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Although the semi-annual report turned losses into profits, the three independent directors were still not satisfied and jointly sent a letter demanding improvements in the company's operating conditions - this is what happened to *ST Xianfeng (002141.SZ).

On August 21, *ST Xianfeng announced that it had recently received a letter of urging jointly submitted by three independent directors. The letter stated that the company's financial indicators such as operating income and net profit in the first half of 2024 were still not ideal, and urged the company to actively promote the improvement of its operating conditions.

Previously, the company had just released its semi-annual report. In the first half of this year, *ST Xianfeng achieved a profit of 5.4437 million yuan, turning losses into profits. The non-net profit was -15.4 million yuan.

Turning losses into profits, why are independent directors still not satisfied? China Business News noted that *ST Xianfeng is facing multiple risks of delisting. On the one hand, the company's operating income in 2023 was only 88.04 million yuan, and its net profit loss was 120 million yuan. It has been "branded" and issued a delisting risk warning. Although the performance in the first half of 2024 has improved, there is still a high probability that it will trigger the delisting clauses of the new regulations. On the other hand, although the company's net profit turned losses into profits in the first half of the year, it mainly came from asset disposal and financial investment income, and the main business is still losing money.

In this difficult situation, *ST Xianfeng seems to want to put its bets on mergers and acquisitions, and has mentioned many times its intention to implement mergers and acquisitions, but as of now, it has not disclosed the progress of the mergers and acquisitions.

Independent directors jointly sent letters several times

Unlike other listed companies’ recent independent directors’ letters mostly targeting the authenticity of annual reports and occupation of non-operating funds, the three independent directors of *ST Xianfeng’s letter this time directly targeted the company’s operations.

According to *ST Xianfeng's disclosure, the three independent directors Xiao Shilian, Deng Yanchang and Liang Rong believed in the "Letter of Urgency Requesting the Company to Actively Promote Measures to Improve Operating Conditions" jointly submitted that the company's financial indicators such as operating income and net profit in the first half of 2024 were still unsatisfactory.

In this regard, the above-mentioned independent directors put forward two suggestions. The first is to actively take various measures to effectively improve the operating conditions of the company's veterinary vaccine business, enhance the company's sustainable operating capabilities, and improve the company's comprehensive service capabilities and market competitiveness in the field of animal health. The second is to actively promote strategic transformation through mergers and acquisitions and other measures according to the established goals, effectively improve the company's sustainable operating capabilities, strengthen communication with relevant regulatory authorities, and strive to obtain relevant support within an effective time.

This is not the first time that the company's independent director has spoken out. In June this year, the above-mentioned independent director sent a letter to the company's board of directors, requesting the hiring of a third-party intermediary agency to conduct a special review of whether the impact of the matters involved in the company's 2023 internal control audit report has been eliminated.

Multiple delisting risks

Behind the frequent voices of independent directors, *ST Xianfeng is facing multiple risks of delisting due to its operational crisis.

Public information shows that *ST Xianfeng's business is mainly based on pig vaccine products. It currently has 6 series of core pig vaccine products including blue ear, circovirus, diarrhea, mycoplasma, pseudorabies, and swine fever.

Since last year, *ST Xianfeng's performance has declined rapidly. According to the financial report, in 2022, *ST Xianfeng's revenue was 885.7 million yuan, which dropped sharply to 88.04 million yuan in 2023, a year-on-year decline of 90.05%. The net profit in 2023 was -120.1 million yuan, a year-on-year decline of 151.72%.

Because the net profit attributable to shareholders of the listed company in 2023 is negative, and the operating income after deduction is less than 100 million yuan, and the internal control audit report in 2023 was issued with a negative opinion, *ST Xianfeng was issued a delisting risk warning and other risk warnings.

*ST Xianfeng explained in its financial report that one of the reasons for the decline in performance was that the pace of pig capacity reduction accelerated in the second half of 2023, and the demand for animal health products by pig breeding companies dropped significantly, and animal health companies faced strong operating pressure.

In fact, the industry in which *ST Xianfeng operates is indeed facing cyclical adjustments. According to the data compiled by Choice, among the 14 listed companies in the animal health sector, 7 companies saw a year-on-year decline in operating income in 2023. Among them, Haili Bio (603718.SH) and Yongshun Bio (839729.BJ) saw a revenue decline of more than 9%.

Apart from the cyclical factors of the industry, the sharp decline in *ST Xianfeng's operating income may be mainly due to the company's sale of its original main business. *ST Xianfeng said at the annual report performance briefing that the change in operating income was mainly due to strategic transformation, and the original nearly 1 billion enameled wire business was divested, which led to a significant decline in consolidated performance.

