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Fuyang Bearing Leverages Shares to Reject “Packageâ€
Fuyang Bearing (000678), which has gone through a major restructuring process, recently unveiled its share-trading reform plan. The company opted for a relatively low level of compensation, and the design of follow-up shares and the disposal of bad debts became key components of the reform. This move aims to align the interests of both tradable and non-tradable shareholders while improving the company's financial health.
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 transferred from non-tradable shareholders. In addition, the non-tradable shareholder group 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 announce a buyback of one share for every 10 shares held by tradable shareholders within a certain period after the annual report is released.
Furthermore, with the support of the Xiangyang City Government, the company successfully offloaded 90.56 million yuan in bad receivables and liabilities. Despite this, the company’s overall assets, liabilities, and equity remained unchanged, but the net asset value per share and earnings per share were diluted by 16.8%. This suggests that the reform primarily focused on restructuring rather than immediate financial gains.
The level of consideration paid by the company is notably lower than the current industry average of 10 shares for 3. Given that the major shareholder, Yuxi Group, holds only 33.4% of the shares, it makes sense that they are negotiating to maintain control over the company and reorganize the Tiansheng Group. Using the capital reserve to increase shares is also a strategic move, though the transfer ratio still has room for improvement. There may be further negotiations with circulating shareholders to fine-tune the terms.
The structure of the follow-up shares is particularly interesting, resembling a warrant mechanism. It gives tradable shareholders a hedging tool: if the company meets performance targets in 2006 and 2007, no additional shares will be issued, allowing them to benefit from potential stock price increases. However, if the targets are not met, the company will issue more shares to compensate the tradable shareholders. This mechanism ties the company’s future performance directly to shareholder interests and eases the pressure of large upfront payments.
In addition, the actual controller of the company, the Xiangyang City Government, agreed to help the company deal with its obligations toward Xiangfan Guoyi Company (controlled by the Xiangfan City Government) and other OEMs like Dongfeng. A total of 90.56 million yuan in bad debt was written off, along with 76.18 million yuan in long-overdue accounts receivable and 14.38 million yuan in claims for quality compensation. These measures significantly improve the company’s asset quality and position it for a stronger recovery, which is a positive development for all shareholders.
Although the company has faced many challenges during the restructuring, it now appears that Tiansheng Bearings will serve as the main platform for future growth. If the reform is approved, the company could potentially achieve net profits between 60 million and 100 million yuan over the next three years. This would allow it to shed its burdens and move forward with a lighter load, creating optimism about its long-term prospects.
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