The liquidity of the group's financial company is tightening, leading to restrictions on the large withdrawal of 1.6 billion yuan in deposits by Dongfang Group (600811.SH). After disclosing the risk of deposits, on June 19, the stock hit the daily limit down.
The funds that Dongfang Group is restricted from withdrawing are deposited with Dongfang Financial Co., Ltd. (hereinafter referred to as "Dongfang Finance"). Both Dongfang Finance and Dongfang Group's controlling shareholder are Dongfang Group Co., Ltd. (hereinafter referred to as "Dongfang Group Company"), and the actual controller of both is Zhang Hongwei.
On the evening of June 19, Dongfang Group announced again that Zhang Hongwei plans to resolve the liquidity crisis of Dongfang Finance by disposing of assets and other means, including the equity assets of several companies.
In the past three years, Dongfang Group itself has been financially strained, with only 3.179 billion yuan in monetary funds on the books in 2023, while the total interest-bearing debt is about 18.6 billion yuan, with a static debt repayment fund gap of over 15 billion yuan. However, it still deposited nearly 60% of its monetary funds into Dongfang Finance.
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The actual controller has expressed support, but Dongfang Group Company itself faces significant debt repayment pressure, and the extent to which it can alleviate liquidity pressure remains to be seen. As of May 24, 99.46% of the Dongfang Group shares held by Dongfang Group Company have been pledged, and there have been overdue debts. Dongfang Group, which provides guarantees, may also be affected.
1.6 billion yuan in deposits are restricted from large withdrawals
According to Dongfang Group's disclosure, the recent temporary tightening of liquidity at Dongfang Finance has led to restrictions on the large withdrawal of 164 million yuan in deposits by the company and its subsidiaries. According to the financial report, at the end of the first quarter of this year, the company's monetary funds were 2.5 billion yuan, and the restricted deposits account for as high as 65.6%.
Both Dongfang Group and Dongfang Finance's controlling shareholder is Dongfang Group Company. As of the end of March 2024, Dongfang Group Company holds 30.11% of Dongfang Group's shares. Public data shows that Dongfang Finance's registered capital is 3 billion yuan, with Dongfang Group Company holding 70% and Dongfang Group holding 30%.
In recent years, Dongfang Group has deposited a large amount of funds into Dongfang Finance Company. An announcement by Dongfang Group in 2022 showed that from the date of approval at the 2021 annual shareholders' meeting (June 2022) for three years, Dongfang Finance will provide financial services such as fund settlement and deposits for the company and its consolidated subsidiaries, with a daily deposit balance limit of 3 billion yuan. As of June 17, the deposit balance of the company and its subsidiaries at Dongfang Finance Company was 164 million yuan, and the loan balance was 66.6 million yuan, with a deposit-loan difference of about 97.4 million yuan.
In response to the large withdrawal restrictions on this deposit, Dongfang Group explained that it has started the risk disposal procedure in a timely manner according to the relevant provisions of the "Risk Disposal Plan," requiring Dongfang Finance to take measures, including but not limited to temporarily suspending or stopping loan disbursement, recovering funds, and other measures to resolve risks.On the evening of the 19th, Dongfang Group once again announced that it had received a commitment letter from its controlling shareholder and actual controller, Zhang Hongwei. The latter intends to adopt measures including, but not limited to, the disposal of assets to support the resolution of liquidity fund shortages at Dongfang Finance. It is expected that within 3-6 months, funds will be recouped by disposing of some of the equity he holds in United Energy Group Limited (0467.HK, hereinafter referred to as "United Energy") and UEP Wind Energy (Private) Limited, etc., to support Dongfang Finance in addressing short-term liquidity tightening issues.
High Deposits and Low Loans at Financial Companies
Over the past three years, nearly sixty percent of Dongfang Group's monetary funds have been placed in a single institution, Dongfang Finance.
