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The belated plan by Zhongshan State-owned Assets to acquire part of Lingnan convertible bonds is expected to bring a turning point to the convertible bond repayment issue.

On the afternoon of August 16 (Saturday),Lingnan Shares(002717.SZ) announced that the company received a notice from Zhongshan Talent Innovation and Entrepreneurship Ecological Park Service Co., Ltd. (hereinafter referred to as "Zhongshan Talent Service") on August 16 that it plans to acquire part of Lingnan convertible bonds at a purchase price of 100.127 yuan per share.

Soute convertible bonds and Landun convertible bonds defaulted in May and August this year, breaking the 30-year "unbeatable golden body" of convertible bonds. The impact of Lingnan convertible bond delisting is that the actual controller of Lingnan shares is state-owned, and this is the first case of convertible bond default before the delisting of the underlying stock. The market is worried that this will further affect the pricing of weak-asset bonds.

The arrival of Zhongshan State-owned Assets has relieved investors in Lingnan Convertible Bonds who have not yet converted their bonds. However, due to the large number of conversions in a short period of time, the latest share price of Lingnan Shares is only 0.93 yuan. In addition to the risk of delisting at par value, how the company can reverse the decline in fundamentals is the focus of market attention.

Zhongshan State-owned Assets intends to acquire Lingnan convertible bonds

The recent reports published by China Business News, "The underlying stock is approaching 1 yuan, the convertible bonds are facing default, and Lingnan shares are facing the problem of conversion and repayment" and "Convertible bonds have broken the "golden body" three times this year, and the credit risk has increased again and cannot be ignored", pointed out that due to the high debt ratio, the Lingnan convertible bonds due on August 14 "unsurprisingly" defaulted substantially. According to the announcement, as of August 14, 2024, the remaining amount of "Lingnan convertible bonds" is 456 million yuan. Investors who still do not convert their convertible bonds after the delisting of convertible bonds expire, the company that issued the convertible bonds is obliged to repay the principal and interest. As of the end of the first quarter, Lingnan shares had 246 million yuan in cash and could not repay the principal and interest of "Lingnan convertible bonds".

Regarding Zhongshan Talent Service's plan to acquire some Lingnan convertible bonds, Lingnan shares said that this major event is still in the planning stage. Currently, the "Lingnan convertible bonds" have stopped trading and conversion into shares.

Specifically for this acquisition, Zhongshan Talent Services will conduct a partial acquisition.BondsIf the holder holds no more than 1,000 Lingnan convertible bonds, all of them will be purchased according to the actual number; if the holder holds more than 1,000 bonds, part of them will be purchased, limited to 1,000 bonds.

The purchase price is 100.127 yuan per bond, which is 15% higher than the average closing price of the Lingnan Convertible Bonds for 20 consecutive trading days before August 9, 2024 (including that day).Bond face value。Calculated based on 1,000 bonds, this means that investors holding Lingnan convertible bonds worth more than 100,000 yuan cannot be redeemed.

The Management Committee of Zhongshan Torch High-tech Industrial Development Zone (hereinafter referred to as the "Torch District Management Committee") is the actual controller of Lingnan Shares, and behind it is the Zhongshan State-owned Assets Supervision and Administration Commission. The Torch District Management Committee officially moved into the listed company at the end of 2022. At that time, Zhongshan Huaying Industrial Investment Partnership (Limited Partnership) (hereinafter referred to as "Huaying Industrial Investment") invested 302 million yuan to acquire 5.02% of Lingnan Shares and obtained the voting rights corresponding to 17.32% of Lingnan Shares entrusted by the original actual controller Yin Hongwei. As of now, Huaying Industrial Investment holds 84.26 million shares of the listed company, accounting for 5.02% of the total share capital.

Before Lingnan's convertible bonds defaulted, many investors hoped that the Torch District Management Committee would help the listed company to repay. Interestingly, the company that intends to acquire Lingnan's convertible bonds is Zhongshan Talent Services, which is actually controlled by the State-owned Assets Supervision and Administration Commission of the Zhongshan Municipal People's Government.

