On January 24, Shenzhen Stock Exchange issued a letter of concern for Nanfang Zhongjin Environment Co.Ltd(300145) , focusing on the company’s expected performance loss in 2021, focusing on the large amount of provision for goodwill impairment. According to the announcement, the company plans to make a provision for goodwill impairment of 470 million yuan to 520 million yuan, which is an important reason for its performance loss.
With the centralized disclosure of 2021 performance forecast of A-share listed companies, there has been an increase in inquiries from regulatory authorities recently, many of which focus on the large provision of goodwill impairment of listed companies, and pay special attention to the possible performance loss risk.
Data show that last week (January 17 to January 23), the Shanghai and Shenzhen Stock Exchange has issued inquiries about goodwill impairment to eight listed companies. Among them, the three companies are expected to have a significant loss in last year’s performance due to large provision for goodwill impairment and other reasons.
It is worth mentioning that the regulatory authorities not only expressed concern about the large provision for goodwill impairment of some listed companies last year, but also questioned whether the provision of these companies in previous years was sufficient.
On January 21, Suzhou Kingswood Education Technology Co.Ltd(300192) disclosed the performance forecast for 2021. It is estimated that the net profit loss will be 380 million yuan to 480 million yuan, mainly due to the proposed provision for goodwill impairment formed by the acquisition of Longmen education, which is about 420 million yuan to 520 million yuan. For this large amount of goodwill impairment, the Shenzhen Stock Exchange put forward in the concern letter issued on January 23 that it asked Suzhou Kingswood Education Technology Co.Ltd(300192) to explain the specific time point when Longmen education’s goodwill showed signs of impairment and whether the goodwill impairment provision for Longmen education’s goodwill in previous years was sufficient.
Saturday Co.Ltd(002291) also received a letter of concern for this kind of situation. According to the announcement, the company expects a loss of 430 million yuan to 650 million yuan in 2021. An important reason for the loss is that the goodwill impairment provision of the two fashion new media companies to be acquired is 180 million yuan to 270 million yuan. In this regard, the Shenzhen stock exchange requires to explain whether it is prudent, reasonable and accurate that no provision for goodwill impairment has been made in 2020.
In addition, last week, some listed companies were found to have problems in the goodwill impairment test during the on-site inspection by the regulatory authorities. Because the company’s forecast of equipment sales growth is inconsistent with historical data, and no reason is given. The regulatory authorities believe that the relevant basis for the sales forecast in the goodwill impairment test of the company is insufficient.
“Goodwill impairment is essentially a problem caused by M & A of listed companies. In the process of acquisition, the part of the consideration paid by the acquirer exceeding the net assets of the acquiree forms goodwill. In the process of acquisition, the value of many companies is greatly overestimated, which intensifies the large fluctuation of the performance of listed companies and even leads to the risk of huge losses.” Yan Kaiwen, chief strategic analyst of Huaxin securities, told the reporter of Securities Daily.
Yan Kaiwen said that the large amount of provision for goodwill impairment of listed companies will directly affect the net profit. Once the performance of the acquiree fails to meet the standard, it may cause huge losses in the performance of the listed company, have a significant impact on the stock price, and then damage the interests of investors. Especially for cross industry acquisitions, the risk of large impairment of goodwill is greater.
“In addition, there are also cases where listed companies use goodwill to adjust profits. Especially in the case of general downturn in the industry, some listed companies will take the initiative to reduce profits this year by deliberately withdrawing goodwill, in order to reflect a more considerable ‘performance growth’ on the book after the prosperity of the industry recovers.” He further said.
“The impairment of large amount of goodwill may lead to the disharmony of enterprises, the loss of investors’ wealth, the loss of market confidence and the decline of stock price with value reconstruction.” Tian Lihui, Dean of the Financial Development Research Institute of Nankai University, told the Securities Daily that mergers and acquisitions should focus on synergy, but some enterprises do have problems in financial whitewashing and even benefit transfer. “Due diligence of M & A is the basic requirement, and reasonable valuation is the key.”
In fact, one of the reasons why the regulatory authorities strengthen the inquiry and review of goodwill impairment is to be vigilant against the large amount of goodwill impairment, especially the possible hidden financial “big bath” risk.
A few days ago, a listed company was required by the regulatory authorities to explain that it was determined that there was no sign of impairment at the end of 2020 and the reason and rationality of withdrawing large amount of goodwill impairment provision in 2021. On this basis, it explained whether the listed company had a “big bath” by withdrawing goodwill impairment in the corresponding year. Last week, the company replied and made it clear that there was no “big bath” behavior.
Tian Lihui believes that the regulatory authorities should encourage mergers and acquisitions with synergistic effects and prevent mergers and acquisitions that transfer interests or whitewash statements. The abnormal large impairment of goodwill should be examined, and the behavior of deliberately damaging the interests of small and medium-sized investors in M & A should be punished.
Yan Kaiwen believes that for the high goodwill caused by the high premium in the process of M & A, the accrued impairment is not accrued, and it is difficult to cash the performance gambling, the regulatory authorities should strengthen the valuation constraints on the subject matter of M & A, especially cross industry acquisitions. At the same time, the regulatory authorities should also strengthen the supervision of goodwill disclosure information. In addition, we need to be vigilant against listed companies whose abnormal accrual of large goodwill impairment leads to “performance change”, and focus on the specific reasons for its accrual of goodwill impairment, the assumptions used in the calculation of goodwill impairment and the rationality of key parameters.
