Dongxing Securities Sells a 158 Million Yuan Debt for 3.43 Million Yuan: The Industry Changes Behind This "Breakdown Price" Liquidation
Summary of Key Points
The main news item is that Dongxing Securities is disposing of a large amount of non-performing debt at an extremely low price (21.7% of the original value).
In simple terms, Dongxing Securities holds a debt claim worth approximately 158 million yuan, which is owed by the real estate giant Huaxia Happiness (*ST Huaxing*). Since Huaxia Happiness is unable to repay the debt and is even insolvent, Dongxing Securities has decided to act quickly. It listed the debt on the Shanghai United Property Rights Exchange and sold it for just 3.4306 million yuan.
This is not just a matter for Dongxing Securities alone; it reflects two significant broader trends:
1. The debtor's dire situation: Huaxia Happiness is deeply mired in debt, with negative net assets, making repayment highly unlikely. As a result, creditors have no choice but to accept significant losses to minimize their losses.
2. The seller's need for consolidation: Dongxing Securities is about to be merged with CICC (China International Capital Corporation). To prepare for the merger and shed its historical burdens, it has a strong desire to dispose of its non-performing assets.
The news also indicates that other securities firms, such as Great Wall Guorong, Guotai Haitong, Zhongyuan Securities, and Founder Securities, are also clearing their assets by selling debts and properties. This suggests that the securities industry is undergoing a major transformation, shifting from a focus on scale expansion to emphasis on asset quality and operational efficiency.
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Detailed Analysis
What does 21.7% off mean, and why are they selling at such a low price?
Simple explanation:
21.7% off means that if you owe me 100 yuan, I am now willing to buy that debt for only 2.17 yuan. This is considered a very low price in the financial sector, almost like giving it away for free or charging a nominal fee.
In-depth analysis:
- The status of the debt: The debt claimed by Dongxing Securities originally amounted to 158 million yuan, including interest. However, this amount is not in cash but represents a financial asset. The underlying debtor is Huaxia Happiness.
- Why such a low price? Huaxia Happiness is in a very poor financial state:
- Unable to repay: The company has accumulated debts of 28.432 billion yuan (excluding interest) that it has failed to repay on time.
- Insolvent: As of the end of the first half of the year, Huaxia Happiness's net assets were negative by 21.773 billion yuan. This means that even if all of the company's assets were sold to pay off the debts, there would still be a deficit of over 20 billion yuan, and the company would owe its shareholders even more.
- No hope of recovery: Given these circumstances, Dongxing Securities would likely not recover any money if it continued to hold the debt. Instead, selling it at a low price to a professional bad debt buyer (such as one of the four major asset management companies or a special opportunity investor) is a better option. Even if only a small amount of cash is recovered, it is better than nothing and allows the company to recognize the loss on its financial statements, making them more presentable.
Why is Dongxing Securities rushing to sell the debt? The "three-in-one" merger is the driving factor
Simple explanation:
Dongxing Securities is willing to sell the debt at a discount not only because the debtor cannot repay but also due to an important internal reason: it is about to merge with CICC. Before the merger, each securities firm needs to clean up its assets. Non-performing assets are like outdated or worthless items in a house; selling them, although costly, frees up space and allows the new merged company (CICC) to have a healthier financial profile.
In-depth analysis:
- Merger background: Dongxing Securities and CICC are merging to form a new entity. After the merger, both companies will cease to exist as separate entities, and their stocks will be delisted.
- Clearing burdens: By disposing of non-performing assets, firms can streamline their operations and prepare for the merger.
- Strategic intent: Dongxing Securities had good performance in the first half of the year (11.4% revenue growth and 25.13% net profit growth), but this non-performing debt is a significant drawback. Selling the debt through a public bidding process not only complies with regulatory requirements but also quickly eliminates the risk, paving the way for the integration.
Who is behind this debt? The intricacies of Huaxia Happiness's debt
Simple explanation:
This debt is not a straightforward matter of one party owing another; it involves multiple layers of financial structures, all ultimately pointing to Huaxia Happiness as the debtor.
