Faced with 530 million yuan in investor claims, can Guoan still remove the ST label?

30 years ago, the famous Beijing Guoan Football Club was established, and CITIC Guoan was one of the investors and operators. Now, this old state-owned enterprise is being "demanded an explanation" by investors.

Recently, the CITIC Guoan (000839.SZ, now known as "ST Guoan") shareholder compensation case was heard at the Beijing No. 3 Intermediate People's Court, with 64 shareholders participating. At present, the case has not yet been decided.

The investor lawsuit against CITIC Guoan stems from the company's seven-year financial fraud. On March 4, 2021, CITIC Guoan received the "Administrative Penalty Advance Notice" from the China Securities Regulatory Commission, stating that from 2009 to 2015, it had inflated its total profits by more than 1 billion yuan by inflating its operating income and understating its financial expenses.

CITIC Guoan Group was originally a first-level subsidiary of CITIC Group, which was wholly owned by the company. Backed by CITIC Group, CITIC Guoan Group successively acquired the equity of listed companies Baiyin Nonferrous Metals and Sino-Portuguese Co., Ltd. In 2013, CITIC Guoan Group started mixed ownership reform.

After years of capital expansion after the mixed ownership reform, CITIC Guoan Group's capital tentacles have extended to nine major fields, including finance, real estate, culture, and elderly care. However, due to false securities statements, CITIC Guoan has been put on the defendant's bench by many investors. Since the beginning of this year, its stock price has always been hovering at a historical low. Although it rebounded in June and July, it later returned to a downward trend. As of October 26, it closed at 2.19 yuan per share, with a market value of 8.6 billion yuan.

This once multi-billion dollar giant was subject to other risk warnings (ST) in 2022 and is now undergoing restructuring, waiting for redemption by the "white knight" CITIC Group.

7 consecutive years of fraud, shareholders are seeking compensation

On October 19, the much-watched case of shareholders claiming compensation for CITIC Guoan's falsely inflated revenue was heard at the Beijing No. 3 Intermediate People's Court. Among them, 38 investors represented by Wu Lijun, a professional lawyer for stock claims at Shanghai Haihui Law Firm, participated in the trial. Lawyer Wu Lijun believes that the probability of shareholders receiving compensation is relatively high. The case is currently in the evidence exchange stage, and there will be a trial later, but no judgment has been made yet.

Three years ago, on May 17, 2020, CITIC Guoan was investigated by the China Securities Regulatory Commission for suspected violations of securities laws and regulations. On June 2, 2021, CITIC Guoan received the "Administrative Penalty Decision" from the China Securities Regulatory Commission. It was found that during the period from 2009 to 2014 when the subsidiary was included in the consolidated financial statements, the cumulative operating income was inflated by 506 million yuan, the cumulative financial expenses were understated by 507 million yuan, and the total profit was inflated by 1.013 billion yuan. In addition, there were also false records in the disclosed 2015 annual report.

Specifically, in the "2015 Annual Report", on December 24, 2014, CITIC Guoan and CITIC Guoan Investment Co., Ltd. (hereinafter referred to as "CITIC Guoan Investment") signed a share transfer agreement, transferring its 51% equity in Qinghai CITIC Guoan to CITIC Guoan Investment.

After the transfer, CITIC Guoan held 49% of the equity of Qinghai CITIC Guoan, and the accounting of long-term equity investment was changed from cost method to equity method. On January 23, 2015, CITIC Guoan and CITIC Guoan Investment signed an equity transfer agreement again, transferring its 49% equity of Qinghai CITIC Guoan to CITIC Guoan Investment. On June 30, 2015, CITIC Guoan processed the accounting of its transferred 49% equity of Qinghai CITIC Guoan, and recognized the investment income generated from the equity from January to June 2015.

Qinghai CITIC Guoan signed poly and interest-bearing pre-sale potassium chloride contracts with 10 customers, including China National Agricultural Group, Banglida, Sichuan Agricultural Materials, China National Agricultural Shanghai, Hubei Chufeng, Anhui Huilong, Hebei Agricultural Materials, Jilin Beifeng, Guangdong Tianhe and Jiangsu Yongdefeng. Due to the false increase in revenue and understating of financial expenses on the books, the net profit was falsely increased by RMB 68.3261 million from January to June 2015, resulting in an overstated investment income of RMB 33.4798 million on the books of CITIC Guoan in 2015, accounting for 6.24% of CITIC Guoan's investment income and 8.56% of the total profit that year.

The fact that the once blue chip stock had been falsifying its financial statements for seven consecutive years caused a huge stir in the A-share market. CITIC Guoan was eventually fined 600,000 yuan in accordance with the old Securities Law, and other senior executives and responsible personnel were also fined in varying amounts.

It is worth mentioning that since CITIC Guoan went public in 1997, the company has been audited by the same auditing agency, which has issued standard unqualified opinions every year.

Since the investigation was launched, CITIC Guoan’s share price has never recovered.

