In the key time window of annual report accounting, the leader of biochemical diagnosis Shanghai Kehua Bio-Engineering Co.Ltd(002022) has exposed an extremely wonderful thunder: the main subsidiaries that contribute more than 80% of the company’s net profit do not cooperate with the financial audit.
On the evening of April 20, Shanghai Kehua Bio-Engineering Co.Ltd(002022) announced that the senior management of the holding subsidiary Tianlong company headed by general manager Li Ming refused to cooperate with the accounting firm hired by the company to carry out the audit work in 2021 and refused to provide important information such as the financial books of Tianlong company in 2021. This may cause the company’s 2021 financial report to be issued with an audit report of “unable to express an opinion” by the accountant, and the company’s shares may be warned of delisting risk according to relevant regulations.
The reporter of China fund daily noted that in 2020 and the half year of 2021, Tianlong company contributed more than 90% and 80% of the consolidated statement net profit respectively. Now the sudden thunderstorm may st, and 70000 shareholders are directly confused: “it’s over, this big face, at least three price limits”, “who can reason with the loss of shareholders”
major subsidiaries do not cooperate with the audit
Shanghai Kehua Bio-Engineering Co.Ltd(002022) in the announcement, it is said that the senior managers of Xi’an Tianlong Technology Co., Ltd. and Suzhou Tianlong Biotechnology Co., Ltd. (collectively referred to as “Tianlong company”), the holding subsidiaries of the company, led by general manager Li Ming, violated the provisions of the company on the management rules and regulations of the holding subsidiaries and the articles of association of Tianlong company, and refused to implement the resolutions made by the board of directors of Tianlong company, Refusing to cooperate with Lixin Certified Public Accountants (special general partnership) hired by the company to carry out the audit work in 2021, and refusing to provide important information such as the financial account book of Tianlong company in 2021, which may lead to the audit report of “unable to express opinions” issued by Lixin Certified Public Accountants.
According to article 14.3.1 of the stock listing rules of Shenzhen Stock Exchange, “if the financial and accounting report of the latest fiscal year is issued and cannot express opinions or negative opinions”, Shenzhen Stock Exchange will implement delisting risk warning for its stock trading. The company reminds investors of risks.
The company still released an unaudited “performance express” that did not include the financial data of Tianlong company in the fourth quarter of 2021: in 2021, it realized a total operating revenue of 4.469 billion yuan and a net profit attributable to shareholders of listed companies of 721 million yuan, an increase of 7.55% and 6.76% respectively over the same period last year.
Of course, such a performance express is obviously distorted, because the profit contribution of Tianlong company to the whole parent company is not generally large.
In 2020, the net profit of Shanghai Kehua Bio-Engineering Co.Ltd(002022) consolidated statements was 1.142 billion yuan, while the net profit of Xi’an Tianlong alone reached 1.086 billion yuan, accounting for 95%. According to the semi annual report of 2021, the profit of the whole consolidated statement is 741 million yuan, while Xi’an Tianlong’s contribution is 596 million yuan, accounting for more than 80%.
company’s “painstaking” communication
In the announcement, Shanghai Kehua Bio-Engineering Co.Ltd(002022) disclosed that the management of Tianlong company openly disagreed and how the company tried to communicate.
On December 25, 2021, Li Ming, general manager of Tianlong company, sent a letter to the chairman, President and chief financial officer of the company by email, saying that he was unable to cooperate with the pre-trial accounting statements and subsequent audit of listed companies at present.
The company believes that the company legally holds 62% of the equity of Tianlong company and is the controlling shareholder of Tianlong company. As the audit institution of the listed company, Tianlong has the obligation to accept the audit of its subsidiary as well as the responsibility of its holding company. The management and relevant responsible persons of Tianlong company shall not obstruct the normal audit work of listed companies on the basis of disputes between shareholders of Tianlong company.
To this end, “the company always maintains the utmost patience and hopes that both parties can properly resolve audit differences” and “painstaking” communication:
On February 18, 2022, Lixin certified public accountants sent the 2021 annual report audit communication letter to Tianlong company, clearly requiring Tianlong company to cooperate with the on-site audit of the annual report and willing to negotiate the specific arrangement of the audit work.
On the morning of March 2, 2022, Lixin certified public accountants, CFO and audit manager of the company went to Xi’an Tianlong for face-to-face communication with Li Ming, general manager of Tianlong company, and again asked Tianlong company to cooperate with the audit of the annual report, but they failed to get their cooperation.
On March 28, 2022, Lixin certified public accountants communicated with Tao min, chief financial officer of Tianlong company to negotiate the work related to annual report audit, but no agreement was reached; On the same day, the board of supervisors of the company sent a special letter urging the president and all members of the management to accelerate the company’s annual audit of Tianlong company and effectively solve the problems.
On April 6, 2022, the company’s chief financial officer and Lixin accountant tried to contact Tao min, the chief financial officer of Tianlong again, but there was no wechat reply and the phone was not answered.
