Caixin
Nov 09, 2018 04:27 AM
FINANCE

Saving Private Companies Is Riddled With Risks

Although regulators have repeatedly said that state-backed bailouts should be given only to companies that have “good development prospects,” the program is in danger of being used to prop up companies facing challenges that threaten the businesses’ survival. Photo: VCG
Although regulators have repeatedly said that state-backed bailouts should be given only to companies that have “good development prospects,” the program is in danger of being used to prop up companies facing challenges that threaten the businesses’ survival. Photo: VCG

The road to hell is paved with good intentions, the old proverb goes, and China’s latest initiative to encourage state-backed funds to help cash-strapped private listed companies is another example of how government policies can have unintended consequences.

These funds, many of which are being coordinated by local governments, are part of a series of measures authorized by the central government over the past month to bolster confidence in a stock market battered by the pledged shares crisis and to help private companies struggling to raise money.

Although regulators have repeatedly said that bailouts should be given only to companies that have “good development prospects” (link in Chinese) but are facing temporary difficulties, the program is in danger of being used to prop up shares in companies facing challenges that threaten the businesses’ survival, such as slumping profits, massive debts, and lawsuits over loans that haven’t been repaid.

This risk is illustrated by the case of troubled Zhejiang Unifull Industrial Fiber Co. Ltd., a manufacturer of industrial yarn and cord fabrics that has diversified into designing and making lithium batteries for vehicles. Based in the southern city of Huzhou, some 150 kilometers (93 miles) west of Shanghai, the company is being investigated by the stocks regulator for possible violations of the Securities Law, is under threat of delisting, has more than two dozen pending lawsuits over unpaid debts, and expects its 2018 profit to slump by 90% to 100%.

On Nov. 7, it announced that Shanghai Yaokuo Enterprise Management Center LP, a rescue fund set up by six companies, including state-owned enterprises, held 5% of the company’s outstanding shares, having built up its stake from Oct. 11 to Nov. 7.

Optimistic view

Huang Jing, an executive with Shanghai Yaokuo, said in the statement that it was “responding to the call of the (Communist) Party Central Committee on financial work to serve the real economy” and aimed to help the company overcome its problems and return its operations to normal through a fund specially set up to relieve corporate funding difficulties.

The purchase of the shares was based on its “optimistic view of the company’s promising outlook and the potential for future gains from the deal,” Huang said. The fund will make announcements if it buys more shares over the next 12 months.

Shanghai Yaokuo is already sitting on a paper profit, having bought 10.72 million shares at prices ranging from 11.04 yuan ($1.59) and 14.22 yuan, and another 9.19 million shares of stock at 13.51 yuan to 16.15 yuan. The shares, which slumped from 33.1 yuan in January to 5.9 yuan in June, closed up 3.27% at 16.1 yuan on Nov. 8.

Zhejiang Unifull is under threat of being delisted after the Shenzhen Stock Exchange slapped it with a warning in February and gave it “Special Treatment” (ST) status, a tag given to companies in financial distress or with regulatory problems. The move followed an announcement by the China Securities Regulatory Commission on Jan. 19 that Zhejiang Unifull was suspected of violating the Securities Law and related regulations, and that the company and its controlling shareholder, Yan Jinggang, were under investigation.

Later in January, the company announced that it was facing two lawsuits for nonpayment of loans, and at the end of August said the number had snowballed to 32 involving a total of 2.24 billion yuan of loans, although since then some have been settled and it is now facing 28 cases.

Although the company reported that its 2017 net profit nearly doubled to 327 million yuan, it warned in October that its profit this year would likely be in the range of zero to 32.7 million yuan in 2018.

But behind Shanghai Yaokuo’s efforts to prop up Zhejiang Unifull lies Zhongrong International Trust Co. Ltd., an aggressive financial conglomerate based in the northeastern city of Harbin that has significant “shadow banking” operations. It is one of six shareholders in Shanghai Yaokuo, with the second-biggest stake of 29.9%. It also holds a 6.99% stake in Zhejiang Unifull through a trust plan.

Other shareholders in Shanghai Yaokuo include Wuhan Tianjieying Enterprise Management Center LP, a private-fund manager set up in 2017, which holds 33%, while Tibet Dingxin Asset Management Co. is the third-biggest shareholder with a 16.1% stake.

Failed rescue

Zhongrong was previously controlled by tycoon Xie Zhikun through his privately owned vehicle ZEG, but in 2010 he sold a 37% stake to Jingwei Textile Machinery Co. Ltd., a Shenzhen-listed subsidiary of Hi-Tech Group, a central-government-owned textile conglomerate under the direct supervision of the State-owned Assets Supervision and Administration Commission. Jingwei Textile announced in June it plans to increase its stake to 70.5%.

Zhongrong and Tibet Dingxin Asset Management have already made one failed attempt to shore up Zhejiang Unifull. In March, they and other investors, including Jinzhong Bank, a city commercial bank based in northern Shanxi province, announced plans for a rescue fund of 6.4 billion yuan.

That coincided with an announcement by Zhejiang Unifull of a plan to sell a 29.8% stake to Aerospace Science and Technology Asset Management Co. Ltd., the investment arm of state-owned China Aerospace Science and Industry Corp., Zhejiang Unifull would have become a subsidiary of the asset manager, which promised to inject high-quality aerospace assets into the business. But the deal failed to materialize.

The latest rescue plan is short on detail so far, and it remains to be seen whether Zhejiang Unifull can be saved.

Contact reporter Leng Cheng (chengleng@caixin.com)

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