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Fuyang Bearing Leverages Shares to Reject “Packageâ€
Fuyang Bearing (000678), after a period of restructuring and reorganization, recently announced its share-trading reform plan. The company opted for a relatively low level of consideration, and the design of follow-up shares and the disposal of bad debts became central to the reform. This approach aims to streamline operations and improve long-term value for shareholders.
Under the plan, Fuyang Bearing will transfer capital reserves to tradable shareholders in a targeted manner. Specifically, for every 10 tradable shares, 3 additional shares will be issued, equivalent to 1.12 shares being paid by non-tradable shareholders. In addition, the major non-tradable shareholder, Yuxi Group, has made a special commitment: if the audited net profit falls below 18 million yuan in 2006 or below 28 million yuan in 2007, the company will issue one additional share for every 10 shares held by tradable shareholders following the annual report announcement.
With support from the Xiangyang City Government, the company has also stripped away 90.56 million yuan in bad receivables and liabilities. Despite this, the company’s assets, liabilities, and equity remain unchanged, though the net assets per share and earnings per share have been diluted by 16.8%. This dilution may raise concerns among investors, but it is seen as a necessary step to clean up the balance sheet and set the stage for future growth.
The company’s level of consideration is notably low compared to industry standards, which typically involve 10 shares for 3. Given that Yuxi Group holds only 33.4% of the company’s shares, it makes sense for them to negotiate with other shareholders to maintain control and restructure Tiansheng Group. Additionally, the company has a capital reserve of 2.32 yuan per share, which could be used for future share increases. However, the current transfer ratio still leaves room for improvement, and further negotiations with circulating shareholders may be possible.
The design of the follow-up shares is particularly interesting, resembling a form of warrant. It offers tradable shareholders a hedging mechanism. If the company meets performance targets in 2006 and 2007, no additional shares will be issued, allowing shareholders to benefit from rising stock prices. If not, the company will issue more shares to compensate for any losses, aligning the interests of both management and shareholders.
Moreover, the actual controller, Xiangyang City Government, has agreed to help the company deal with debt obligations totaling 90.56 million yuan, including non-performing receivables of over 76.18 million yuan and claims for quality compensation from Dongfeng Company and others worth 14.38 million yuan. These measures are expected to significantly improve asset quality, helping the company overcome its challenges and move toward a more sustainable path.
The company's restructuring has faced many challenges, but it now seems that Tiansheng Bearings will serve as the core platform for future development. With a better outcome, the company expects to achieve net profits between 60 million and 100 million yuan over three consecutive years. If this reform is approved, the company will be able to shed its burdens and operate with greater efficiency, leading to positive expectations for its future growth.
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