On April 8, 2022, the audit committee of the board of directors of the company discussed and decided to send a letter to the management of Tianlong company to urge them to fulfill their obligations and cooperate with the audit, and clearly inform them that refusing to cooperate with the annual report audit will bear the corresponding legal consequences; On the same day, the management of the company also wrote to the management of Tianlong company to urge them to fulfill their obligations and cooperate with the audit.
On April 12, 2022, the president of the company again urged the management and relevant principals of Tianlong company to cooperate with the audit work, and clarified again that if they still refuse to cooperate with the annual report audit work, they will bear the corresponding legal consequences.
Eight days later, on the evening of April 20, the company finally “couldn’t hold it” and announced this wonderful “big thunder”.
netizen: Chinese companies are awesome
Shanghai Kehua Bio-Engineering Co.Ltd(002022) once this announcement was made, the stock bar directly fried the pot.
Some netizens said “Chinese companies are too cow”. Some are worried about the continuous limit, “at least three boards” and “over, this is a big face, and the three limit boards start”.
Some netizens said, “who can reason with the loss of shareholders” and “I’ll ask how to compensate the majority of retail investors”
According to the third quarterly report of 2021, Shanghai Kehua Bio-Engineering Co.Ltd(002022) has a relatively decentralized ownership structure, with 70600 shareholders.
disputes originated from 10.5 billion arbitration cases
Why did the management of Tianlong refuse to cooperate with the audit? It all starts with the acquisition four years ago.
According to the announcement on major arbitration issued by Shanghai Kehua Bio-Engineering Co.Ltd(002022) last July, Shanghai Kehua Bio-Engineering Co.Ltd(002022) signed the investment agreement with Tianlong company on June 8, 2018, and Shanghai Kehua Bio-Engineering Co.Ltd(002022) will increase capital and acquire all equity of Tianlong company. The acquisition will be completed in two stages.
In the first stage, Shanghai Kehua Bio-Engineering Co.Ltd(002022) obtained 62% equity of Tianlong company for a consideration of about 550 million yuan; In the second stage, Shanghai Kehua Bio-Engineering Co.Ltd(002022) after calculating the equity value according to the net profit of Tianlong company in 2020, it will acquire the remaining 38% equity.
In 2018, the first phase of acquisition will be completed soon. For the second stage acquisition, the investment agreement stipulates that the higher of the following two shall prevail: (1) 900 million yuan; (2) Net profit of Tianlong company in 2020 × 25 times.
However, there was an unexpected situation. In 2020, the covid-19 epidemic suddenly struck, and the performance of Tianlong company, which is mainly engaged in in vitro diagnostic reagents, soared. On May 18, 2021, the total net profit of Tianlong company in 2020 after deducting non recurring profits and losses was 1.106 billion yuan. According to the investment agreement, Shanghai Kehua Bio-Engineering Co.Ltd(002022) needs to acquire the remaining 38% equity at the standard of 25 times the net profit, and the payment consideration reached 10.5 billion yuan, which can be described as a sky high price.
Obviously, Shanghai Kehua Bio-Engineering Co.Ltd(002022) has neither the will nor the ability to bear such a sky high price. According to the third quarterly report of 2021, Shanghai Kehua Bio-Engineering Co.Ltd(002022) Book monetary capital is 2.25 billion yuan, total assets are only 6.4 billion yuan, and net assets are only 4.9 billion yuan. According to the latest share price on April 20, the market value of Shanghai Kehua Bio-Engineering Co.Ltd(002022) is only 6.7 billion yuan.
Because Shanghai Kehua Bio-Engineering Co.Ltd(002022) to fulfill the contract, four minority shareholders of Tianlong company filed an arbitration and demanded Shanghai Kehua Bio-Engineering Co.Ltd(002022) to pay the purchase price of 10.5 billion yuan as agreed, and pay liquidated damages of 1.05 billion yuan and 4097000 yuan for delay in payment Shanghai Kehua Bio-Engineering Co.Ltd(002022) the funds of 1.609 million yuan in relevant bank accounts were also frozen.
In response to the arbitration application of four minority shareholders of Tianlong company, Shanghai Kehua Bio-Engineering Co.Ltd(002022) in the announcement, he gave the defense reason for his failure to perform the contract: the income and profit of Tianlong company in 2020 were affected by objective factors such as covid-19 pneumonia epidemic, and the explosive growth obviously constituted the situation of “change of circumstances” stipulated by law. Under the above circumstances, Shanghai Kehua Bio-Engineering Co.Ltd(002022) considering that it is the party adversely affected, it has the right to require re negotiation according to law to change or terminate the transaction terms of “further investment”.
According to the latest announcement on March 15, the Shanghai International Economic and Trade Arbitration Commission organized the parties to hold an online hearing on March 12, 2022. As of April 20, the arbitration tribunal had not made an award on the arbitration case.
