MTC intends to sell receivables related to the Evergrande Group to its controlling shareholder for RMB 2 billion

On May 26, MTC announced that it plans to transfer receivables from the Evergrande group to its controlling shareholder, Nanchang MTC Investment Partnership (Limited Partnership), to clear risks. The transaction consideration is approximately RMB 2 billion.

The transfer of receivables from the Evergrande group by MTC has been fraught with twists and turns.

According to the announcement, on December 8, 2021, MTC signed an "Equity Transfer Agreement" with Shenzhen Beirongxin Investment Development Co., Ltd. (hereinafter referred to as "Beirongxin"), purchasing 44.6154% equity interest in Kunming Fengtai Investment Co., Ltd. ("Kunming Fengtai") held by Beirongxin through a trust plan for RMB 2.9 billion. The Company used receivables from Evergrande Group and its affiliates (including commercial acceptance bills and accounts receivable) amounting to approximately RMB 2.894 billion (amount after deducting prepaid interest) and cash of RMB 5.673 million as consideration.

In this context, on February 28, 2022, the Company received a letter of commitment from its controlling shareholder Nanchang MTC Investment Partnership (Limited Partnership) (hereinafter referred to as "Nanchang MTC"), stating that if the transfer of the 44.6154% equity interest in Kunming Fengtai is ultimately not completed, in order to minimize the impact on the Company, Nanchang MTC commits to acquiring the claims (including commercial acceptance bills and accounts receivable) between the Company and Evergrande Group and its affiliated enterprises at a price no lower than the appraised value, with the final transaction price to be determined through negotiation with the Company based on the appraised value, and the payment method shall be cash. Whether Nanchang MTC is the Company's controlling shareholder does not affect the fulfillment of this commitment.

MTC stated that the main purpose of the company's acquisition of equity in Kunming Fengtai was to transfer receivables from Evergrande Group and its affiliates while obtaining valuable assets, thereby maximizing the protection of the interests of the company and all shareholders. However, according to the Equity Transfer Agreement, 44.6154% of the equity in Kunming Fengtai should have been transferred to the company and the industrial and commercial registration completed within 30 working days after the signing of the agreement. As of the date of this announcement, the equity transfer for the aforementioned transaction has not been completed due to overdue status, and there is significant uncertainty regarding its future completion. Meanwhile, when the company signed the agreement with Beirongxin, the pricing was based on the "Asset Appraisal Report on the Total Equity Interests of Shareholders of Kunming Fengtai Investment Co., Ltd." (Pengxin Zi Ping Bao Zi [2021] No. S191). A considerable amount of time has passed since the valuation reference date, making it difficult to assess the value of the undelivered equity, which may pose contingent risks to the company in the future.

In addition, MTC stated that the receivables held by the company from Evergrande Group and its affiliates (including commercial acceptance bills and accounts receivable) are at risk of default, and the company has already made impairment provisions for this. If Evergrande Group and its affiliates continue to face difficulties in capital turnover and tight cash flow, the receivables held by the company from Evergrande Group and its affiliates will face further impairment risks.

Therefore, to maximize the protection of the interests of the company and its shareholders, and to mitigate the contingent risks associated with the receivables (including commercial acceptance bills and accounts receivable) held by the company from Evergrande Group and its affiliates, MTC held a meeting on May 25. It is proposed to sign the "Agreement on the Assignment of Rights and Obligations under <股权转让协议>" with the controlling shareholder, Nanchang Zhaotou, and the actual controller, Gu Wei. will transfer all rights and burdens under the aforementioned "Equity Transfer Agreement" to the controlling shareholder, Nanchang Zhaotou.

