IPO observation | whether the shares of Shanxi Water Conservancy and wood industry of five enterprises on the main board were cancelled on the same day

According to the news from Hongxing capital Bureau on April 22, the official website of the CSRC announced that the 46th meeting of the issuance examination committee of the 18th Issuance Examination Committee of the CSRC in 2022 was held on April 21, and the initial launch of Xinjiang Lixin Energy Co., Ltd., Shenzhen Technology Co., Ltd. and Jinlv Environmental Technology Co., Ltd. was approved, Zhejiang Shanxi Water Conservancy and Hydropower Development Co., Ltd. (hereinafter referred to as “Shanxi Water Conservancy”) and Tangshan Caofeidian Wood Industry Co., Ltd. (hereinafter referred to as “Wood Industry Co., Ltd”) failed to pass the initial public offering.

It is worth noting that five enterprises attended the meeting on the same day, creating a new high in the audit of the main board this year; Whether the two enterprises were rejected on the same day also appeared for the first time this year, and the two rejected enterprises intend to sprint the main board of Shanghai stock market. So far, the number of IPO companies has reached 11 this year, including 5 on the main board (4 in Shanghai and 1 in Shenzhen) and 6 on the gem. In the on-site inquiry of the IEC meeting, the related party transactions of the two enterprises were mentioned.

Shanxi Water Conservancy “eat from the sky”, with a high proportion of connected transactions

The main business of Shanxi water conservancy is raw water supply and hydropower generation. It is responsible for the operation of Shanxi water conservancy project located in the middle and upper reaches of the main stream of Feiyun River in Wenzhou, which is composed of Shanxi reservoir project and Zhaoshandu water diversion project. The company plans to raise 232 million yuan and the sponsor is Zheshang Securities Co.Ltd(601878) .

According to the prospectus, Shanxi Water Conservancy’s performance can be said to be “eating on the day”, which largely depends on the precipitation of that year . From 2017 to 2019 and the first half of 2020 (reporting period), the company’s operating revenue was 483 million yuan, 497 million yuan, 543 million yuan and 229 million yuan respectively, and the net profit attributable to shareholders of the parent company was 952685 million yuan, 896267 million yuan, 111 million yuan and 249492 million yuan respectively.

Shanxi water conservancy has the risk of performance decline. In 2020, the company’s unaudited operating income was 453 million yuan, and the net profit attributable to the shareholders of the parent company (the lower before and after deducting non recurring profits and losses) was 45.98 million yuan. After deducting non recurring profits and losses, the net profit attributable to the shareholders of the parent company decreased by 54.47% year-on-year in 2020. Shanxi Water Resources said that the main reason for the sharp decline in the performance of the whole year in 2020 is that the rainfall and water inflow of the basin where the company’s hydropower station is located are greatly reduced, resulting in the sharp decline of the company’s power generation performance. If rainfall and water inflow continue to decrease due to natural weather factors in the future, the company will face the risk of continuous decline in net profit.

In addition, Shanxi water conservancy has a high risk of related party transactions . The actual controller of the company, Wenzhou SASAC, holds 56.08% of the shares through Wenzhou public utility investment group (hereinafter referred to as “Wenzhou Public Utility group”). From 2017 to November 2018, one of the company’s raw water sales customers in Wenzhou City was the water branch of Wenzhou Public Utilities Group Co., Ltd; Since December 2018, Wenzhou public utilities group has established a wholly-owned subsidiary Wenzhou water supply Co., Ltd. with its water related asset business, becoming the company’s raw water sales target.

During the reporting period, the amounts of the above related party transactions were 187 million yuan, 197 million yuan, 203 million yuan and 104 million yuan respectively, accounting for 38.81%, 39.58%, 37.40% and 45.70% of the company’s operating revenue respectively; It is estimated that the gross profit formed by the related party transaction is 482625 million yuan, 58.508 million yuan, 642563 million yuan and 342944 million yuan respectively, accounting for 27.19%, 31.74%, 28.26% and 47.79% of the gross profit of the company’s main business respectively. Shanxi Water Resources said that although the company is also constantly developing markets in other regions outside Wenzhou, it does not rule out the risk that with the economic development of Wenzhou, the water consumption in Wenzhou is on the rise, and the related party transactions can not significantly and effectively reduce the risk.

The questions raised by the on-site inquiry at the meeting of the development and Examination Commission mainly focus on the related party transactions of Shanxi water conservancy.

Shanxi Water Conservancy and Wenzhou Zeya reservoir management station supply raw water to Wenzhou water supply company in a fixed proportion, and the actual control of both is Wenzhou SASAC. The development and Examination Commission requires to explain whether the raw water business of Zeya reservoir in Wenzhou has occupied the company’s market share, whether there is a conflict of interest, and whether the reasons and basis for the absence of horizontal competition between the two are sufficient; Whether there are arrangements for further acquisition of assets and businesses in the future, and whether Wenzhou SASAC and relevant units have plans to effectively solve horizontal competition.

