High premium gambling, regulatory risks, Shandong mining machinery cross-border game industry hides hidden worries

Shandong Mining Machinery, which is mired in performance quagmire, is trying to seek self-help through the cross-border game industry. Shandong Mining Machinery has also invested a lot of money in its transformation and plans to spend more than 1 billion yuan to purchase two game assets at a high premium. However, in the eyes of industry insiders, it is still unknown whether Shandong Mining Machinery's transformation attempt will be successful in the context of increasingly stringent regulatory reviews of cross-border mergers and acquisitions.

Original title: Shandong Mining Machinery

Co., Ltd., which is mired in performance quagmire, is trying to seek self-help through the cross-border game industry. Shandong Mining Machinery has also invested a lot of money in its transformation and plans to spend more than 1 billion yuan to purchase two game assets at a high premium. However, in the eyes of industry insiders, it is still unknown whether Shandong Mining Machinery's transformation attempt will be successful in the context of increasingly stringent regulatory reviews of cross-border mergers and acquisitions.

Shandong

Mining Machinery, which plans to suspend trading in the cross-border game industry from August 2, 2016, launched a major asset reorganization plan on January 25 this year, planning to acquire 100% equity of two game assets, which also means that Shandong Mining Machinery plans to cross borders into the game industry.

The trading plan released by Shandong Mining Machinery shows that this reorganization consists of two parts: issuing shares to purchase assets and raising matching funds. Shandong Mining Machinery plans to purchase 100% equity of Wenmai Interactive and 100% equity of Linyou Interactive through a non-public offering of shares, with a total transaction amount of 1002.7 million yuan. In addition, Shandong Mining Machinery plans to issue shares from Shandong Mining Venture Capital and Yanchang Investment to raise matching funds.

It is understood that Shandong Mining Machinery is mainly engaged in coal machine production, coal sales and coal mining service industries. Wenwen Interactive, one of the target companies to be purchased this time, was established in December 2014. Its main business is entrusted customized development and independent research and development of online games. Another target company, Linyou Interactive, was established in October 2014, and its main business is the agency distribution and joint operation of mobile online games. In this regard, Shandong Mining Machinery stated that through this transaction, Shandong Mining Machinery will inject online game assets into listed companies. After the transaction is completed, Shandong Mining Machinery will transform into a company with dual main business development of "coal mining machine production, coal sales and coal mining services"+"online game services". At the same time, the counterparty also made relatively outstanding performance commitments. The counterparty stated that the total net profit attributable to the two target companies from 2017 to 2019 after deducting non-profit was no less than 316 million yuan.

Helpless attempt to save

oneself can be seen from the company's financial data in recent years that Shandong Mining Machinery's performance is not optimistic. This cross-border game industry is also a helpless move by Shandong Mining Machinery to try to save itself through transformation.

Data shows that the net profit attributable to shareholders of listed companies achieved by Shandong Mining Machinery from 2013 to 2015 and from January to September 2016 was 45.8248 million yuan, 2.6243 million yuan,-268 million yuan and-35.4803 million yuan respectively. The performance shows obvious signs of pressure. Regarding the reasons for this reorganization, Shandong Mining Machinery also stated without hesitation that the company's main business continues to be sluggish and market competition is fierce.

In fact, Shandong Mining Machinery has also made various efforts in order to self-rescue. In the revision announcement of the 2016 annual performance forecast, Shandong Mining Machinery stated that compared with the losses in the same period in 2015, the company expects to achieve an attributable net profit of 5 million to 15 million yuan in 2016. It is worth mentioning that as early as the third quarter report of 2016, Shandong Mining Machinery made a performance forecast. At that time, Shandong Mining Machinery stated that the company expects to achieve a net profit of-70 million yuan to-40 million yuan in 2016. Regarding the reasons for the expected turnaround into profit, Shandong Mining Machinery explained that one of them was the increase in earnings due to the company's disposal of the equity held by Zhungeer Banner Baishipo Coal Co., Ltd.

High premium gambling hides hidden

dangers. However, famous economist Song Qinghui said that "cross-border mergers and acquisitions often have too many uncertain risks." This high-premium acquisition is undoubtedly a big gamble for Shandong Mining Machinery.

In Song Qinghui's view, since 2015, dazzling cross-border mergers and acquisitions have not only challenged the imagination of the market, but also encountered strict supervision. The regulatory authorities have always maintained a high-pressure and "strict review" attitude towards cross-border mergers and acquisitions. Shandong Mining Machinery's cross-border mergers and acquisitions may encounter "thorough investigation" from the regulatory authorities. The plan shows that the premium rates of the two companies acquired by Shandong Mining Machinery are not low. Among them, on the estimated benchmark date of September 30, 2016, the estimated value of all equity of Linyou Interactive's shareholders is 437.6071 million yuan, with an estimated value-added rate of approximately 2321.72%; the estimated value of all equity of Wenmeng Interactive's shareholders is 568.0521 million yuan, with an estimated value-added rate of 12,927.82%. In this regard, Song Qinghui said that against the background of a very serious bubble in the game industry in China, Shandong Mining Machinery's high acquisition premium rate poses a major hidden danger. If the acquisition expectations are not ideal, it will inevitably lead to changes in its overall performance, which will bring great risks.

In this acquisition, the counterparty promised that Wenwu Interactive's net profit after deduction of non-profit from 2017-2019 will not be less than 45 million yuan, 58 million yuan, and 75 million yuan respectively. However, data shows that Wenwu Interactive, which was established in 2014, achieved a net attributable profit of-5.8367 million yuan and 7.197 million yuan in 2015 and from January to September 2016 respectively. "Combined with the performance of the target company in recent years, the performance commitments of the target company may be difficult to achieve and there are high risks." Song Qinghui said,"Entering industries with low relevance, management, talents, technology, knowledge, etc. will become shortcomings in enterprise development. The actual business problems may be more than expected, and the possibility of a black swan incident is also very high."

Regarding the company's operating experience in the game industry and other related issues about this acquisition, the reporter sent an interview letter to Shandong Mining Machinery by email. However, as of press time, the other party had not responded.

Editor: Nancy