A Share Explosion Rises Again, Consecutive Performance Losses 75 Listed Companies Predict Goodwill Impairment Risk

With the advent of the 2020 annual report disclosure season, the A-share market has ushered in another round of explosion.

On the evening of January 20, two companies, Edill and Jincheng Pharmaceuticals, simultaneously announced explosive performance. The former expected a loss of 846 million yuan to 950 million yuan, and the latter expected a loss of 450 million yuan to 500 million yuan. The reasons for the explosion were related to the failure of mergers and acquisitions.

However, in the face of the performance explosion, the secondary market on January 21 showed a different trend. Edill's share price fell 9.49%, while Jincheng Pharmaceutical's share price rose 0.54% slightly.

"If there is no provision for goodwill, Jincheng Pharmaceutical's performance is positive, and after full provision for goodwill, the company can go into action lightly." On January 21, a private equity firm engaged in pharmaceutical investment in South China said.

In fact, this is just the tip of the iceberg of the current performance explosion. According to Wind data, up to now, 1098 listed companies have disclosed their 2020 performance flash reports, of which 16 companies have an advance loss of more than 400 million. The reporter found that most of these enterprises whose performance has changed significantly or worsened were dragged down by goodwill, leading to worse performance.

A number of listed companies announced "explosion"

The "explosive" announcements of Edill, Jincheng Pharmaceutical and other companies triggered a wave of goodwill impairment in 2021.

On the evening of January 20, Edill released the 2020 Performance Forecast, in which the company is expected to lose 846 million yuan to 950 million yuan.

As for the reasons for the changes in the company's performance, Edill said that the company lost effective control over its holding subsidiary Shenzhen Dapan Jewelry Co., Ltd. (hereinafter referred to as "Dapan Jewelry"), which will not be included in the consolidated statements since April 2020. It is expected that the investment will be fully depreciated.

In addition, Edill said that under the influence of the epidemic, the target companies of major asset restructuring, Jiangsu Millennium Jewelry Co., Ltd. (hereinafter referred to as "Millennium Jewelry") and Chengdu Shumao Diamond Co., Ltd. (hereinafter referred to as "Shumao Diamond"), are expected to fail to fulfill their original performance commitments in 2020, and the company is expected to withdraw goodwill impairment reserves in that year.

In fact, there are signs of this goodwill accrual, and the crazy mergers and acquisitions in the early years are gradually bringing down Edill. In 2017, after just two years of landing in the capital market, Edill's M&A intentions were aroused, and within one year, it planned to acquire three companies. First, it purchased 51% of the equity of the large jewelry market at a cash price of 255 million yuan; It also purchased 100% equity of Millennium Jewelry at a price of 900 million yuan, and 100% equity of Shumao Diamond at a price of 700 million yuan.

At the same time, after listing, the company also wanted to acquire the shares of Shandong Shijiyuan Jewelry Co., Ltd. and Shenzhen Diamond Rough Trading Center Co., Ltd., but it failed to do so.

However, the above three mergers and acquisitions did not significantly improve the performance of Edill. In 2017, the company realized a net profit attributable to shareholders of about 60.34 million yuan, a slight increase of 4.4% year on year. In 2018, the company realized a net profit attributable to shareholders of about 28.15 million yuan, a sharp drop of 53.35% year on year. In 2019, Edill's net profit loss was nearly 300 million yuan due to the large amount of goodwill accrued for large jewelry market.

If Edill's advance notice finally comes true, the company will be given a risk warning due to losses for two consecutive years. As of the third quarter of 2020, the number of shareholders of Edill was 38800, and the top ten outstanding shareholders of the company held 65658300 shares in total, accounting for 27.19% of the outstanding shares in total.

The same "thunder explosion" scene also occurred in Jincheng Medicine.

