (net asset value) attributable to the parent company after evaluation was 201.0604 million yuan. The evaluation value added was 116.1487 million yuan, with a value-added rate of 136.79%.

In addition, Huacai Tiandi's main business income in 2013 was 34.7353 million, and net profit was 4.1743 million; in 2014, Huacai Tiandi's main business income was 52.2977 million, and the current loss was 3.438 million; in 2015, its main business income was 69.1086 million, and its net profit was 422,100.

According to the current net profit situation of Huacai Tiandi, achieving a growth rate of more than 70 times to reach 30 million yuan in 2016 is tantamount to drawing a cake to satisfy hunger.

Similarly, the inflated performance of promises has also attracted the attention of regulators. On May 23, the Shenzhen Stock Exchange sent an inquiry letter to Contemporary Oriental to inquire about the underlying operation and performance commitment.

On May 27, in its reply, Contemporary Oriental stated that from January to March 2016, Huacai Tiandi achieved a cumulative operating income of 2,316.94 yuan and a net profit of 262.90 yuan. It is expected to complete 10 million yuan for the whole year.

Contemporary Oriental loses money just to buy licenses?

In addition, Contemporary Oriental also stated that in order to ensure the realizability of performance commitments, the agreement stipulates that net profit can fluctuate reasonably in a single year, but the cumulative profit for the final three years shall not be less than 116 million yuan, and the three-year commitment shall be completed. Compensation will be made once after completion, but the performance committer should still bear the corresponding compensation liability.

In other words, for example, in 2016, when Huacai Tiandi achieved a net profit of 18 million yuan, Contemporary Oriental can consider that it has completed its performance commitment for that year, but the performance committer still has to bear the compensation responsibility for the difference between the profit of 30 million yuan.

On paper, the deal doesn't seem like a good deal; but the buyer, Contemporary Oriental, doesn't think so.

In the acquisition announcement, Contemporary Oriental stated that in order to further improve the business layout of the entire film and television culture industry chain, it will expand its main business from the production and distribution of film and television drama content to multiple fields such as movie theater business, seize the opportunity of the rapid growth of the film industry, and expand movie theater business.

After the investment is completed, the company holds a total of 51.126% of the shares of the target company. In the future, it will actively explore the development of cinema business and strengthen the integration and coordination of film and television content and cinema channels, with a view to ultimately promoting the development of its main business.

In the eyes of industry insiders, Contemporary Oriental is interested in the theater license of Huacai Tiandi. Public information shows that Shanghai Hongge is a theater line established in June 2011, and a holding subsidiary of Huacai Tiandi is Hongge Theater Company.

Some industry analysts believe that Contemporary Oriental is officially pursuing Shanghai Hongge's theater license.

However, as early as the end of November last year, Contemporary Oriental had acquired a 30% stake in China Broadcasting Theater Line with 32.3529 million yuan in cash and intervened in the movie theater industry.

Editor: Nancy