In fact, the investor claim case has been launched since 2021. The case of shareholders claiming compensation against CITIC Guoan, represented by Li Hongjie, a lawyer from Beijing Jingshi (Shenzhen) Law Firm, has been accepted by the Beijing No. 3 Intermediate People's Court. Some of the cases have been heard in court in 2022, and the court's judgment has not yet been received.

Li Jian, one of the plaintiff's agents and a lawyer at Zhejiang Yufeng Law Firm, said that in July 2021, the Beijing No. 3 Intermediate People's Court officially accepted some of the cases he represented, with defendants including ST Guoan and Deloitte Touche Tohmatsu CPA Ltd. Since then, due to joint trials and model litigation, some of the cases he represented have not yet been scheduled for trial. According to the judicial interpretation of false statements, if listed companies and other companies cause damage to investors' rights and interests due to illegal information disclosure, the damaged investors can sue for compensation in accordance with the law, and the scope of compensation includes investment difference losses, commissions and stamp duty losses.

"There are only seven months left before the expiration of the statute of limitations for claims in this case, and we are continuing to represent investors in claims in batches." Lawyer Li Jian said that according to judicial interpretation, it is tentatively determined that investors who bought ST Guoan shares between February 6, 2010 and May 17, 2020 and continued to hold the shares at the close of May 17, 2020 can claim compensation . The conditions for claims are subject to the court's determination.

Turned losses into profits in the first half of the year

The estimated liabilities from the compensation lawsuit will exceed 529 million

In January 2022, the Beijing No. 1 Intermediate People's Court ruled that CITIC Guoan should be reorganized. It was not until February 2023 that the company's draft reorganization plan was approved by the court. The company's reorganization plan is now in the implementation stage. As a reorganization investor, China CITIC Group Corporation indirectly controls CITIC Guoan and becomes the actual controller of CITIC Guoan. In this reorganization, CITIC Group invested a total of 12 billion yuan and adopted a "sale-style reorganization" model to absorb the high-quality assets of CITIC Guoan Group by establishing a new subsidiary, thereby achieving divestiture.

According to Caijing.com, on June 6, 2023, CITIC Guoan completed the corresponding equity industrial and commercial registration change procedures. CITIC Group held 31.67% of the shares, becoming the largest shareholder of CITIC Guoan. It actually controlled CITIC Guoan and managed it in accordance with the substantive management of a first-level subsidiary. The eight creditor shareholding platforms held a total of 68.33% of the shares.

Along with the restructuring plan, there are also changes in the management. Before the second extraordinary shareholders' meeting of 2023 was held on August 11 this year, senior executives of CITIC Guoan resigned one after another. Liu Deng, chairman and general manager of the company, Lv Peng, director and deputy general manager, Wu Shizeng, financial director, and Si Zenghui, secretary of the board of directors, resigned at the end of July and the beginning of August respectively for work reasons; except for Si Zenghui who continued to work in the company after his resignation, the other three no longer held their positions after their resignation.

Shen Meng, director of Xiangsong Capital, believes that although the restructuring may bring certain losses to shareholders, it reshapes the stable prospects for the company's future development and is conducive to driving value recovery and rising stock price expectations.

CITIC Guoan's 2023 semi-annual report shows that it is expected that the pending lawsuits are likely to result in the company being liable for compensation, and the matters involved in the lawsuits will be recognized as estimated liabilities and non-operating expenses. As of June 30, 2023, the company has accumulated estimated liabilities of 529 million yuan.

However, lawyer Li Jian said that considering factors such as the fact that some of the cases submitted last year have not yet been formally accepted by the court and that the current statute of limitations has not yet expired, it is expected that the actual total amount of claims claimed by investors will significantly exceed the company's estimated liabilities of 529 million yuan.

In addition to the risk of investor litigation, CITIC Guoan also mentioned the risk of debt litigation in its announcement on August 30. The company's current liquidity situation is still relatively tight, and it is unable to fulfill some of the payment obligations agreed in the contract as scheduled, resulting in some creditors filing lawsuits and the corresponding assets being seized and frozen. On the one hand, the company actively communicates and negotiates with relevant parties and responds to cases. On the other hand, it strives to carry out financing and repayment work to minimize the risks of related debt litigation.

IPG China Chief Economist Bo Wenxi believes that although the investor claim case is ongoing, no verdict has been made yet, and the company has turned losses into profits and its profitability has gradually recovered. In addition, CITIC Guoan is also involved in other major lawsuits or arbitrations, which may affect the company's delisting process. However, whether it will affect the delisting process needs to be evaluated based on specific circumstances. In short, CITIC Guoan's situation needs to be comprehensively evaluated based on specific events, financial data, market performance and other factors.

According to the reorganization plan approved by the court, the debt restructuring arrangement is that ordinary claims below 1 million yuan (including the principal) will be fully repaid in cash. Industry insiders generally believe that if it can return to the embrace of CITIC Group, it will be beneficial to the claims of small and medium shareholders who were harmed by CITIC Guoan’s false statements.

Shen Meng believes that the final amount of the claim will be the result of a dynamic game. If the claim burden is too heavy and the company that originally intended to restructure is unwilling to bear the consequences and withdraws, the investor's claim will be empty talk. Without sufficient executable assets, no matter how high the amount is, it will not make much sense. Therefore, the claim must be based on a compromise that both parties can afford.

