Lingnan Shares Near 1 Yuan, Convertible Bonds Face Default Dilemma

• News
• 2024-07-16

Lingnan Shares Plunges into a Dual Crisis of Stock and Bond "Double Kill" as 645 Million Convertible Bonds Fail to be Redeemed and the Main Stock is on the Brink of Falling Below 1 Yuan.

On August 7th, Lingnan Shares opened with a limit-down,报价 at 1.12 yuan per share, while Lingnan Convertible Bonds opened with a drop of over 13%, and the decline later expanded to 20%, closing at 74.346 yuan per bond.

The catalyst for the sharp decline in both the main stock and the convertible bonds was an announcement on the evening of August 6th. Lingnan Shares announced that night that there was a risk the company might not be able to redeem the principal and interest of Lingnan Convertible Bonds. The bond matures on August 14th, with a remaining amount of 645 million yuan as of July 31st.

As of the end of the first quarter of this year, the company's cash balance was 246 million yuan. If the conversion continues, it could potentially crush the main stock price, which is already approaching 1 yuan. Given the current financial situation of the listed company, a buyback would also face tremendous financial pressure. The company is facing multiple difficulties, including a sudden increase in debt pressure, lack of profitability, and difficulty in recovering project payments.

Can Lingnan Shares resolve the crisis? A reporter attempted to contact Lingnan Shares by phone, but as of the time of publication, the phone of its securities affairs department has been continuously busy.

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Difficult Redemption of Convertible Bonds and Main Stock Approaching 1 Yuan

Public information shows that the convertible bonds facing default risk for Lingnan Shares were issued in August 2018, with a total amount of 660 million yuan, maturing this year on August 14th, with the last trading day and suspension day for the convertible bonds being August 9th and 12th, respectively. As of July 31st, the remaining amount of Lingnan Convertible Bonds was 645 million yuan.

As the convertible bonds are nearing maturity, Lingnan's funds are already tight. As of the end of the first quarter, the company's cash balance was 247 million yuan, with short-term loan balance at 2.24 billion yuan, and the balance of non-current liabilities due within one year at 1.662 billion yuan.

Lingnan Shares stated that there is a significant funding gap for the redemption amount of "Lingnan Convertible Bonds," and the company does not foresee any large inflows of funds in the next two weeks, making the risk of redemption highly likely. The company has provided guarantees for "Lingnan Convertible Bonds" by increasing assets, but there is significant uncertainty in the realization of the value of the additional credit assets.

Public information shows that as of July 11th, Lingnan Shares and its controlling subsidiaries have added new lawsuits and arbitration matters within twelve consecutive months that have not yet been disclosed, with a total amount involved of approximately 317 million yuan, some of which have not yet been heard in court.Can converting to shares before maturity help Lingnan Shares to mitigate risks? As of the close on August 7th, Lingnan Shares closed at 1.12 yuan per share, with a total market value of 1.9 billion yuan, marking the lowest since its listing. The low stock price makes it difficult to implement a downward revision of the conversion price to promote share conversion. The 645 million yuan in convertible bonds accounts for 34% of the total market value of the main stock, which is 1.9 billion yuan. A large volume of share conversion in a short period may lead to consecutive daily limit-downs in the main stock.

A seasoned convertible bond investor analyzed for the reporter that the remaining time for Lingnan convertible bonds to convert to shares is too short, leaving little room for maneuver. More problematically, the low stock price of Lingnan Shares requires market absorption; a large volume of share conversion in a short period could push the main stock into the danger zone of delisting.

"If Lingnan convertible bond investors directly convert to shares, they will also suffer significant losses if the stock price falls, and it may not be possible to sell if the stock price is below par value. However, if the convertible bond defaults, it becomes an ordinary claim, and there won't be much money left after future bankruptcy liquidation," said the investor.

