(Yicai Global) Dec. 17 -- Authorities in China are asking questions over TCL Group's proposed restructuring, which includes a CNY4.8 billion (USD689 million) plan to sell part of the electronics makers' assets to a new firm its executives own.
The Shenzhen Stock Exchange has sent a 16-page letter to the Huizhou-based firm asking for more details on 31 aspects of the proposed restructuring plan, according to a statement from the bourse. Among the issues the exchange is seeking clarification on are the reason for the sale and valuation of the assets.
The company announced plans more than a week ago to sell its consumer electronics, home electric appliances and intelligent terminal businesses, which boast combined annual revenues of about CNY50 billion, to TCL Industries Holdings, a company set up by TCL President Li Dongsheng and other executives.
The plan is part of TCL's efforts to focus on its Shenzhen-based semiconductor display business. China Star Optoelectronics Technology's profits have waned in recent years.
According to the bourse's letter, Li needs to explain why the company is going all-in on the display business and convince the regulator that the move is in the interests of the listed firm. He also needs to clarify the deal's pricing, when the market capitalization of TCL's two Hong Kong-listed units is closer to CNY4 billion.
Asset sales are common among listed companies, but it is not usual to see a listed firm's operating revenue predicted to halve after a sell-off. That's why TCL's rationale for the sale and its impact on listed units has become the focus of the Shenzhen exchange's inquiry. It also wants to know whether the plan is conducive to boosting the profitability of these units based on the changes in the company's financial status and operating results before and after the sale.
Some of the assets to be stripped have had relatively high profitability over the past two-and-a-half years, a company report issued on Dec. 8 shows. Net profits attributable to TCL Electronics Holdings, the key subsidiary of TCL Industries Holdings HK, accounts for 30.4 percent of all net earnings at the parent company.
TCL Group's asset-liability ratio to June 30 this year will fall 3.9 percent after the sale, while operating revenue and net income from continuing operations will drop 59.8 percent and 8.5 percent, respectively. Lending costs will increase almost 30 percent.
The Shenzhen exchange also pointed out that slower growth in the semiconductor display industry is due to falls in the average prices of products compared with last year, according to the company's own financial reports. The bourse calls into question the scope of the assets to be sold and asks if the sale will lead to an increase in the company's business volatility. It also inquires as to whether the plan will increase the operating costs of the semiconductor display and material business and if it is in line with the company's development strategy and long-term interests.
'Explain in Detail'
TCL will sell stakes in nine related companies, including all of TCL Industries Holdings and TCL Cultural Industry Park, and 36 percent of Gechuang Dongzhi Technology.
The bourse calls on the company to "explain in detail whether related equities of TCL Industries and Gechuang Dongzhi are still being valued as negative in the transaction price, and if they are, the reasons and rationality behind this." Again, the regulator asks if the plan is in line with general business logic and if it is beneficial to the interests of the listed firms.
TCL Industries has a 52.5 percent stake in Hong Kong-listed TCL Electronics and a 48.7 percent stake in Tonly Electronics Holdings. The market value of TCL Electronics was HKD7.3 billion (USD930 million) at the close on Dec. 14, while that of Tonly Electronics was HKD1.6 billion. Based on these valuations, TCL's combined stakes are worth close to CNY4 billion, while the final assessment in the restructuring plan is almost -CNY8 billion.
The Shenzhen Stock Exchange has called on TCL to explain why only one valuation method was used in the plan.