Translation in English: Inflated revenue and costs exceeding 7.2 billion, illega
Over a span of three consecutive years, listed companies collectively inflated their revenue and cost figures by more than 7.2 billion yuan, while over 8.4 billion yuan of funds were also non-operationally occupied by major shareholders. Just one week after the case was filed, Zhongtai Chemical (002092.SZ), along with its controlling shareholder Xinjiang Zhongtai (Group) Co., Ltd. (hereinafter referred to as "Zhongtai Group"), and 16 directors and senior executives of the two companies, received regulatory penalty notices.
On the evening of March 27, Zhongtai Chemical, Zhongtai Group, and 12 responsible personnel received six administrative penalty pre-notice letters and regulatory decision letters from the Xinjiang Securities Regulatory Bureau, as well as a total fine of 213 million yuan. The reasons for the penalties included three main aspects: inflating revenue and cost figures, non-disclosure of major shareholder fund occupation, and violations of bond information disclosure regulations.
While funneling funds to major shareholders through related party transactions, Zhongtai Chemical itself was not financially well-off. Its revenue and profits have been declining year after year, and its cash flow has been under constant strain. As of the end of September last year, the company's cash balance had a shortfall of more than 5.7 billion yuan compared to its short-term borrowings and non-current liabilities due within one year. During the same period, the funding gap between its controlling shareholder's cash and short-term debt reached as high as 35 billion yuan.
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The penalties imposed on Zhongtai Chemical and Zhongtai Group, as well as the relevant executives, mainly involved inflating revenue and cost figures in the annual reports from 2020 to 2022, non-disclosure of fund occupation by the major shareholder, and the resulting violations of bond information disclosure regulations.
Public information shows that as of the end of September last year, Zhongtai Group and its related parties held a combined 28.18% stake in Zhongtai Chemical. After recent increases in holdings and participation in auctions, the stake has risen to 29.49%.
The non-operational occupation of Zhongtai Chemical's funds by Zhongtai Group was concentrated between 2020 and 2022. Over these three years, the total amount of funds occupied by Zhongtai Group in violation of regulations exceeded 8.4 billion yuan, and the latter failed to disclose this as required.
According to the pre-penalty notice, between 2020 and 2022, Zhongtai Chemical and its subsidiaries provided financial support to Zhongtai Group in the form of direct and indirect prepayments and advances for expenses, with amounts of 2.15 billion yuan, 5.56 billion yuan, and 698 million yuan, respectively. These amounts represented 8.54%, 21.61%, and 2.72% of the company's audited net assets during the same periods.
Not only was there a violation of fund occupation by the controlling shareholder, but the scale of Zhongtai Chemical's inflated revenue and cost figures was also enormous, exceeding 7.2 billion yuan. Disclosures showed that from 2020 to 2022, the company's inflated operating income and costs amounted to 896 million yuan, 2.139 billion yuan, and 4.248 billion yuan, respectively. The proportion of inflated operating income in the total operating income during the same periods was 1.07%, 3.43%, and 7.6%.
The inflated revenue and cost figures for Zhongtai Chemical in 2022 had a direct relationship with the controlling shareholder. Regulatory investigations later revealed that in order to meet the operating income targets set by Zhongtai Group, Zhongtai Chemical and its four controlled subsidiaries accounted for businesses over which they had no control or were actually acting as agents, using the gross method. This led to the inflation of 2022 income and costs by 4.248 billion yuan. In the company's 2022 annual report, the inflated portion accounted for 7.75% of the disclosed operating costs.The undisclosed non-operational fund occupation by the controlling shareholder in 2021 and 2022, as well as the act of inflating the income and costs in 2022, led to the prospectus for the bond issuance by Zhongtai Chemical in 2023 and subsequent disclosures being identified by regulators as suspected of containing false records, significant omissions, and inaccurate information disclosure.
Public information indicates that in March and August 2023, Zhongtai Chemical issued two corporate bonds on the Shenzhen Stock Exchange, raising a total of 1.1 billion yuan.
The prospectuses for these two bond issues cited the company's financial data from January to September 2021 and 2022, as well as the annual reports for 2021 and 2022. The bond issued in March also disclosed Zhongtai Chemical's annual report for 2022 during its existence. In addition, during the existence of the debt financing instruments issued in the interbank market from September 2019 to September 2022, Zhongtai Chemical also disclosed its annual reports for 2021 and 2022.
Within a week, 14 senior executives were penalized.
The penalties imposed on Zhongtai Chemical and Zhongtai Group came swiftly.
The company disclosed on March 20 that due to suspected violations of information disclosure laws and regulations, the China Securities Regulatory Commission (CSRC) decided to initiate an investigation into the company. On March 24, Zhongtai Group was also investigated for suspected organization and instigation of illegal information disclosure by the listed company. Subsequently, several former and current executives of the company, as well as Zhongtai Group and related responsible parties, were warned.
The Xinjiang Securities Regulatory Bureau determined that in addition to the falsification of the 2020 annual report, the aforementioned other actions by Zhongtai Chemical constituted false records, misleading statements, or significant omissions. Zhongtai Group organized and instigated the fund occupation of Zhongtai Chemical, constituting the controlling shareholder's organization and instigation of illegal information disclosure by the listed company.
The Xinjiang Securities Regulatory Bureau decided to order corrections and issue warnings to Zhongtai Chemical and Zhongtai Group, with fines of 5 million yuan each. The then CFO of Zhongtai Group, Gong Chunhua, was warned and fined 2 million yuan.