Jincheng Pharmaceutical announced that the company expects to achieve a net profit attributable to shareholders of listed companies of 450 million yuan to 500 million yuan in 2020, compared with 203 million yuan in the same period last year. According to the preliminary calculation of the company, it is planned to withdraw a total of 740 million yuan of goodwill impairment reserves for Kincheng Thale and Kincheng Suzhi. After this withdrawal, the goodwill balance of Kincheng Thale and Kincheng Suzhi is 0.

However, unlike Edill investors who voted with their feet, Jincheng Pharmaceutical's share price turned slightly red after the announcement was released.

The 21st Century Business Herald reporter found that in fact, this is not the first time that Jincheng Tower has been withdrawn impairment losses. As early as 2018, Jincheng Tower was withdrawn goodwill impairment reserves of 122 million yuan because its profitability did not meet expectations. In 2019, Jincheng Taier's performance declined, and its profit failed to meet expectations. Jincheng Pharmaceutical made a provision of 286 million yuan for goodwill impairment of Jincheng Taier. After withdrawing the provision for impairment of goodwill this time, the goodwill balance of Kincheng Thale is 0.

In fact, from a more long-term perspective, Jincheng Pharmaceutical's share price began to decline for four consecutive months after reaching the year's high point at the end of July 2020. As of January 21, its share price had fallen by nearly 50%, almost half of its value.

The tide of goodwill impairment is rising again

In fact, the performance of Jincheng Pharmaceuticals and Adil is just a part of the boom in goodwill during the disclosure period of the annual report.

The 21st Century Business Herald reporter found that 75 of the more than 1000 listed companies' performance forecasts mentioned goodwill impairment losses in their announcements.

For example, * ST Zotye is expected to make a loss of 2.2 billion yuan - 3.3 billion yuan from the provision for impairment of large goodwill; Huadong Heavy Machinery Co., Ltd. plans to make provision for impairment of goodwill ranging from 700 million yuan to 900 million yuan, and Gaoweida expects to make provision for impairment of goodwill between 645 million yuan and 794 million yuan in 2020; Hekang Xincai expects that in 2020, the company will withdraw and devalue the remaining goodwill formed by the acquisition of 100% equity of Beijing Huatai Runda Energy Saving Technology Co., Ltd

"After the A-share goodwill impairment hit a record high in 2018, the market generated great concern. In 2019, the pressure on goodwill impairment has been alleviated, but there is still a high level of goodwill to be further digested. In 2020, the COVID-19 epidemic has caused serious damage to the real economy. In the 2020 annual report, the pressure on goodwill impairment may hit again, which requires vigilance." According to an interview with a strategic analyst of a medium-sized securities firm in Shanghai.

According to the reporter's statistics, as of the third quarter of 2020, the total goodwill of A-share market totaled 1.28 trillion, which was also significantly lower than the scale of 1.39 trillion in the third quarter of 2019, but the pressure on goodwill of some listed companies and industry sectors should not be underestimated.

Wind data shows that there are 14 enterprises with a goodwill scale of more than 400 million in the A-share market, of which Midea Group has the highest goodwill scale of 28.928 billion yuan, followed by Weichai Power with a goodwill scale of 24.251 billion yuan, and Haier Zhijia, the third largest, also has a goodwill scale of 23.344 billion yuan.

From the perspective of the proportion of goodwill in the total market value, as of the closing of January 21, there were three enterprises whose goodwill scale accounted for more than 100% of the total market value, namely HNA Technology, Digivoice Technology and Jinhong Group, with the proportions of 208.59%, 148.71% and 146.52% respectively. The goodwill scale of the three companies was 15.324 billion yuan, 6.186 billion yuan and 1.827 billion yuan respectively.

From the perspective of industry distribution, pharmaceutical biology, media, computer, electronics, and non bank finance are the sectors with the highest goodwill, with the goodwill scale reaching 150.819 billion yuan, 122.605 billion yuan, 108.044 billion yuan, 94.263 billion yuan, and 87.943 billion yuan respectively.

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