Regarding the transaction consideration for this deal, MTC stated that as of the end of 2021, the original book value of overdue and not-yet-due commercial acceptance bills and accounts receivable accepted by companies affiliated with Evergrande Group, as declared by the company, was RMB 2.986 billion, with a book value of RMB 1.971 billion and a bad debt provision ratio of 34%. The book value of receivables from Evergrande Group and its member enterprises, used as payment consideration, should be RMB 1.967 billion; adding the cash payment of RMB 5.673 million brings the total to RMB 1.973 billion. Referencing the aforementioned valuation report and considering the actual circumstances of the transaction, the consideration for this transaction is RMB 2 billion.

MTC stated that transferring all rights and obligations under the "Equity Transfer Agreement" to Nanchang Zhaotou will help quickly dispose of receivables from Evergrande Group and its affiliates, thereby clearing the risk of debt defaults by Evergrande Group and its affiliates. On the other hand, Nanchang Zhaotou's cash consideration for this transaction will help increase the company's working capital, enhancing its financial strength and risk resistance.

MTC believes that this transaction will help the company adhere to its principle of steady development, focus on the three major business segments of smart display, smart home networking, and the LED industry chain, continue to increase R&D investment and technological innovation, achieve high-quality corporate development, and promote efficient asset utilization and coordinated industrial development.

On the same day, MTC Co., Ltd. disclosed its intention to dispose of partnership and trust interests: The company plans to transfer its partnership interest in Qianhai Hongtai to its controlling shareholder, Nanchang Zhaotou, and actual controller, Gu Wei, for a transaction amount of RMB 700 million; it also plans to transfer its trust shares in Xinyao No. 7, which it previously subscribed for at RMB 900 million. If the cumulative investment recovered by the company within three months after the trust maturity date is less than RMB 900 million, or if there is a possibility of impairment or indeterminable value of the assets under this investment during the period the company holds the trust shares, Nanchang Zhaotou and Gu Wei shall acquire the trust interests held by the company.

MTC actively mitigates risks related to the Evergrande Group

Evergrande is massive, with numerous companies across the supply chain. After Evergrande's financial crisis erupted, affected companies emerged in large numbers. Annual reports disclosed by many related companies in April showed a sharp decline in net profit or huge losses in 2021, mainly due to provisions for bad debts from Evergrande Group and its affiliates.

Among them, MTC achieved revenue of RMB 22.538 billion in 2021, a year-on-year (YoY) increase of 11.65%; net profit attributable to shareholders of the listed company was RMB 333 million, a decrease of RMB 1.43 billion from the previous year, representing a decline of 81.12%. The main reason for the significant drop in profit was being dragged down by Evergrande, resulting in an asset impairment provision of RMB 1.893 billion for receivables from Evergrande Group and its member enterprises.

How did Evergrande incur debts to MTC (supply chain) and encounter financial pitfalls?

Evergrande Group and its affiliated enterprises had business dealings with MTC Group. Specifically, when purchasing products such as LED luminaires from MTC, they did not use cash settlement but instead issued commercial acceptance bills worth 2.827 billion yuan to MTC Supply Chain. Of course, it is not uncommon in the industry for centralized procurement involving large corporate clients to be conducted on credit via commercial acceptance bills. However, unforeseen circumstances arose: Evergrande defaulted before completing the payments.

So, how did MTC Electronics "save itself"?

Some time ago, in response to investor inquiries, MTC stated that the company has taken a series of measures to mitigate risks related to the Evergrande Group , such as divesting MTC Supply Chain and obtaining shareholder commitments to acquire receivables related to the Evergrande Group at no less than the assessed value. The company will no longer accept commercial acceptance bills as a payment method for future business related to the real estate industry, and fully accrued relevant asset impairment provisions in 2021.

Specifically, in November 2021, MTC fully divested its wholly-owned subsidiary, MTC Supply Chain. MTC Supply Chain planned to introduce Maiwei New Power and Yiwei Technology as strategic investors, who subscribed to RMB 2,884,615,384 of new registered capital in MTC Supply Chain for a total of RMB 3 billion.

