On February 11, Leo Group Co.Ltd(002131) (002131, SZ) replied to the attention letter of Shenzhen Stock Exchange on the provision for impairment of large amount goodwill.
Previously, Leo Group Co.Ltd(002131) released the performance forecast. It is estimated that the net profit after deducting non-profit in 2021 will be a loss of 1.4 billion yuan to 1.25 billion yuan, mainly due to the provision for goodwill impairment in the digital sector (1.25 billion yuan to 1.45 billion yuan) and the provision for bad debts of customer receivables.
As for the reasons for the withdrawal, the company said in the above reply announcement that the operating revenue of Leo digital platform in 2021 was about 16.2 billion yuan and the profit before interest and tax was about 250 million yuan, but the completion ratio was only 74% compared with the predicted amount in 2021, and there were signs of goodwill impairment. The main reasons why the operating performance of Leo digital platform in 2021 did not meet the expectations were the changes in the operating environment, the fierce competition in digital advertising agency business, and the impact of policies on subdivided industries.
Traditional digital marketing business is impacted
In the letter of concern, the Shenzhen Stock Exchange asked the company to explain the specific reasons for the huge performance fluctuation for two consecutive years.
Leo Group Co.Ltd(002131) responded that the company’s performance loss in 2021 was mainly due to the company’s large provision for goodwill impairment and bad debt provision for accounts receivable. The company’s net profit is expected to be about 0.5 billion yuan after excluding the above adverse factors.
In the machinery manufacturing sector, orders in China and foreign markets showed significant growth in 2021, with an annual operating revenue of about 3.5 billion yuan, a year-on-year increase of about 35%. However, affected by multiple factors such as the increase of production costs, exchange rate fluctuations and the increase of various expenses, the net profit of the company’s machinery manufacturing sector in 2021 decreased compared with that in 2020. In this regard, the management of the company has taken effective measures to deal with market changes, such as product price adjustment and vigorously developing the Chinese market.
The company’s digital marketing sector is facing the slowdown of industry growth, increasingly fierce market competition, the decline of gross profit margin and the decline of business volume of some subdivided industries affected by supervision.
Leo Group Co.Ltd(002131) said that on the one hand, the content, channel, communication mode and audience of digital marketing have changed, giving birth to new marketing methods, and the traditional digital marketing business has been impacted; On the other hand, the competition of digital advertising agency business is fierce, the voice of mainstream media pricing is enhanced, and the gross profit margin of the company’s platform traffic business is declining.
In addition, affected by the double reduction policy and the continuous supervision of the game industry, the gross profit of the company’s education industry and game industry was less than expected. The decline in the gross profit of creative marketing business is mainly affected by market competition, personnel adjustment and other factors. In addition, the layout of the new incubation team is less than expected, resulting in the increase of expenses during the period. In addition, a customer of the company’s business condition is abnormal, resulting in the company’s large amount of receivables not being recovered normally, and a large amount of bad debt reserves are accrued.
In addition to the above two sectors, investment business is currently one of the important factors affecting the company’s profits. In the past two years, Leo Group Co.Ltd(002131) has invested in the pharmaceutical health and intelligent automobile industry chain. The company’s financial investment is widely involved in high-tech fields such as big data, Internet of things, aerospace and information security.
Provision for goodwill impairment for five consecutive years
So how did the huge goodwill impairment of more than 1.25 billion yuan form in 2021?
The company said that from 2014 to 2016, it acquired the equity of target companies such as Shanghai Manku, Shanghai argon krypton, Shanghai wodong, amber communication, Wansheng Weiye, minimally invasive era and Shanghai Zhiqu, and then transferred the goodwill of RMB 3.808 billion formed by the above targets to Leo digital platform.
From 2017 to 2020, the company made a total of 2.045 billion yuan of goodwill impairment provision for the asset group of digital marketing.
Among them, Leo digital platform had an operating loss of 85.9028 million yuan in 2018. The recoverable amount of some of the above-mentioned target companies was lower than their book value, and several companies were provided for goodwill impairment.
In 2019 and 2020, the operating revenue of the digital marketing sector increased year by year, the gross profit margin and period expenses decreased year by year, the operating profit increased, and Leo Group Co.Ltd(002131) made a partial provision for goodwill.
By 2021, Leo’s digital platform will experience another “explosion” of huge goodwill.
In 2021, the operating revenue of the digital marketing sector increased by about 26%, but the operating performance did not meet expectations. Affected by the above industry factors, the profit before interest and tax of Leo digital platform in 2021 is about 250 million yuan (this amount does not take into account the provision for goodwill impairment and investment income; at the same time, excluding the provision for bad debts withdrawn individually due to abnormal operating conditions of a customer), which is only 74% higher than the predicted amount in 2021, showing signs of goodwill impairment.
In addition, Leo Group Co.Ltd(002131) said that at the end of each period, the company reasonably predicted the future operating performance in combination with the actual operating conditions of the enterprise and the market environment. At the same time, Kunyuan evaluation was hired for special evaluation. The provision for goodwill impairment was withdrawn in accordance with the accounting standards for Business Enterprises No. 8 – asset impairment and relevant accounting policies, and there was no provision for asset impairment through adjustment, Improper earnings management.
