On 8 June 2020, Sinomach Heavy Equipment Group relisted A shares, five years after delisting on 23 April 2015. The relisting of Sinomach has given hope to numerous investors who have considered investing in delisted stocks. In fact, the number of delisted enterprises that announce bankruptcy reorganisation plans with a view to relisting is not insignificant, with some currently in the course of applying, including Hui Lyu 5, Powerise 5, Nanyang 5, etc. Judging by the enterprises that have successfully relisted, Nanjing Tanker and Sinomach, there are some major difficulties to be overcome.
High thresholds set by the stock exchanges for relisting by delisted companies
Both the Implementing Measures of the Shanghai Stock Exchange for the Relisting of Delisted Companies and the Implementing Measures of the Shenzhen Stock Exchange for the Relisting of Delisted Companies set relatively high thresholds for delisted companies that apply to relist. In addition to setting relatively stringent requirements for compliant operation of the company, they also specify strict performance indicators for delisted companies, including positive net profits in each of the past three fiscal years, with the aggregate exceeding RMB30 million (US$4.6 million), and aggregate operating revenues exceeding RMB300 million during the past three fiscal years.
For a company delisted for performance reasons, satisfying the above-mentioned performance targets within a short period of time is quite difficult. Judging from successful relisting cases, and cases in which announcements of the intent to apply for relisting have been issued, delisted companies usually satisfy the relisting conditions by the spinning-off of non-performing assets through bankruptcy reorganisation, and the injection of high-quality assets.
From the relisting report issued by the sponsor at the time of Sinomach’s listing, it can be seen that Sinomach was entirely reliant on the profits generated by the assets injected during the reorganisation to turn its situation around. The audited net profits of the shareholders of Sinomach’s parent company (calculated on the basis of whichever was lower before and after subtracting non-recurring gains and losses) for 2016, 2017 and 2018, and January to June 2019, disclosed at the time of Sinomach’s application for relisting, were RMB67,599,938, RMB75,134,048, RMB393,399,518, and RMB89,714,848, respectively.
In the course of the material asset restructuring, Sinomach Group gave performance commitments of RMB254,947,200, RMB294,671,400 and RMB333,269,500, respectively, for the combined net profits of China National Heavy Machinery Research Institute, and China National Heavy Machinery Corporation for the years 2017, 2018 and 2019, all the commitments of which were achieved during the reporting period.
Bankruptcy reorganization requires the participation of large quantities of external funds and assets, and places stringent requirements on investors
In the course of Nanjing Tanker’s relisting, its actual controller changed to China Merchants Group through an equity transfer without consideration, and a transfer by agreement. Sinotrans & CSC Holdings paid an equity transfer amount of about RMB1.9 billion, after the transfer to China Merchants Group, which served as a transaction condition for the separate settlement agreement it reached with the transferor, Nanjing Tanker, and China Development Bank to pay the principal of, and interest on, matured debts of RMB747 million on the transferor’s behalf.
It additionally provided financial assistance to, and security for, Nanjing Tanker through the execution of a financial services agreement between an affiliate and Nanjing Tanker.
In the course of the reorganisation of Sinomach, its actual controller, Sinomach Group, and its subsidiary, Erzhong Group, agreed, regarding their confirmed claims in the amount of RMB3.01 billion against Sinomach, not to appropriate reorganisation debt repayment resources and to lawfully, compliantly and duly resolve the issue by way of a private additional offering, after completion of the reorganisation procedure.
After completion of its bankruptcy reorganisation, Sinomach will purchase the 82.827% of the shares of China National Heavy Machinery Research Institute, and 100% of the equity of China National Heavy Machinery Corporation, held by Sinomach Group, by way of an offering of shares to purchase assets. The transaction is valued at RMB5.86 billion. Once the transaction is completed, Sinomach will hold 82.827% of the shares of China National Heavy Machinery Research Institute, and 100% of the equity of China National Heavy Machinery Corporation.
The relistings of Nanjing Tanker and Sinomach relied on the enormous financial strengths of their major shareholders, and their ability to inject quality assets and forgive large amounts of debt in a short period of time, enabling the two companies to quickly turn things around after completion of their bankruptcy reorganisations.
An application for relisting by a delisted company is time-consuming, and funding costs are steep
Even though Nanjing Tanker had the support and assistance of the funds of its state-owned actual controller, it nonetheless took more than four years from delisting to relisting, and Sinomach required five years. For financial investors participating in the reorganisation of a delisted company, the time during which their funds are immobile while the company applies for relisting is quite long, and the funding costs quite steep.
If relisting fails, investors may be unable to divest
Where an investment is made in a company proposing to list, the investor can, if the listing of the target company falls through, seek to divest by selling its equity, or through an equity buyback by the company. However, if a delisted company’s application for relisting fails, it is very possible that the investor will have no way of divesting. For investors, the risks of investing in delisted stocks are quite substantial.
Furthermore, the above-mentioned two companies were delisted for performance reasons, with Nanjing Tanker compelled to terminate its listing due to losses suffered in four successive years. In the case of Sinomach, the shareholders’ general meeting decided to proactively terminate its listing due to consecutive losses from 2011 to 2013, and further losses anticipated for 2014.
A delisted company with its listing terminated for performance reasons is only required to satisfy relevant provisions of article 8 of the stock exchange’s relisting measures when applying for relisting. If a delisted company were compelled to terminate its listing due to a major violation of the law, it will, when applying for relisting, additionally be required to satisfy articles 10 and 11 of the relisting measures, which require comprehensive rectification of the violation, replacement of the relevant responsible officers, and appropriate arrangements for bearing the relevant civil damages.
Wang Yuanyuan is a salary partner at Grandway Law Offices