Annual report data shows that from 2021 to 2023, the balance of monetary funds of Dongfang Group were 4.438 billion yuan, 4.802 billion yuan, and 3.179 billion yuan, respectively. During the same period, the company's deposit balances at Dongfang Finance were 2.722 billion yuan, 2.423 billion yuan, and 2.333 billion yuan, respectively.
Based on the aforementioned data, during this period, the company's deposits at Dongfang Finance accounted for 61.33%, 50.46%, and 73.39% of the monetary funds of the same period, respectively, showing a continuously increasing trend.
However, Dongfang Finance's "high deposits and low loans" situation is prominent, with the loan-to-deposit ratio severely exceeding standards.
Image source: Dongfang Group Financial Company Risk Assessment Report
According to Dongfang Group's previous disclosures, as of the end of 2023, the company's "loan balance" to "deposit balance + paid-in capital" ratio was as high as 131.61%, far exceeding regulatory standards. The Financial Company Management Measures for Enterprise Groups designated by the China Banking and Insurance Regulatory Commission in 2022 stipulate that the loan balance of a financial company in this period must not exceed 80% of the deposit balance and paid-in capital. In addition, the company's ratio of bill acceptance balance to interbank deposit balance is also as high as 316%, above the regulatory requirement of 300%.
While having a large proportion of deposits at Dongfang Finance, Dongfang Group's loan scale has been growing year by year, and by 2023, the loan scale was nearly five times that of the deposits of the same period. Financial reports show that from 2021 to 2023, the company received cash from borrowings of 9.362 billion yuan, 15.9 billion yuan, and 13.46 billion yuan, respectively; other financing received cash of 0.666 billion yuan, 0.917 billion yuan, and 0.283 billion yuan. The cumulative totals were 10.028 billion yuan, 16.817 billion yuan, and 13.743 billion yuan, respectively.
At the same time, the company's debt repayment pressure is high. Dongfang Group's interest-bearing debt mainly consists of floating interest rate contracts, fixed interest rate loan contracts, commercial bills and letters of credit that have not been terminated for recognition, bonds payable, and other long-term financial liabilities with fixed returns. According to the financial report, as of the end of 2023, the amount of floating interest rate loans was 1.016 billion yuan, the amount of fixed interest rate loans was 13.342 billion yuan, the discounted loans of commercial bills and letters of credit were 2.155 billion yuan, and the long-term payables were 2.137 billion yuan, totaling 18.65 billion yuan. At the same time, the company's monetary funds were only 3.179 billion yuan. Based on this calculation, under a static approach, the company's funding gap for repaying the above four types of debts exceeds 15 billion yuan.The financing cost of Oriental Group at Oriental Finance is significantly higher than the deposit income. According to the disclosure by Oriental Group on April 30, by the end of 2023, the company's deposits at Oriental Finance amounted to 2.333 billion yuan, with interest received in the year being 77.0592 million yuan, which translates to an estimated annualized interest rate of 3.3%. Additionally, according to the annual report, in 2023, the deposit interest rate range for Oriental Group at Oriental Finance was 3.5%, while the loan interest rate was between 3.45% and 4.3%.
Image source: Oriental Group's 2023 financial report
According to financial professionals in the industry, generally, market loan interest rates are higher than those of the company's own finance company. Therefore, it is highly likely that the overall financing interest rate of Oriental Group is higher than the deposit yield.
Under these circumstances, why doesn't Oriental Group withdraw the deposits to reduce loans? A financial officer of a listed company told First Financial that the financial company of an enterprise group is a non-banking financial institution that provides financial management services for the member units of the enterprise group. The group's financial company signs a "Financial Service Agreement" with the listed companies under the group, providing financial services such as fund settlement, credit financing, fund management, and discounting of bank acceptance bills. However, in actual operation, some controlling shareholders of listed companies may have influence over the related financial companies, and there may be situations where funds are withdrawn at will. High deposit and low loan ratios, sudden inability to withdraw funds, and other such situations are signals that warrant vigilance.