However, CITIC Guoan also received good news, turning losses into profits in the first half of the year, and is on the verge of being delisted. According to the semi-annual report, from January to June 2023, the company achieved operating income of 1.519 billion yuan, a year-on-year increase of 13.95%; and realized a net profit of 67 million yuan attributable to shareholders of listed companies, a year-on-year increase of 128.06% , and profitability gradually recovered.

On June 30, CITIC Guoan Industrial Group Co., Ltd. was officially established, marking a substantial breakthrough in CITIC Guoan's risk mitigation. Shen Meng said that removing the hat requires restoring the sustainable operation and profitability of assets. Whether the crisis can be resolved is not a simple return, and the intervention of CITIC Group is only the first step in the whole process.

From the peak of his career to his fall from grace

Can one be reborn into Nirvana?

CITIC Guoan Group was originally a genuine old state-owned enterprise with a history of 30 years.

The predecessor of CITIC Guoan General Company was Beijing Guoan Hotel, which was invested and established by China International Trust and Investment Corporation. In the early days of its establishment, the only shareholder was CITIC Group. In 1987, the Guoan Hotel, which had hosted many former state leaders, was invested and established by CITIC Group. Subsequently, Beijing Guoan Industrial Development General Company was established on this basis, and then listed as a first-level subsidiary of CITIC Group, and later renamed CITIC Guoan Group.

In 1992, Beijing Guoan Football Club Co., Ltd. was established by a tripartite partnership between Beijing Municipal Sports Committee, Xiannongtan Sports School and CITIC Guoan Company. Zhonghe Group took over all the shares in 2017 and 2021.

In recent years, CITIC Guoan Group has initiated mixed-ownership reform, and the shareholders' meeting voted to agree to transform CITIC Group's 100% state-owned holding into a joint shareholding by six shareholders.

After the restructuring, CITIC Group holds 20.94% of the shares, Huatai Automobile Group holds 19.76%, Guangdong Zhongding Group Co., Ltd. holds 17.78%, Henan Senyuan Group Co., Ltd. and Beijing Qianrong Investment (Group) Co., Ltd. each hold 15.81%, and Tianjin Wanshun Real Estate Co., Ltd. holds 9.88%. The five private enterprises have invested a total of 8 billion yuan.

After the completion of the "mixed reform", CITIC Guoan Group did show the vitality of mixed-ownership enterprises to the outside world for a time. It overcame all difficulties and started the "buy, buy, buy" model, forming an industrial layout integrating nine major industries including finance, information network, tourism, resources and energy, culture, urban operations, health care and elderly care, and overseas business , and it controlled controlling stakes in many listed companies.

According to incomplete statistics from Ye Ma Finance, CITIC Guoan Group is the actual controller of at least three listed companies , namely CITIC Guoan (000839.SZ), Sino-Portuguese Holdings (600084.SH) and Guoan International (0143.HK), and is the largest shareholder of Baiyin Nonferrous Metals (601212.SH). At the same time, through its subsidiaries Guoan Communications, Tibet Manting, Guoan Chemicals and other platforms, CITIC Guoan Group has also indirectly invested in Jiangsu Cable (600959.SH) and Baoyue Media (838506.OC) .

In addition to the listed platforms and companies listed on the New Third Board, it also indirectly holds many well-known companies such as the National Stadium Co., Ltd. (Bird's Nest).

On this basis, CITIC Guoan Group has also successively made investments around the world, including NextVR in the United States, First Gold in South Africa, social housing in Angola, and many projects in Bolivia’s salt lakes, with footprints in Asia, America, and Africa.

In January 2018, CITIC Guoan Group also planned to spend 9 billion yuan to take over Hengtou Securities (1476.HK, also known as "Hengtai Securities"), a subsidiary of another capital giant. In April 2018, the transaction finally fell through.

From 2014 to 2016, the total consolidated assets of CITIC Guoan Group were approximately RMB 117.2 billion, RMB 158 billion, and RMB 166.3 billion, respectively. In just three years, compared with the data before the mixed-ownership reform, the assets have doubled. At the same time, the total liabilities of the group also increased from RMB 67.6 billion in 2014 to RMB 131.2 billion in 2016, which is also an astonishing increase.

As of the first half of this year, CITIC Guoan’s total assets were 7.064 billion yuan, an increase of 19.36% from the end of last year; the net assets attributable to shareholders of listed companies were 2.114 billion yuan, an increase of 103.76% from the end of last year.

Under financial pressure, CITIC Guoan Group has also taken a series of measures to raise funds. In the first half of the year, its short-term loans accounted for 4.06% less than the end of the previous year, and its debt structure has gradually been optimized. In the future, CITIC Guoan will also actively expand new businesses, explore and cultivate new business growth points, and achieve balanced and sustainable development of scale and efficiency.

CITIC Guoan, which once had 200 billion yuan in assets, has now returned to the arms of CITIC Group. Can the "white knight" come to the rescue and help CITIC Guoan get rid of the haze of fraud and restore its glory? What do you think? Leave a message and chat!

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.