It is worth noting that with the substantial growth of the company's performance, the accounts receivable of Beijing Shen'an Group have also increased significantly. From 2012 to 2013, Beijing Shen'an Group's operating income came from accounts receivable, exceeding 50% and 90% respectively.
Some market participants pointed out that Beijing Shen'an Group used a large amount of accounts receivable to boost its performance, possibly in order to increase its acquisition valuation. In addition, the large amount of accounts receivable also posed the risk of bad debts.
High premium acquisition
Feile Audio was established on November 18, 1984, and listed on the Shanghai Stock Exchange on December 19, 1990. From 1984 to 1997, the company's main business was home appliance marketing, professional production and sales of audio. From 1997 to 2002, the company's industrial structure was adjusted and transformed into the IC card industry. In 2002, the company acquired 100% equity of Shanghai Yaming Light Bulb Factory Co., Ltd. and entered the green lighting industry. In 2009, the company adjusted its strategy, focusing its main business on green lighting, and gradually exited the IC card industry.
With the development of the lighting business, this business has become the main source of income for Feiyue Audio. Currently, the company's wholly-owned subsidiary Shanghai Yaming Lighting Co., Ltd. and its holding subsidiary Shanghai Shenglan Industrial Co., Ltd. produce LED lighting products.
From 2012 to 2013, the company achieved revenue of 2.014 billion yuan and 2.142 billion yuan respectively, and net profits of 105 million yuan and 57.44 million yuan respectively. During the same period, Shanghai Yaming Lighting Co., Ltd. achieved total operating income of 1.642 billion yuan and 1.649 billion yuan, respectively, and net profits of 44.6477 million yuan and 8.18 million yuan respectively; Shanghai Shenglan Industrial Co., Ltd. achieved total operating income of 287 million yuan and 384 million yuan, with net profits of 34.9119 million yuan and 40.95 million yuan respectively.
Beijing Shen’an Group, which is planned to be acquired this time, is a large LED lighting solution provider in my country. Feile Audio stated that the acquisition of Beijing Shen'an Group will help the company leverage Beijing Shen'an Group's years of experience in the field of LED lighting applications and engineering project construction experience, channel resources and customer resources to accelerate the expansion of the company's LED lighting business sector. It is an important measure to achieve the company's established strategic development goals.
However, the acquisition price is relatively high and has attracted market attention. As of May 31, 2014, the audited net assets of the transaction subject attributable to the parent company were 413 million yuan, the assessed value was 1.593 billion yuan, and the assessed value-added rate was 285.45%. It is understood that this transaction adopts the income method evaluation result as the final evaluation result.
Information shows that Beijing Shen'an Group's predicted net profit in 2014 is 136 million yuan. Calculated based on the assessed value of 1.593 billion yuan, the price-to-earnings ratio of Feile Audio's acquisition of Beijing Shen'an Group is 11.71 times.
Compared with the acquisition of Feile Audio, the price-to-earnings ratio of Zhongjing Electronics' acquisition of LED assets is lower. In February this year, Zhongjing Electronics announced its plan to acquire 100% of Founder's equity for 286 million yuan. Founder estimates that its net profit in 2014 will be no less than 28 million yuan. Based on this calculation, the price-to-earnings ratio of Zhongjing Electronics' acquisition of Founder is 10.21 times. According to the data, Founder's current main business is the R&D, production and sales of flexible printed circuit boards (FPC), which are booming. It is a leading enterprise in the FPC market used in the field of LED energy-saving lighting.
Similarly, Leyard’s acquisition of Kinda Lighting also appears to be a relatively cost-effective deal. In November last year, Leyard spent 203 million yuan to acquire 100% equity of Kinda Lighting. Kinda Lighting, whose main business is the lighting scheme design of buildings and roads, lighting engineering construction and the design, installation and sales of supporting lamps, is expected to deduct non-net profits of no less than 22.5 million yuan in 2014. Based on this calculation, the price-earnings ratio of Leyard's acquisition of Kinda Lighting is 9 times.
