the valuation of hanjia design’s acquisition of futai technology is like “launching a satellite”. who will protect the interests of small and medium shareholders?
2024-09-26
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as for this m&a transaction, the proportion of related-party transactions is extremely high, the equity valuation involves several key assumptions that are overly optimistic, and the rationality of futai technology's high acquisition premium is questionable;as the coverage ratio of its performance commitment arrangements is significantly low and all transaction counterparties are able to secure cash, the interests of hanjia design's small and medium shareholders may be severely damaged, among other serious problems.
on september 10, 2024, hanjia design group co., ltd. (hereinafter referred to as "hanjia design", stock code: 300746.sz) issued a suggestive announcement on the proposed change of control, and also issued an announcement on the cash acquisition of part of the equity of suzhou futai information technology co., ltd. (hereinafter referred to as "futai technology").
hanjia design is a company mainly engaged in architectural engineering design and epc general contracting business. this time, hanjia design intends to purchase the target assets controlled by the actual controller after the change of ownership in full cash payment, and the transaction price is 581.3993 million yuan. the target asset of this transaction is 51.00% of futai technology, whose main business is in the field of e-government, mainly in the fields of urban environment and municipal utilities.
as far as this m&a transaction is concerned, there are a very high proportion of related-party transactions, several key assumptions involved in the equity valuation are overly optimistic, and the rationality of futai technology's high acquisition premium is questionable; it also faces many serious problems, such as perfect evasion of supervision through suspected careful calculations and designs, and the significantly low coverage rate of its performance commitment arrangements, with the counterparties able to pocket cash, which may seriously damage the interests of small and medium shareholders of hanjia design.
the valuation of the acquisition target futai technology is like "launching a satellite"
in this huge related-party transaction, how can we ensure the fairness of the equity acquisition price?
from the perspective of the counterparty, the counterparties of this acquisition transaction include shen gang, cheng zhuo, he weijun, suzhou tailian zhixin investment management partnership, and other related parties, and the number of shares transferred by the related parties is 10.8582 million shares, accounting for 50.63% of the total transferred shares. in the case of more than half of the acquisition transaction involving a large number of related transactions, how can hanjia design effectively ensure that the price of this equity acquisition is fair, and whether this transaction has seriously transferred benefits to the company's major shareholders are questionable.
it should be noted that liquidity is worrying, but the equity acquisition price is much higher than that of comparable listed companies. is the acquisition premium of futai technology too outrageous?
the final valuation of the total equity value of futai technology shareholders, the target of this acquisition transaction, is rmb 1,140,000,000, which is rmb 801,290,900 higher than the net assets attributable to the parent company, with an appreciation rate of 236.57%. is it reasonable for futai technology, a company that has been delisted from the new third board for many years, to record such a high premium rate in its equity transaction?
to answer this question, we need to refer to the valuation level of comparable companies for analysis. since the equity valuation results of the final income method are basically the same as the market method valuation results, and the difference between the valuation results of the two methods is only 3.68%, the market method valuation results can be used for further valuation rationality analysis.
in the market method of equity valuation for this acquisition, the comparable companies selected by hanjia design include baosight software, chinasoft and digital government. baosight software has served customers in 10 major industries and more than 550,000 corporate customers; chinasoft's main customers are major high-quality financial institutions. the business areas of the above two companies are completely different from futai technology's current e-government business areas mainly focusing on urban environment and municipal utilities, so their business comparability is quite low. futai technology carefully selected companies with higher market value and poor comparability, which may lead to the possibility of serious water injection in its equity valuation.
on the other hand, the only listed company with similar and comparable business to futai technology is digital government, which is also an e-government solution provider. in this equity valuation of futai technology, the modified value ratio pb used is still as high as 4.26 even after considering the liquidity discount, which is more than 30% higher than the pb value of 3.22 of digital government, a comparable company, after adjustment in the same period. futai technology, a company that has been delisted from the new third board for many years, has extremely low equity liquidity. compared with the a-share listed company digital government, which is a world apart, the valuation level given by hanjia design can greatly surpass comparable listed companies. it is hard not to sigh that such a high acquisition price is too outrageous.
at the same time, as of september 13, 2024, the closing price of the comparable company digital government was 12.07 yuan, a further decline of -15.83% from the closing price on the valuation base date at the end of july 2024, and the equity of other comparable companies selected this time also suffered a significant decline. as the overall valuation level of the industry continues to decline after the valuation base date, futai technology's already outrageous acquisition price has become even more outrageous. in the future, after the major shareholder's equity transfer cash is pocketed, the consequences of the severely inflated valuation premium and the goodwill barrier may only be paid by many small and medium shareholders.
at the same time, many key assumptions involved in the equity valuation income method are also too optimistic and magical, which can be said to challenge the iq of the majority of investors.
from the perspective of the overall business quality, futai technology's net profit in 2023 was 98.9407 million yuan, but the net cash flow generated by operating activities in the same period was only 9.2826 million yuan, less than one-tenth of the net profit. from january to july 2024, futai technology's net profit was 37.4909 million yuan, while the net cash flow generated by operating activities in the same period fell further to a negative -15.1056 million yuan. during the reporting period, futai technology's net profit was extremely mismatched with its operating cash flow, and the overall quality of its business was very worrying.