In the regulatory work letter issued by the Shanghai Stock Exchange last evening, Oriental Group was also asked to self-inspect the deposit placement and usage at the related financial company. The large amount of deposit withdrawal is restricted, and whether the related funds have been misappropriated by the controlling shareholders and related parties, and whether it constitutes non-operational fund occupation, etc.
Controlling shareholders are in trouble
Recently, there are clear signs of tight funds at Oriental Group Company, and most of the Oriental Group's equity held has been pledged and has been subject to judicial freezing.
According to the disclosure, as of May 24, Oriental Group Company and its wholly-owned subsidiary, Oriental Runlan, have pledged a total of 904 million shares of Oriental Group, accounting for 99.46% and 67.93% of their respective holdings, with a corresponding financing balance of 3.409 billion yuan.
Oriental Group disclosed in March 2022 that due to a contract dispute between Shandong Tian Shang Real Estate Co., Ltd. and China Development Oriental Urban Development Investment Co., Ltd., Oriental Group Co., Ltd., Oriental Group, and Pioneer Zhongrun Biotechnology Co., Ltd., the listed company's fully tradable shares held by Oriental Limited were judicially frozen and judicially marked, with the freezing period starting from March 2, 2022, and a total period of three years. Currently, this judicial freezing has been lifted.
In addition, Oriental Group Company has already defaulted on its debts and has dragged down Oriental Group. Recently, the loan of Oriental Group Company at the Longjiang Bank Longteng Branch has been overdue. As of April 30, the group is negotiating loan repayment arrangements or extensions with the relevant banks.According to disclosures in April 2023, Dongfang Group provided joint and several liability guarantee for this loan, with a financing term not exceeding one year. The guarantee period is three years from the day after the expiration of the loan term. This overdue external guarantee issue may imply that Dongfang Group will face litigation and the risk of assuming joint and several liability.
As disclosed by Dongfang Group, in 2023, the company's operating income was 70.118 billion yuan, with a net loss of 4.83 billion yuan. By the end of December of the same year, the total debt of Dongfang Group Co., Ltd. was 49.028 billion yuan, with total assets of 68.933 billion yuan, resulting in a debt-to-asset ratio of 71.12%. The ratio of cash to current liabilities was only 0.18, indicating significant short-term debt repayment pressure. This also means that although the controlling shareholder has made commitments to alleviate liquidity, the actual availability of this deposit remains to be seen.
Dongfang Group faces delisting risks.
On June 19th, Dongfang Group's stock opened at its limit down, and by the close, the price was 1.22 yuan per share, approaching the 1 yuan delisting threshold.
Since mid-May, when a series of news about the controlling shareholder's overdue external guarantees and pledge extensions was released, the company's stock price has been in a continuous decline. On May 16th, the closing price was still 1.87 yuan per share, and it has fallen for nearly 20 trading days since, with the current drop exceeding 30%.
As of the close on the 19th, the orders to sell at the limit down position of Dongfang Group reached 850,000 lots. If the stock continues to hit the limit down for two consecutive days, the price may fall below 1 yuan, touching the risk of delisting due to par value.
The Shanghai Stock Exchange issued a regulatory letter yesterday, requiring the company to self-inspect whether the large amount of deposit withdrawals is restricted this time, whether the related funds have been misappropriated by the controlling shareholder and related parties, and whether it constitutes non-operational fund occupation, etc.
If there is non-operational fund occupation, according to the new delisting rules, if the balance of funds occupied non-operationally by the controlling shareholder and its related persons reaches more than 200 million yuan, or accounts for more than 30% of the absolute value of the company's most recent audited net assets, and the company is ordered by the China Securities Regulatory Commission to correct but fails to complete the correction within the required period, it will be suspended for 2 months in sequence, implement a delisting risk warning for 2 months, and then delist.
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