Lingnan Shares announced in May of this year that it would revise the conversion price from 3.08 yuan to 1.94 yuan, at which time its main stock price had already broken through 2 yuan. On June 29th, the company once again revised the conversion price down to 1.4 yuan. After consecutive revisions, Lingnan Shares' main stock continued to decline, and in late July, it broke through 1 yuan, which is 90% below the conversion price, triggering the downward revision clause of the conversion price. The board of directors of Lingnan Shares decided not to revise the conversion price further.

"The actual downward revision of the convertible bond price is a contradiction between the interests of creditors and shareholders on the conversion price. Continuously revising the price will suppress the main stock price. If it coincides with a poor market and low industry prosperity, the main stock will face a significant decline. If it is not revised, the listed company will have to face debt issues," the investor also said. Many listed companies with a six-year convertible bond term will initiate share conversion promotion about 2 years before the convertible bond matures. "A lot of risks of convertible bonds are procrastinated. For a convertible bond with a total size of about 500 million yuan, if the listed company actively communicates with investors and actively promotes share conversion within 2 years, the main stock can be gradually digested."

Performance decline and difficulty in receivables collection, how to resolve the crisis?

Data shows that Lingnan Shares was established in 1998 and was listed on the SME board of Shenzhen Stock Exchange in 2014. Its main business is engaged in the construction of the ecological environment and the management of water affairs and water environment.

Since 2019, the operational capability of Lingnan Shares has continued to decline, with a continuous decrease in business income, from about 8 billion yuan in 2018 to about 2.1 billion yuan in 2023; net profit has been in deficit for three out of five years, with a cumulative loss of about 2.6 billion yuan in 2022 and 2023; the net cash flow from operating activities has been negative for three consecutive years.

In the first quarter of this year, the company still hasn't shaken off its downturn, with business income of 305 million yuan, a year-on-year decrease of 39.09%, and a net profit loss of 90.1613 million yuan, a year-on-year decrease of 78.45%. The performance forecast shows that the company is expected to continue to lose 200 million to 250 million yuan in net profit in the first half of this year.

In addition to weak profitability, Lingnan Shares' receivables collection ability is also poor, which has become one of the reasons for triggering a liquidity crisis. Since 2018, the amount of accounts receivable of Lingnan Shares has soared, with a balance of 3.058 billion yuan at the end of 2018, almost doubling from 1.592 billion yuan in the previous year. Except for 2020, the amount of accounts receivable exceeded 2 billion yuan from 2019 to 2023. As of the end of the first quarter of this year, Lingnan Shares' accounts receivable were 2.345 billion yuan.An industry insider close to Lingnan Shares told reporters that listed companies in the landscape water affairs sector generally face the issue of slow receivables. Lingnan Shares has over 2 billion yuan in accounts receivable, mainly due to the local governments related to projects initiated in previous years' arrears in project payments.

Regarding the difficulty in receivables, Lingnan Shares mentioned in its 2024 semi-annual performance forecast that the company's main clients are local governments or their various investment and financing platforms, and some projects have not been able to pay the company's project funds in full and on time, which has restricted the construction progress of the company's ongoing projects.

In 2022, Zhongshan Huayin Industry Investment Partnership (Limited Partnership) (hereinafter referred to as "Huayin Investment"), under the name of Zhongshan State-owned Assets, obtained a total of 5.02% of Lingnan Shares' equity through old stock transfers and private placements. In December of that year, the Management Committee of Zhongshan Torch High-tech Industrial Development Zone became the actual controller of Lingnan Shares, backed by Zhongshan State-owned Assets.

Zhongshan State-owned Assets had previously extended a helping hand to Lingnan Shares. From December 2022 to June 2023, Huayin Investment lent a total of 1 billion yuan to the company. Of this amount, 900 million yuan was originally scheduled to mature at the end of 2023, and 100 million yuan was to mature in mid-June 2024. However, to provide liquidity support, Huayin Investment has agreed to extend the repayment deadlines for both loans.