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Yuntianhua plans to acquire 93.89% of the shares in Yunnan Dawa Ammonia Production Co., Ltd. (hereinafter referred to as Dawa Ammonia Production) for 938 million yuan. Author/Source: Chen Finance; Date: 2020-07-17; Clicks: 23 It is worth noting that before issuing the acquisition announcement, the transferor converted the debts of the target into equity, thereby turning the originally negative net assets into positive ones. According to the audit report, Dawa Ammonia has substantial accounts receivable from its subsidiaries. Dawei Ammonia also made a full provision for bad debts on the accounts receivable of one of its subsidiaries. The total transaction value amounts to 938 million yuan. On July 15, Yuntianhua announced that it intended to acquire, through a negotiated transfer, 93.89% of the shares in Dawa Ammonia Production held by Yunnan Coal Chemical Group Co., Ltd. (hereinafter referred to as Coal Chemical Group), in cash. The total consideration for this transaction is 938 million yuan. This acquisition consists of equity and debt components; the total assessed value of Dawa Ammonia Production’s equity is 560 million yuan, with an assessment appreciation rate of 14.46% ； Dada Ammonia Production owes 413 million yuan in debt to the Coal Chemical Group; the company pays this amount on behalf of Dada Ammonia Production to the Coal Chemical Group, after which Dada Ammonia Production repays the loan to the company. Dawei’s ammonia production capacity includes 500,000 tons per year of liquid ammonia, 10,000 tons per year of sulfur, 53,000 tons per year of sulfuric acid, 350,000 tons per year of urea, 180,000 tons per year of soda ash, and 180,000 tons per year of ammonium chloride, thus forming a relatively complete industrial chain for synthetic ammonia, fertilizers, and soda ash. In terms of revenue and profits, from January to May 2020, Dawa Ammonia Production’s operating revenue was 800 million yuan, with a net profit of 166 million yuan. It should be noted that as of December 31, 2019, the owners’ equity of Dawa Ammonia Production was -1.3 billion yuan, while by May 31, 2020, it had risen to 490 million yuan. The reporter noted that in May 2020, the Coal Chemical Group converted 1.5 billion yuan of its 1.913 billion yuan claim against Dawa Ammonia Production into equity; Qumei Coking increased its investment in Dawa Ammonia Production by providing assets in kind. As a result of these actions, Dawa Ammonia Production’s net assets shifted from negative to positive. Nevertheless, as of May 31, Dawa Ammonia’s debt-to-asset ratio remained at 71.72%. Yuntianhua stated that Dawa Ammonia Production has relatively stable profitability, and the acquisition will improve its operational results. In addition, at present Yuntianhua purchases around 350,000 to 400,000 tons of synthetic ammonia each year from external suppliers. After acquiring Dawa Ammonia Production, the company will significantly reduce its reliance on external supplies of synthetic ammonia, increase its self-sufficiency in raw materials, gain effective control over the synthetic ammonia market in Yunnan Province, and further optimize the overall structure of its phosphate fertilizer business ； Dawei Ammonia Production’s existing urea products are an influential fertilizer brand in Yunnan Province, with an annual production capacity of around 350,000 tons. By acquiring Dawei Ammonia Production, the company’s urea production capacity in Yunnan Province increased from 800,000 tons to around 1.2 million tons, which helps to strengthen the company’s control over the urea market in that region. A large amount of provisions for bad debts are made on accounts receivable; in fact, Yuntianhua and Dada Ammonia Production operate in a relationship between customers and suppliers. From January to May 2020, Yunnan Yuntianhua Trading Co., Ltd., a wholly-owned subsidiary of Yuntianhua, was the third-largest customer of Dawei Ammonia Production, generating revenue of 30.83 million yuan, which accounted for 3.84% of the total revenue. However, according to the audit report, Dawa Ammonia has a significant proportion of bad debt provisions for its accounts receivable. As of May 31, 2020, the book balance of Dawa Ammonia’s accounts receivable was 162 million yuan, of which the provision for bad debts amounted to as much as 118 million yuan. Reporters from the Daily Economic News noticed that Dawa Ammonia’s accounts receivable were concentrated among a few parties; the total accounts receivable from the top five parties alone amounted to 142 million yuan. These include Yunnan Yunwei Chemical Refining Co., Ltd. (related party), Yunnan Dafufulong Agricultural Supplies Trading Co., Ltd. (related party), Yunnan Xinlong Agricultural Supplies Co., Ltd., Yunnan Zichen Agricultural Development Co., Ltd., and Yunnan Yuntianhua Trading Co., Ltd. Interestingly, as of May 31, 2020, the accounts receivable listed on Dawa Ammonia’s consolidated balance sheet was only 44.14 million yuan. Its parent company’s balance sheet shows accounts receivable amounting to 120 million yuan. It is easy to see that Dawa Ammonia’s accounts receivable are concentrated in its subsidiaries or grandchildren companies. Dawei Ammonia Production has three holding companies: it holds 100% of the shares in Yunnan Yuandong Fertilizer Co., Ltd., 100% of the shares in Dali Dawei Fertilizer Co., Ltd., and directly or indirectly holds 38.50% of the shares in Yunnan Dawei Fulong Agricultural Supplies Trading Co., Ltd. As of May 31, 2020, Dawa Ammonia Production’s accounts receivable from Yunnan Dawa Fulong Agricultural Supplies Trading Co., Ltd. amounted to 65.036 million yuan, for which a full provision for bad debts was made ； The accounts receivable from Yunnan Yuandong Fertilizer Co., Ltd. amount to 69.34 million yuan ； The accounts receivable from Dali Dawei Fertilizer Co., Ltd. amount to 30.7 million yuan. Yuntianhua stated in its announcement that Yunnan Dafu Fulong Agricultural Supplies Trading Co., Ltd. has ceased operations, and Dafu Ammonia Production and related entities are being divested. In fact, Yunnan Xinlong Agricultural Supplies Co., Ltd., which also holds 35% of the shares in Yunnan Dafu Fulong Agricultural Supplies and Trade Co., Ltd., has accounts receivable from Dafu Ammonia Production in the amount of 21.3697 million yuan, for which full provisions for bad debts have been made. Yunnan Xinnong Agricultural Supplies Co., Ltd. has had its license revoked and was added to the list of entities that fail to fulfill their obligations, on July 15, 2019.