“Investors Network” Jordan

In January of this year, Dongfang Yuhong (002271.SZ) issued an announcement disclosing the shareholder and actual controller Li Weiguo's holdings reduction plan. The funds from this holdings reduction will be used to fulfill the underwriting commitments of the employee stock ownership plan. This employee stock ownership plan began in 2021, when Li Weiguo promised to supplement employees with interest of about 8% per annum (simple interest).

The implementation of this holdings reduction plan is a direct result of a sharp drop in the company's stock price. Compared to the stock price when the employee stock ownership plan was announced, Dongfang Yuhong's current market value has shrunk by 100 billion yuan. Apart from the market capitalization issue, the company's performance was not ideal. Due to adjustments in the real estate market and the impact of the macroeconomic environment, the company's performance has fluctuated greatly. In particular, in terms of cash flow and accounts receivable, it accounts for a large share of current assets, which has undoubtedly increased the company's operating risks.

The market capitalization fell to 100 billion dollars in two years

According to Dongfang Yuhong's announcement, Li Weiguo plans to reduce his holdings of the company's shares by no more than 50,3693 million shares through bulk transactions within 3 months after 15 trading days from the date of disclosure of this announcement, accounting for 2% of the company's total share capital. The funds obtained from the reduction will be used to fulfill the underwriting promise of the shareholding plan.

The employee stock ownership plan described above can be traced back to 2021, when Dongfang Yuhong introduced an employee stock ownership plan and soon completed the stock purchase in June of that year. The number of employees participating in the program reached 1,411, and there are various sources of funding, including employees' legal remuneration, self-financing, and financing from financial institutions. The shareholding plan lasts for 60 months.

According to the announcement, the employee stock ownership plan securities account purchased a total of about 494.717 million shares, accounting for 1.96% of the company's total share capital.

Of these, 344.717 million shares were purchased through continuous bidding transactions in the secondary market, while the other 15 million shares were transferred to Li Weiguo. The average transaction price was about 55.78 yuan/share, and the total capital raised by employees was about 1.38 billion yuan, the ratio to the financing capital was 1:1. The total transaction amount was about 2.76 billion yuan.

Dongfang Yuhong is a leader in the domestic waterproof industry. Its industry is closely linked to the real estate industry, and its stock price fluctuates along with the development of the industry. In 2021, when the employee stock ownership plan mentioned above was introduced, the company's stock price reached a high of 64.14 yuan/share on June 1 of that year, but then began to decline. As of January 2024, the company was less than 20 yuan/share, down about 70% compared to the employee's shareholding price of 55.78 yuan/share.

Judging from the current situation of Dongfang Yuhong's top ten shareholders, many employees have chosen to leave the market. According to Dongcai Choice data, at the end of 2021, the company's employee shareholding platform Fucheng Haifutong Asset Management ranked as the company's 7th largest shareholder. By the end of September 2023, the shareholder's shareholding ratio decreased by 22.83% month-on-month, and the shareholding ratio dropped to 1.52%. By November 13, 2023, Fucheng Haifutong Asset Management was no longer among the top ten shareholders of the company.

Optimizing the capital chain is one of the priorities

In addition to market capitalization issues, Dongfang Yuhong is also facing major challenges in terms of operation. The company's core products are waterproof materials, and this industry is closely linked to China's real estate and infrastructure investment. Affected by fluctuations in the real estate market, the company has experienced significant changes in its operations. An announcement issued by the company in November 2023 attracted widespread attention in the market.

On November 16, 2023, Dongfang Yuhong issued an announcement stating that its wholly-owned subsidiary Hongxi Real Estate plans to transfer 95% of its shares to Suzhou Zhuhui Industrial Co., Ltd., at a transfer price of only 475,000 yuan. The deal raised concerns in the market because, according to Red Star News, the relevant assets of Hongfeng Real Estate were contested by Hongxi Real Estate for 4,013 billion yuan on October 18, 2023. It was sold at a sharp discount in less than a month, causing the market to worry about Dongfang Yuhong's financial situation.

Regarding the transfer transaction, Dongfang Yuhong stated in the announcement, “This transaction will help further improve the efficiency of the company's capital and resource utilization, and help establish long-term stable and deep business partnerships with customers.”

Fluctuations in performance are also evident. In particular, in 2022, the company's revenue declined for the first time since listing.

In 2022, Dongfang Yuhong's revenue was 31.2 billion yuan, down 2.26% year on year, while net profit fell short, down 49.57% year on year to 2.12 billion yuan. In addition to industry factors, prices of bulk raw materials such as asphalt continued to rise sharply during the reporting period, leading to an increase in operating costs and further encroaching on net profit.

As of the third quarter of 2023, the company's performance rebounded slightly. Revenue reached 25.4 billion yuan, up 8.48% year on year, and net profit was 2.353 billion yuan, up 42.22% year on year. However, there is still a big gap between net profit and 4.205 billion yuan in 2021.

Dongfang Yuhong is also facing certain cash flow problems. By the end of September 2023, Dongfang Yuhong's accounts receivable reached 15.1 billion yuan, an increase of 39% over the initial balance, accounting for nearly half of current current assets. At the same time, operating cash flow in the first three quarters was negative, reaching -4 to 76 billion yuan, increasing the company's operating risk. In response, the company explained that it is mainly due to the year-on-year increase in cash received from the company's continuous strengthening of channel structure optimization and the year-on-year increase in cash received from selling products and providing services.

Furthermore, by the end of September 2023, Dongfang Yuhong's monetary capital was 4.163 billion yuan, while its short-term loans and non-current liabilities due within one year totaled about 6 billion yuan. This means that the company's current monetary capital cannot cover short-term debt, increasing the company's debt repayment pressure.

Dongfang Yuhong is also aware of this phenomenon. In the investor relations activity record sheet after the release of the third quarter report, the company stated that there will be various adjustments in 2024. The first item is to take measures to improve the company's cash flow and accounts receivable issues.

As a domestic waterproof leader, Dongfang Yuhong has strong channels, brands, customers and technical advantages, and has maintained steady growth in performance for many years. However, due to industry fluctuations, the company's performance fluctuated greatly. Facing this challenge, the company has taken active measures, including increasing the expansion of non-waterproof business, continuously launching diversified products such as paint, mortar, insulation, etc., and gradually moving from a waterproof leader to a comprehensive building materials service provider. Capital Securities believes that the company's newly expanded categories and original business have good synergy in terms of channels, brands and customers, and can achieve faster growth. (Produced by Thinking Finance) ■