Layoffs and factory closures! Can Dehao Runda successfully maintain its listing status?

*ST Dehao issued an announcement authorizing the management to proceed with matters related to the closure of the LED chip factory.

The announcement shows that Dehow Runda held the 14th meeting of the 6th Board of Directors on July 9, 2019, and reviewed and approved the "Proposal on Authorizing the Management to Promote the Closure of the LED Chip Factory", recognizing the company's management's handling of the LED chip business in the fourth quarter of 2018 and agreed to close the LED chip factory, and authorized the management to promote implementation.

Shell protection is imminent

It is reported that Elec-Tech was founded in Zhuhai in May 1996 and has been engaged in the research and development and manufacturing of small household appliances. It was listed on the Shenzhen Stock Exchange in June 2004. In 2009, Elec-Tech began to enter the LED industry and the layout of the LED chip business also began in that year. At present, the small household appliance business and the LED industry are developing in synergy.

In 2018, Dehao Runda achieved operating income of 4 billion yuan, a year-on-year decrease of 4.80%, and achieved a net profit attributable to shareholders of listed companies of -580 million yuan, a year-on-year increase of 40.16%.

It is worth noting that due to the negative audited net profit for two consecutive fiscal years in 2017 and 2018, the Shenzhen Stock Exchange will implement a special treatment of "delisting risk warning" for Dehao Runda's shares. The stock name will be changed from "Dehao Runda" to "*ST Dehao", and the stock code will remain 002005.

According to the relevant provisions of the Shenzhen Stock Exchange's "Stock Listing Rules", if the company's audited net profit in 2019 continues to be negative, Dehao Runda's shares will be suspended from listing from the date of disclosure of the 2019 annual report.

From this, we can see that how to turn the company's net profit from loss to profit in 2019 and thus avoid delisting is Dehow Runda's top priority.

In fact, Dehao Runda has been making efforts. On May 9, 2019, *ST Dehao announced that the company plans to transfer 100% of the equity of Zhuhai Yingrui Energy Saving Technology Co., Ltd. (hereinafter referred to as "Zhuhai Yingrui") to Deqicheng at a price of 245 million yuan.

It is worth mentioning that Zhuhai Yingrui’s net assets are 268.8646 million yuan, while the transfer price is 245 million yuan, which is obviously a discounted sale of the subsidiary.

At that time, *ST Dehao stated that the company's move was mainly to revitalize the company's existing assets, and the proceeds from the transfer would be mainly used to repay bank loans, supplement the company's working capital, etc.

Divestiture of LED chip business

Simply divesting Zhuhai Yingrui will not be enough to turn Dehow Runda around. This time, Dehow Runda has begun to target its main LED chip business.

Since 2009, Dehow Runda has made significant investments in LED chips through mergers and acquisitions of peer companies, private placements of stocks, its own funds, bank loans, etc. After years of development, it has established industrial bases in Dalian, Wuhu and Bengbu.

The LED chip industry has experienced many ups and downs. As the market entered a state of oversupply, the industry began to accelerate the reshuffle, and a wave of bankruptcies of small and medium-sized enterprises followed.

In the past two years, the market environment of the domestic LED chip industry has undergone tremendous changes. On the one hand, major competitors in the industry have purchased a large number of machines to expand production capacity; the new production capacity has been released rapidly, resulting in a continuous overcapacity of LED chips, which has further driven the continuous decline in LED chip prices, and the situation has accelerated in the third quarter of 2018. On the other hand, with the continued Sino-US trade dispute, the uncertainty of the macroeconomic environment has increased since 2018. The downstream application end of LED has been affected by the regulation and purchase restrictions of real estate, and the saturation of consumer markets such as automobiles, smartphones and TVs. The market demand for LED chips has been greatly reduced, and the industry has been weak in growth.

Dehow Runda stated that in the face of huge unfavorable changes in both the demand and supply of LED chips, although the company's LED chip products have advantages such as advanced technical indicators and leading flip-chip market segments, limited financing has caused the timing of planned new production capacity investment to lag behind competitors, and the production capacity scale, customer groups, new market development and other aspects are far behind the main competitors. As a result, the unit cost of the company's LED chip products is relatively high, the market share of LED chips is low, and the scale effect is not obvious. The operating conditions of this business are not ideal.

In the fourth quarter of 2018, the management of Dehow Runda conducted research and analysis on the industry prospects, market conditions, and price trends of the LED chip business, and redeployed the operating direction of the LED chip business in the fourth quarter. At the same time, it took measures including but not limited to reducing the production capacity of the LED chip business, clearing inventory, and reducing staff.

Based on the fact that the situation of huge overcapacity in the LED chip industry is difficult to alleviate in the short term, and the macro environment is still tense due to the impact of the Sino-US trade dispute, the downstream market of LED chips is also expected to be affected, etc., and considering the company's financing ability and the pressure of continued operation of various businesses, the management of Dehao Runda predicts that even if the price of LED chips rebounds in the short term to improve short-term performance, if the long-term financing ability is not restored and there is a lack of subsequent capital investment, the LED chip business will be difficult to maintain normal operations. Therefore, the company's management formulated a plan to close the LED chip factory in December 2018.

Dehow Runda mentioned that based on the operating conditions in 2019, the company's management, after comprehensive evaluation, made recommendations to the company's board of directors: agree and authorize the management to implement the "closure, shutdown and transfer" as planned to deal with the chip manufacturing business as soon as possible, and strive to complete it in the third quarter of 2019.

Dehow Runda said that after preliminary discussions between the company's management, appraisers and accountants, it was believed that the closure of the LED chip factory and most of the equipment assets, real estate and infrastructure may result in a large amount of asset impairment provisions for LED chip assets at the end of 2018. The treatment of impairment provisions will help to eliminate the impact of the qualified opinion issued on the company's 2018 financial statements as soon as possible. The specific amount of possible impairment is subject to final confirmation by the appraisal agency and accountants.

In addition, closing the LED chip factory will incur potential losses in the short term in terms of employee layoffs, inventory, and asset disposal. However, in the long run, it will help reduce the company's overall operating performance pressure, ease the company's long-term financial pressure on LED chips, ensure that the company has more resources to develop other business segments, and help the company's overall operations return to normal track.