At the same time, due to responsibility for the controlling shareholder's fund occupation and the corresponding significant omissions in the 2021 and 2022 annual reports, financial fraud in 2022, and bond disclosure, the then Chairman of Zhongtai Chemical, Yang Jianghong, as well as the general manager, CFO, supervisor, and six other then directors and supervisors, were also warned and fined amounts ranging from 500,000 yuan to 2.5 million yuan.
In addition, the then Chairman of Zhongtai Group, Wang Hongxin, was also warned and fined 2.5 million yuan for being responsible for the fund occupation of Zhongtai Group in 2021 and 2022 and the aforementioned bond disclosure. Zhang Ling, who served as the Secretary of the Board of Zhongtai Chemical from November 2020, and Yu Yaijing, who served as a director and deputy general manager of Zhongtai Chemical from February 2020 to September 2023, were also issued warning letters and recorded in the securities and futures market integrity file for their respective responsibilities in the inflation of income and costs, and the fund occupation by the controlling shareholder in the annual reports of Zhongtai Chemical from 2020 to 2022.According to the disclosure by Zhongtai Chemical on March 24, the company's former general manager Feng Bin, former CFO Wang Hailing, current CFO Huang Zewei, and others have been subjected to regulatory measures such as issuing warning letters and recording in the securities and futures market integrity files due to financial data, major shareholder fund occupation, and disclosure violations from 2020 to 2022.
So far, Zhongtai Chemical has had 14 former and current executives penalized by regulatory authorities, with a total fine amounting to 6.8 million yuan. Including the listed company, Zhongtai Group, and its related personnel, the total fine amount has reached 21.3 million yuan.
Performance has been declining year after year, and the capital chain is tight.
While pumping a large amount of funds into major shareholders, Zhongtai Chemical itself is not financially abundant. Not only has its revenue and profit been declining year after year, but its cash flow has also been tight for many years.
According to the performance forecast, Zhongtai Chemical estimates that the net profit loss for the whole year last year was between 2.7 billion yuan and 2.98 billion yuan, a year-on-year decrease of 478.15% to 517.37%. The net profit attributable to non-recurring gains and losses is expected to be between 2.715 billion yuan and 2.995 billion yuan, a year-on-year decrease of 496.74% to 537.65%.
The company explained that due to the impact of the industry cycle, the selling prices of the main products PVC, caustic soda, viscose fiber, and viscose yarn have declined to varying degrees compared with the same period last year, and the profitability of the products has significantly decreased. At the end of 2023, the company conducted an impairment test on assets with signs of impairment, resulting in asset impairment losses. The performance of joint ventures has declined, and the losses have increased, leading to an increase in the recognized investment losses.
Even if the revenue and cost of goods sold were inflated, the performance of Zhongtai Chemical had been declining year after year. Annual report data shows that in 2020, the company's revenue was 84.21 billion yuan, and the net profit was 144 million yuan. By 2022, the revenue had dropped to 55.91 billion yuan, a year-on-year decrease of 11.1%, and the net profit was 713 million yuan, a year-on-year decrease of 74.02%.
In addition to the low performance, the company's capital is also in a tight state. At the end of 2020, the company's cash and cash equivalents were 5.15 billion yuan, and the short-term borrowings and non-current liabilities due within one year were 8.66 billion yuan and 2.658 billion yuan, respectively, with the total short-term debt reaching more than 2.4 times the cash and cash equivalents of the same period.
With the continuous decline in operations, the financial pressure on Zhongtai Chemical has further increased. As of the end of September last year, the company's cash and cash equivalents were 7.07 billion yuan, while the short-term borrowings were 5.898 billion yuan, and the non-current liabilities due within one year reached 6.91 billion yuan, with a total amount of about 12.8 billion yuan, and the gap with the cash and cash equivalents on hand exceeded 5.7 billion yuan.
In addition, Zhongtai Chemical has a large amount of guarantees. The company disclosed on March 20 that as of February 29, the actual total amount of guarantees provided to external parties was 21.54 billion yuan, accounting for 83.7% of the net assets audited in the most recent period. If a guarantee disclosed on the same day were to occur, the total amount of guarantees provided to external parties would increase to 21.95 billion yuan, accounting for 85.30% of the net assets audited in the most recent period and 27.32% of the total assets audited.Zhongtai Group's situation is no less alarming. The third-quarter report for 2023 indicates that for the first three quarters of 2023, the company's total operating revenue was 14.98 billion yuan, with a net profit loss of 1.48 billion yuan. During the same period, while the operating activities generated a net cash flow of 15.749 billion yuan, the net cash flows from investing and financing activities were both negative, amounting to -9.058 billion yuan and -4.28 billion yuan, respectively.
Under these circumstances, Zhongtai Group is facing significant debt repayment pressure. As of the end of September last year, the company's cash balance was 17.53 billion yuan, with short-term borrowings of 22.66 billion yuan and short-term liabilities due within one year amounting to 9.34 billion yuan, resulting in a corresponding funding gap of over 15 billion yuan. If the 19.96 billion yuan of notes payable and accounts payable are added, the funding gap for the same period would be as high as approximately 35 billion yuan.
Zhongtai Group had originally planned to issue the second medium-term note of 2024 during the period from March 18 to 19. The base issuance scale for this medium-term note was set at 2 billion yuan, with an upper limit of 4 billion yuan. However, by March 19, the company announced that, based on the fund arrangement plan and recent market changes, it had decided to cancel this issuance.