In-depth analysis:
- Structure of the asset management plan: Dongxing Securities is selling shares of the "Dongxing Jinxuan Xingsheng 25th Collective Asset Management Plan." This plan includes three components:
1. Restructured debt: The debt directly owed by Huaxia Happiness.
2. Trust beneficiary rights: A trust established by Huaxia Happiness (CCB Trust-Caifeng 1) that uses its income to repay the debt.
3. Cash: A small amount of cash in the account.
- Core debtor: Regardless of the structure, Huaxia Happiness is the ultimate party responsible for the repayment.
- Huaxia Happiness's difficulties: Since the fourth quarter of 2020, Huaxia Happiness has faced a liquidity crisis, unable to pay for suppliers, bonds, or bank loans.
- The company is currently in a pre-restructuring process, negotiating with courts and creditors on how to repay the debt and reduce interest to survive.
- For financial institutions like Dongxing Securities, participating in a restructuring process is time-consuming and uncertain. Selling the debt transfers the risk to a more professional buyer.
It's not just Dongxing Securities; the entire securities industry is undergoing a major cleanup
Simple explanation:
Dongxing Securities is not the only firm in this situation; the entire securities industry is busy selling assets. Some are selling debts, while others are selling properties, aiming to get rid of unprofitable assets and focus on their core businesses.
In-depth analysis:
- Debt sales: Great Wall Guorong is also selling debts worth 6.091 billion yuan, using shares of the listed company Chitianhua as collateral. This shows that large financial institutions are using market-based methods to dispose of non-performing assets.
- Property sales: Guotai Haitong has announced 18 property sales, ranging in price from 900,000 to 17 million yuan, involving properties in Shanghai and other cities. These properties were likely acquired during the company's expansion and are now being sold to free up capital.
- Zhongyuan Securities: It is selling properties at a 38% discount. A property valued at 1.49 million yuan in 2018 is now being sold for 570,000 yuan. The decline in real estate prices, along with the urgency to liquidate assets, has forced these sales at reduced prices.
- Founder Securities: It is selling a building at a 60% discount. The Zhengzhou Yuda Guomao Building, which was valued at 1.2 billion yuan by the court in 2021, is now being sold for 730 million yuan. Although there is a loss, this avoids further depreciation, maintenance costs, and changes in fair value (the company had already incurred a loss of 519 million yuan).
Industry trend: The securities industry is shifting from a scale-driven to a quality-driven approach. In the past, firms expanded by leveraging and acquiring assets; now, they are focusing on optimizing their capital use by clearing out inefficient assets.
Implications for individual investors and the market
Simple explanation: What does this mean for ordinary investors? There are three main takeaways:
1. **Be cautious of "paper wealth": Many financial products and asset management plans may appear large in scale, but their underlying assets could be high-risk real estate debts. Investors should carefully examine the underlying assets before purchasing.
2. Bad debt disposal is becoming the norm: During economic downturns, the risk of corporate defaults increases, and financial institutions will increasingly dispose of non-performing assets. This does not mean that financial institutions will fail; rather, it is a proactive risk management strategy.
3. Pay attention to merger and consolidation opportunities: The merger of Dongxing Securities and CICC is a significant event in the securities industry. The new merged company will be stronger but will also face integration challenges. Investors can watch for potential synergies and changes in market share.
4. Real estate debt risks remain: The Huaxia Happiness case highlights that the debt risks in the real estate industry have not completely resolved. Although the government is working to ensure housing delivery and debt restructuring, the process is long and painful. Both financial institutions and individual investors should remain cautious.
Conclusion:
Dongxing Securities' sale of the debt at a 21.7% discount is a result of both the debtor's financial crisis and the seller's need for consolidation. It is not just a financial maneuver for Dongxing Securities but also a reflection of the financial industry's efforts to adjust its asset structure and manage risks in a complex economic environment. In the future, we are likely to see more similar cases of assets being sold at extremely low prices. This is a necessary step as the industry moves towards more rational and high-quality development.