A brokerage analyst said that compared with the acquisition price-earnings ratios of the above two companies, the price-earnings ratio of Feile Audio's acquisition of Beijing Shen'an Group is significantly higher.
Strange performance "myth"
Feilo Audio adopts the income method as the basis for evaluation results based on the high growth of the target company's performance. The "myth" of Beijing Shen'an Group's performance on the eve of its listing undoubtedly supports such a high valuation on the surface.
Data shows that from 2012 to 2013, Beijing Shen’an Group’s operating income was 137 million yuan and 419 million yuan respectively, and its net profits were 20.3659 million yuan and 70.7019 million yuan respectively. In 2013, the year-on-year growth rates of the above two indicators were 205.83% and 247.16% respectively. This growth rate is much higher than that of Qinshang Optoelectronics, Leyard, Jufei Optoelectronics, Sunshine Lighting and Ledman Optoelectronics in the same industry.
In 2013, among the listed companies in the LED industry, Ledman Optoelectronics, Qinshang Optoelectronics, and Sunshine Lighting achieved year-on-year increases in net profits attributable to listed companies of -23.04%, -1.17%, and 4.52% respectively, while Leyard and Jufei Optoelectronics, which performed better, only saw performance increases of 37.81% and 43.06% in the same period.
Regarding the performance of Beijing Shen'an Group's profit growth which is much higher than that of its listed companies, the above-mentioned securities dealer said that no matter how strong the company's LED business capabilities are, it will not be so much better than the performance of listed companies in the same period. This kind of performance seems too "aesthetic".
In response to this, Feile Audio responded to a reporter's interview and stated that the main business of Beijing Shen'an Group is to provide customers with the design, construction, contracting and technical services of various lighting engineering projects such as outdoor lighting, landscape lighting, indoor lighting, etc., along with the accompanying sales of various LED lighting products or customized lighting products, as well as providing contract energy management services to customers. Feile Audio stated that there are certain differences in the main business types between Beijing Shen'an Group and Qinshang Optoelectronics, Leyard, Jufei Optoelectronics, Sunshine Lighting and Ledman Optoelectronics.
With the substantial increase in the company's operating income and net profit in 2013, Beijing Shen'an Group's accounts receivable balance also increased significantly from 80.2568 million yuan in 2012 to 397 million yuan, and the proportion of this data in operating income during the same period also increased significantly from 58.39% to 94.75%.
The financial director of a listed company told reporters that from the above data, it can be seen that the income of Beijing Shen'an Group in the past two years mainly comes from accounts receivable, and in 2013, more than 90% of the income came from accounts receivable. This situation is very rare among listed companies whose main business is engineering.
It further pointed out that from the above situation, it can be seen that the substantial increase in accounts receivable is the "most important" contributor to the substantial increase in performance of Beijing Shen'an Group in the past two years, but such performance growth is not stable. And it does not rule out the possibility of adopting such a radical approach to increase performance in order to raise the acquisition price.
The financial director pointed out that if the above-mentioned high accounts receivable face the dilemma of being unrecoverable after the acquisition is completed, it will have an adverse impact on the operations of Feile Audio Company.
It is worth noting that Feile Audio stated in the report that considering the nature of the company's business, the receivables have a long accounting period and there is a certain risk of bad debts. Therefore, this assessment predicts the company's future annual asset impairment losses based on 1% of the current year's operating income.
The above-mentioned analysts pointed out that predicting the company's future annual asset impairment losses based on 1% of the current year's operating income provides good insurance for Beijing Shen'an Group to ensure its performance commitments from 2014 to 2016. After the performance commitment period, it is unreasonable to predict future annual asset impairment losses based on 1% of operating income. If the above-mentioned accounts receivable risk breaks out, Feile Audio will have to pay for the bad debt risk of Beijing Shen'an Group.
What’s even more puzzling is that among Beijing Shen’an Group’s five major customers from January to May 2014, Reader Publishing Media Co., Ltd. was the largest customer, with a purchase amount of 111 million yuan, accounting for 28.29%. Reader Publishing Media Co., Ltd. is a cultural company. It is puzzling why it purchased products from Beijing Shen'an Group on such a large scale this year.
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