In the first half of this year, *ST Xianfeng's operating income continued to decline, reaching only 28.56 million yuan, a year-on-year decline of 35.82%. Its non-net profit was -15.40 million yuan, a year-on-year increase of 58.18%. Although its net profit turned from loss to profit, it only made 5.44 million yuan.

According to the delisting rules issued in April this year, for main board companies, if the lower of the audited total profit, net profit and net profit after deducting non-recurring gains and losses in the most recent fiscal year is negative, and the operating income is less than 300 million yuan, a delisting risk warning (*ST) will be implemented; if this situation is still triggered in the next fiscal year, the company will be delisted.

According to this rule, if *ST Xianfeng fails to turn its non-GAAP net profit into profit in 2024, or increase its annual revenue to more than 300 million yuan, it will directly face the risk of delisting.

In addition to the risk of financial delisting, *ST Xianfeng is also facing the risk of delisting at par value. The reporter noticed that with the failure of performance in 2023, the stock price of *ST Xianfeng continued to fall. On January 25, 2024, the company's stock price was 2.86 yuan per share, and then fluctuated downward. On August 22, the closing price was only 1.13 yuan per share, with a range of decline of more than 55%.

If the share price of *ST Xianfeng continues to decline and breaks through the 1 yuan warning line, there may be a risk of delisting at par value.

Can the risk of delisting be avoided?

For *ST Xianfeng, the key to maintaining its listing status is still to improve its operations.

Against the backdrop of a continued downturn in the industry, *ST Xianfeng turned a profit in the first half of the year, but this was not due to an improvement in its main business. The company admitted in its semi-annual report that it faced fierce price competition and payment collection risks in the industry during the reporting period, which further increased operating pressure and sales volume, resulting in unsatisfactory performance of the company's main business and increased losses in this period.

Asset disposal and financial investment may be the key to turning losses into profits. *ST Xianfeng mentioned in its semi-annual report that during the reporting period, it actively took measures to reduce overall management expenses, continued to promote the disposal of land and real estate in Zhuhai, and obtained partial profits, and obtained profits through prudent financial management under the premise of strictly controlling risks.

The company did invest a lot of its own funds in financial management. According to the 2023 financial report, during the reporting period, the company used its own funds to purchase bank financial products of about 100 million yuan, securities financial products of about 480 million yuan, and other financial products of 350 million yuan, totaling about 930 million yuan.

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(Image source: *ST Xianfeng 2023 financial report)

However, some high-risk investment products of *ST Xianfeng suffered large losses in 2023. For example, the company used 50 million yuan of its own funds to purchase a private equity fund product of Hengqin Chuangsheng Jiarong Fund Management Co., Ltd., with a reference annualized return of 5%, but the actual profit and loss in the reporting period was -63.43%.

Industry insiders analyzed that although relying on financial management income can increase profits, this part of the income is difficult to fill the "hole" of net profit after deducting non-net profits. In addition, the investment market has been volatile in recent years, and the rate of return is difficult to guarantee.

In the long run, *ST Xianfeng's financial situation is still not out of trouble. According to a rough estimate, *ST Xianfeng's operating income in the first half of the year was 28.56 million yuan, and its non-net profit after deducting non-recurring items was -15.4 million yuan. According to this trend, in the second half of the year, it needs to have operating income of more than 270 million yuan, or its non-net profit after deducting non-recurring items to return to positive, in order to escape the delisting crisis.

It is not easy to achieve this goal. Judging from the non-net profit alone, *ST Xianfeng has been losing money for many consecutive years. In the nine years from 2015 to 2023, the company suffered losses in net profit after deducting non-net profits for 8 years.

If the company wants to increase its performance and get rid of the risk of financial delisting, M&A is an option. The company has mentioned M&A many times recently. In this urging letter, the independent directors suggested that the company actively promote measures including but not limited to M&A to carry out strategic transformation.

At the annual report performance briefing, *ST Xianfeng also stated that it is actively evaluating and striving to implement measures that are effective for the company's continued operation, including but not limited to mergers and acquisitions, as soon as possible.

However, the window of opportunity to escape from difficulties through M&A is not long, and the conditions are high. The above-mentioned industry insider analyzed that *ST Xianfeng needs to complete the M&A in September in order to merge the target company's financial reports for October, November and December. However, it takes a long time from contact, signing of the letter of intent, due diligence, business negotiations to the final completion of the acquisition. So far, *ST Xianfeng has not announced any substantial progress in M&A.

The above-mentioned person also said that the M&A project itself requires relatively good performance. From the revenue perspective, the operating income in the last quarter needs to be able to make up for the revenue gap of more than 200 million yuan, which is also quite difficult.