As of December 3, 2021, MTC Supply Chain had received RMB 3 billion in capital increase. This funding was not obtained easily; rather, it was achieved by significantly reducing its shareholding (from 100% to 14.7727%), thereby transforming MTC Supply Chain into an equity-participating subsidiary and excluding it from the company's consolidated financial statements, thus completing the capital increase and share expansion of the supply chain.

However, in April 2022, Maiwei New Power and Yiwei Technology planned to transfer their respective 56.8182% and 28.4091% equity interests in Zhaochi Supply Chain to the controlling shareholder, Nanchang Zhaotou.

What was the purpose behind this? MTC explained to investment institutions that, prior to the deconsolidation of MTC Supply Chain, its main assets were commercial acceptance bills issued by Evergrande Group and its affiliated entities. In 2021, the company addressed the potential payment risks associated with certain Evergrande commercial bills held by the listed company (i.e., MTC) through the deconsolidation of MTC Supply Chain. To avoid other contingent risks that the listed company might face under the specific measures taken to mitigate Evergrande-related risks, the controlling shareholder reached an agreement with the capital increase investors, Yiwei Technology and Maiwei New Power, to acquire their equity interests in MTC Supply Chain.

Subsequently, in December 2021, the Equity Transfer Agreement was signed with Beirongxin to purchase a 44.6154% equity interest in Kunming Fengtai from Beirongxin for RMB 2.9 billion ("bad debt + cash"). Meanwhile, pursuant to the Equity Transfer Agreement, the target equity under the agreement shall be transferred to the Company and the industrial and commercial registration shall be completed within 30 working days after the signing of the agreement.

However, as mentioned above, the equity transfer related to the aforementioned transaction has not been completed within the stipulated timeframe, and there is significant uncertainty regarding its future completion.

Just as investors were bewildered by the dazzling equity transfers and guarantee operations, late at night on February 28, MTC issued another announcement stating that the company's controlling shareholder, Nanchang Zhaotou, its parties acting in concert, and actual controller Gu Wei have signed a "Framework Agreement on Share Transfer" with Shenzhen Capital Group and its wholly-owned subsidiary Yixin Investment. Nanchang Zhaotou intends to transfer its 19.73% stake in the company to Shenzhen Capital Group and Yixin Investment, with a transaction price of RMB 4.89 per share and a total transfer consideration of RMB 4.368 billion.

As a result, upon completion of this share transfer, Shenzhen Capital Group will become the actual controller of the listed company MTC, while Nanchang Zhaotou and Gu Wei will retain voting rights for only 5% of the shares in the listed company and waive voting rights for all remaining shares held.

The acquirer, Shenzhen Capital Operation Group Co., Ltd., is a state-owned asset support platform and professional state-owned capital operation platform specially established by the Shenzhen State-owned Assets Supervision and Administration Commission (SASAC) to promote the transformation of state-owned asset management from managing assets to managing capital and to advance the overall capital operation strategy of Shenzhen's state-owned assets. It possesses strong capabilities. The takeover by Shenzhen's state-owned assets may bring substantial cash flow to the company and will also support the future development of its core business.

In response to recent inquiries about the progress of the Acquisition by Shenzhen Capital Group, MTC stated that Shenzhen Capital Group is currently conducting due diligence on the company . This matter still requires all relevant parties to complete full due diligence, sign the share transfer agreement, undergo review and approval procedures by the state-owned assets supervision and administration authorities, file for merger control and obtain a decision or consent document from the anti-monopoly authorities stating no further review will be conducted or that the transaction is not prohibited (if applicable), as well as other necessary procedures. Only after obtaining compliance confirmation from the Shenzhen Stock Exchange can the share transfer registration procedures be handled at the Shenzhen Branch of China Securities Depository and Clearing Corporation Limited.

MTC stated that in 2022 the company will focus on its core business, and will no longer be affected by risks related to the Evergrande Group, nor will it impact subsequent company operations.

Do you understand this series of actions? After such a tortuous yet positive defensive battle, can MTC achieve a turnaround and usher in a new chapter? Let's wait and see and wish it good luck.