An investor close to Lingnan Shares told the First Financial reporter that the Torch District Management Committee actually holds only 5.02% of the listed company's shares, and has provided a lot of funds to Lingnan Shares in the past two years. Faced with the issue of convertible bond repayment with deteriorating operating performance, the Torch District Management Committee has certain concerns.

The announcement shows that since the state-owned assets of Zhongshan Torch District acquired Lingnan Shares, in order to actively support Lingnan Shares in its relief efforts, it has subsequently provided Lingnan Shares with a total of 1 billion yuan in loans and 224 million yuan in financing guarantees.

The underlying stock still faces the risk of delisting at par value

Zhongshan State-owned Assets came to the rescue and resolved the redemption demands of some Lingnan convertible bond holders, but the underlying stock Lingnan shares still faces the risk of delisting at par value.

Since the conversion of convertible bonds needs to be digested by the market, selling the convertible bonds is the last rational choice for most convertible bond holders. As of August 9, the remaining amount of Lingnan convertible bonds was 543 million yuan, which dropped to 456 million yuan on August 14. During the four trading days, about 87 million yuan of convertible bonds were converted into shares, and the underlying stock price was under pressure.

Data shows that Lingnan shares hit the limit down on August 12, closed flat the next day, and fell below 1 yuan on August 14, a drop of 7%. That day was the last conversion day for Lingnan convertible bonds. As of the latest closing day, Lingnan shares' share price was 0.93 yuan, with a total market value of 1.4 billion yuan.

The underlying stocks of Soute Convertible Bond and Blue Shield Convertible Bond, which actually defaulted this year, were delisted last year, so there is no situation where the conversion affects the performance of the underlying stocks. The special feature of Lingnan Convertible Bond is that this is the first case where a convertible bond defaulted before the underlying stock was delisted. "Especially after the release of the 'Nine National Regulations' this year, low-priced stocks continued to fall. Whenever the stock price fell below or approached 1 yuan, the stock price continued to fall due to investors' concerns about the risk of delisting." A senior convertible bond investor told reporters: "The value of convertible bonds lies in the debt repayment ability and credit rating of listed companies. The stronger the debt repayment ability and financing ability, the more stable the performance of convertible bonds. On the contrary, once a listed company is delisted, the equity value is greatly reduced and there is no money to repay the debt, then the convertible bond will be worthless."

Zhongshan Talent Services acquired some convertible bonds, helping Lingnan Shares to resolve some of its debts, but the listed company's operating performance remains thorny, which is actually the key factor leading to the actual default of Lingnan's convertible bonds. As of the end of 2022, Lingnan Shares' monetary funds were 1.02 billion yuan, which was enough to cover the repayment amount of Lingnan's convertible bonds.

Lingnan shares' main business is engaged in ecological environment construction and water affairsEnvironmental governanceIn 2023, these two businesses accounted for more than 95% of the operating income. In that year, the company achieved operating income of 2.13 billion yuan, a year-on-year decrease of 17.08%, and realized a net loss of 1.096 billion yuan attributable to the parent. The net cash flow generated by operating activities was -279 million yuan.

Lingnan shares expects the loss margin to expand in the first half of the year, with a net loss of 200 million to 250 million yuan attributable to the parent company, compared with a loss of 108 million yuan in the same period last year. As of the end of the first quarter, the listed company's retained earnings were a loss of 1.167 billion yuan.

Lingnan shares said that there are three main reasons for the sharp decline in performance: 1. The impact of industry cyclical fluctuations and changes in market supply and demand, government investment reduction, and new orders that did not meet expectations; 2. The company's engineering business settlement cycle was extended, and the collection of accounts receivable was delayed. The tight funds restricted the construction progress of the company's ongoing projects; 3. Daily operating expenses still need to be maintained. As of the end of the first quarter, Lingnan shares had accounts receivable of 2.345 billion yuan.

After the convertible bond crisis is temporarily resolved, how Lingnan Shares will improve its profitability, optimize its financial structure, and avoid delisting of its underlying shares at par value in the future is not only a focus of attention for small and medium shareholders, but is also urgent for the Torch District Management Committee and Zhongshan Talent Services, which have invested real money.