on the other hand, with such poor operating cash flow performance, hanjia design's forecast of free cash flow, a key assumption indicator for equity valuation of futai technology, is outrageous. as we all know, a company's free cash flow, on the basis of its operating cash flow, must also take into account the deduction of capital expenditures. therefore, when capital expenditures are expected to be high, free cash flow will be further reduced compared to operating cash flow.
however, when futai technology's operating cash flow from january to july 2024 was significantly lower than the level for the whole year of 2023 and has fallen to a negative number of over 10 million, and the company's capital expenditure is expected to be as high as 51.1942 million yuan in the remaining period from august to december, hanjia design institute predicts that futai technology's free cash flow for the remaining period of 2024 will be as high as 62.8970 million yuan, which is really surprising and puzzling.
at the same time, hanjia design's estimation of its free cash flow for the forecast period after 2024 is even more outrageous. it estimates that futai technology's free cash flow will reach 104.3706 million yuan in 2025, and its free cash flow in the perpetual period starting in 2030 is expected to be as high as 194.9149 million yuan, nearly doubling that of 2025.
taking into account the fact that futai technology's business operation model has not undergone major changes, its operating income is expected to have an annual compound growth rate of only 5.86% from 2023 to 2030, and its already tight operating cash flow has fallen to a negative number of over 10 million in 2024, hanjia design institute predicts that futai technology's rapidly growing free cash flow is a great challenge to the iq of investors.
the revenue and net profit growth calculated during the forecast period are extremely inconsistent, which also indicates that the equity valuation of futai technology may be seriously inflated.
according to the income method forecast of this equity valuation, from august to december 2024, futai technology's revenue is expected to be 540 million yuan, an estimated increase of 11.76% from january to july this year; while the net profit in the same period is expected to be 70.9802 million yuan, an estimated increase of 62.13% from the first seven months of this year. the predicted steady growth trend in futai technology's operating income and the leapfrog growth trend in net profit are obviously difficult to match with each other.
at the same time, looking further into the entire forecast period, hanjia design predicts that futai technology's net profit compound annual growth rate will be as high as 10.17% from 2023 to 2030, which is also much higher than the revenue compound annual growth rate of only 5.86% during the same period. it is highly questionable whether hanjia design predicts that futai technology's abnormally high net profit amount from august to december 2024 is inflated, and whether the net profit calculation amount of the company during the entire forecast period is reasonable based on it, and whether the equity valuation of futai technology is seriously inflated.
how to protect the interests of numerous small and medium shareholders?
it is suspected that this merger and acquisition transaction was a sophisticated way of evading regulation, thanks to careful calculations and designs.
for major mergers and acquisitions and reorganizations of listed companies, the china securities regulatory commission has formulated a special "management measures for major asset reorganizations of listed companies" to conduct strict supervision and management. in terms of determining whether the hanjia design acquisition of futai technology transaction constitutes a major asset reorganization, the net assets of futai technology were finally confirmed at the transaction amount of 581.3993 million yuan for the 51.00% equity purchased this time, which accounted for 47.36% of the net assets of hanjia design at the end of 2022, which can be said to be precisely below the 50% major asset reorganization standard stipulated by the china securities regulatory commission.
at the same time, according to the semi-annual report data, as of the end of june 2024, hanjia design's book monetary funds amounted to only 160.4481 million yuan, and the amount of trading financial assets was 250.8100 million yuan. the total amount still had a huge funding gap of 170.1411 million yuan compared to the equity transfer payment required this time. in recent years, hanjia design's asset-liability ratio has also shown a clear and rapid growth trend. at the end of 2021, the company's asset-liability ratio was 37.63%, and as of the end of june 2023, it had climbed to 54.12%. in the severe situation where the company's asset-liability ratio continued to rise and the funding gap was huge, hanjia design resolutely gave up equity financing and chose to pay the equity transfer payment entirely in cash, thereby achieving a subtle evasion of regulatory review.
it is worth noting that the coverage ratio of the performance commitment arrangement for this transaction is low, and after the counterparty has pocketed the cash, how can the interests of small and medium shareholders be protected?
for this equity acquisition transaction, futai technology has set up the following performance commitment arrangement: shen gang, cheng zhuo, he weijun and tailian zhixin jointly promised that futai technology's cumulative net profit from 2024 to 2025 will be no less than 216 million yuan. their performance commitment only covers a short period of 2 years.
at the same time, there are as many as 62 counterparties in the acquisition of futai technology, including many natural persons and various investment funds. whether there is any proxy holding of equity is not discussed for the time being. looking only at the counterparties of the performance commitment transaction, the performance commitment arrangement set up this time is only for the four major related parties, namely shen gang, cheng zhuo, he weijun, and tailian zhixin investment. the total transfer of shares by the four parties this time accounts for 50.63% of the total transfer of equity, and their coverage rate is also relatively low.
as of the end of june 2024, hanjia design had goodwill of 353.0844 million yuan on its books; and the high premium acquisition of futai technology is expected to generate a huge amount of goodwill of several hundred million yuan, and the company's corresponding goodwill impairment risk will further increase sharply. in this m&a transaction, regulatory review was perfectly avoided, the performance commitment arrangement coverage rate was significantly low, and both counterparties were able to realize cash in their pockets. in the future, if futai technology's performance is lower than the expectations of this equity valuation, this m&a transaction may seriously damage the interests of many small and medium shareholders of the company.
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