Shanxi Water Resources sells raw water to the related party Wenzhou water supply Co., Ltd., accounting for a large proportion of its operating revenue. The IEC requires to explain the necessity and rationality of transactions between the company and its controlling shareholders and their related parties, and the fairness of pricing; Whether the company’s procurement and sales system is independent and whether the company’s business depends heavily on related parties; Whether the specific measures taken by the company to reduce related party transactions with controlling shareholders and their related parties have been effectively implemented.

The profits of wood industry shares have fallen twice in a row, and whether there is interest transmission of related parties has been questioned

Wood Industry Co., Ltd. is located in Caofeidian area of Hebei pilot free trade zone and Caofeidian national import wood trade and processing demonstration zone. Its main business includes comprehensive supporting services for wood processing industry and non wood logistics services. The company plans to raise 234 million yuan, and the sponsor is Sino German securities.

The prospectus shows that wood industry shares are facing the dilemma of stagnant revenue growth and declining profits. From 2018 to 2020 and the first half of 2021 (reporting period), the operating revenue of wood industry shares was 394 million yuan, 366 million yuan, 368 million yuan and 203 million yuan respectively, and the net profit attributable to the shareholders of the parent company was 111 million yuan, 106 million yuan, 754878 million yuan and 564265 million yuan respectively. In 2019 and 2020, the net profit attributable to the parent decreased by 28.52% and 25.25% respectively.

Although “wood industry” is written into the company’s name, nearly 70% of its revenue comes from non wood logistics service business, and the proportion of revenue from this business shows an increasing trend . In 2020, the company’s revenue from non wood logistics services was 252 million yuan, accounting for 68.95% of its main business revenue; In 2019, the revenue from this business was 210 million yuan, accounting for 59.53%.

wood shares also have related party transaction risk . The related party transactions of the company mainly include the provision of basic logistics, port loading and unloading and other labor services to related parties by the company and its subsidiaries and the acceptance of guarantees from related parties. During the reporting period, the amount of goods sold and labor services provided by the company to related parties was 852154 million yuan, 745415 million yuan, 888554 million yuan and 574721 million yuan respectively, accounting for 21.65%, 20.37%, 24.14% and 28.30% of the operating revenue respectively.

Wood Industry Co., Ltd. said that the business scale of the company’s comprehensive supporting services for wood processing will be further expanded, and the proportion of related party transactions will gradually decrease. However, if the company fails to timely perform the relevant decision-making and approval procedures for related party transactions in the future, or the related party transactions cannot be carried out in strict accordance with the fair price, the interests of the company and minority shareholders may be damaged.

The main questions raised in the on-site inquiry of the IEC meeting also focus on the related party transactions of wood shares.

Wood Industry Co., Ltd. provides transportation services of finished steel and related steelmaking raw materials, port loading and unloading services, leasing and management services for related parties, accounting for a relatively high proportion of recurrent related party transactions. The development and Examination Commission requires to explain the reasons and rationality of the overall downward trend in the proportion of wood processing supporting service revenue during the reporting period, whether it matches the industrial positioning of the company, and whether there is a risk of shrinkage in the wood processing supporting service business, which shall be fully disclosed; The necessity and rationality of related party transactions, the reasons and rationality for the increase of the proportion of related party transactions year by year, whether the related business has stability and sustainability in the future, and whether the company has a significant dependence on related parties; Before 2020, the reasons and commercial rationality of the company’s undertaking a large number of transportation businesses with Wenfeng machinery and Wenfeng special steel as final customers through Jinmao logistics, and whether there is any situation of avoiding related party transactions through such arrangements; Whether there is any damage to the interests of the issuer through price manipulation or other related transactions; Whether the identification and disclosure of capital transactions between Wenfeng steel and its related parties are accurate, and whether there are transactions between Wenfeng steel and its related parties.

Wood Industry Co., Ltd. provides agency procurement services for wood processing enterprises in its industrial park, and the book value of advances receivable from agency business is large. At the end of each reporting period, the book value of advances receivable from agency business of the company was 613864 million yuan, 178 million yuan, 107 million yuan and 747837 million yuan respectively. The IEC requires to explain: the main terms of the agency procurement contract, the commercial rationality of the company to carry out such business, and whether the business is essentially a financing arrangement provided by the company for its customers; During the reporting period, the company had the reason that the balance of advances receivable was much higher than the current delivery value; The reason and rationality of the coincidence between the top five clients and the main customers of wood processing supporting services in each period of the reporting period; Rationality of the provision for bad debts of advances receivable.

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