Bonds Apr 27

China’s ‘Godfather of capital’ urged to open the books

Regulators pressing Liu Shaoxi amid fears Yihua Group may default on bond debts of 7 bn yuan

China’s ‘Godfather of Capital’ urged to open the books
Liu Shaoxi, right, chairman of Yihua Enterprise Group, speaks during a meeting in Shantou city in southern China's Guangdong province. Photo: Xiao yu / ImagineChina via AFP

(ATF) The Yihua Group has suffered its second downgrade in six months, and its control of Yihua Life is also being investigated by the CSRC – the China Securities and Regulation Commission

The ‘Yihua Department’ – the informal name of the whole group – has 7 billion yuan worth of bonds in Yihua Life and it may be facing the biggest dilemma since it was established.

In the Chaoshan area of southeastern Guangdong province, the actual controller of the "Yihua Department", Liu Shaoxi is known as the "Godfather of capital" and the "King of Wood", according to China Bond Market Watch.

On the evening of Sunday April 26, Yihua Life (600978.SH) issued an announcement to say it had received an "Investigation Notice" from the China Securities Regulatory Commission two days earlier. The company is being investigated for suspected information disclosure violations.

On Friday April 24, Yihua Life's controlling shareholder Yihua Enterprise (Group) Co Ltd was downgraded by China Chengxin International, and its credit rating downgraded from AA- to A. The debt credit ratings of the bonds "17 Yihua Enterprise MTN001" and "17 Yihua Enterprise MTN002" were downgraded from AA- to A.

In its ratings report, China Chengxin International noted that Yihua Life and Yihua Health (000150.SZ), an important listed subsidiary of Yihua Group, suffered losses in 2019.

Yihua Life's estimated net profit loss to the Group in 2019 was between 108 million to 159 million yuan, while Yihua Health's estimated 2019 net loss to its parent was estimated at between 1.25 billion to 1.62 billion yuan.

The Yihua Group headquarters has no physical business operations. Its profits depend investment income such as dividends from subsidiaries. Its 2019 performance is also expected to decline significantly.

It is understood that Yihua Group, has a domestic bond debt of 4.244 billion yuan, and US$250 million in foreign debt.

In addition, the "Yihua Department" has 1.8 billion yuan worth of Yihua Life Bonds which expire within one year, while Yihua Health, another listed company in the group, also has 200-million yuan worth of bonds, namely the "18 Yijian 01".

Great pressure

China Chengxin International believes that Yihua Group will face great pressure on due payments this year, and the company's external financing environment is under pressure, as only limited monetary funds are available, liquidity is tight, and the company's source of funds to repay debts is subject to greater uncertainty. Most of the equity of Yihua Life and the equity of Yihua Health that is held by the company is in a judicial freeze or pledged state, and the company's ability to refinance is greatly restricted.

In December last year, China Chengxin International downgraded Yihua Group and the above-mentioned debt credit rating from AA + to AA-. It said the company's main body and the above-mentioned debt credit rating faced possible downgrades.

In 2019, S&P also downgraded the long-term credit rating of Yihua Group twice – in April and July. The reason given at the time was that its “appreciable” debt situation would severely affect the company’s liquidity.

According to the official website, Yihua Group is a large multinational enterprise group that integrates major industries – residential property, life, medical and pension services, hotels, plus capital and finance. It has two listed companies, Yihua Life and Yihua Health.

The group has won honours as a "Top Ten Outstanding Private Enterprises in China", "Top 100 Enterprises in Guangdong Province" and other prizes. It has been rated as one of the "Top 500 Private Enterprises in China" and the "Top 500 Manufacturing Enterprises in China" for eight consecutive years.

According to its financial report for the third quarter of 2019, Yihua Group has total assets of 55.954 billion yuan and total liabilities of 32.889 billion yuan, which includes current liabilities of 24.249 billion yuan. But it is worth noting that the Group's short-term borrowings increased rapidly in the third quarter, from 5.942 billion yuan at the beginning of the period to 7.705 billion yuan.

In the same period, the total amount of capital controlled by Yihua Group decreased from 4.635 billion yuan to 3.263 billion yuan, a decrease of nearly 30%.

At the same time, Yihua Life, a listed company under the Yihua Group, is also being investigated by the Securities Regulatory Commission.

According to the 2019 performance forecast released by Yihua Life, it is expected that the company's net profit loss to its parent will be about 110 million to 160 million yuan. Yihua Life said this was due to the company's North American market, which has suffered reduced customer orders, although North America is still one of its main sales markets.  And while this was the first loss since going public in 2004, it is not the biggest difficulty that Yihua Life faces, as there are "sensitive finance issues".

Liu Shaoxi, the boss of Yihua, was born in Chenghai in Shantou City in Guangdong Province in 1963. Although his family was poor, Liu Shaoxi was extremely talented in business and decided to go to sea early.

He entered a wood factory as a carpenter, but due to his diligence and hard work, he was soon promoted from an ordinary employee to a director. In 1987, Liu Shaoxi borrowed 800 yuan and opened his own wood factory.

Within five years, Liu Shaoxi's wood factory had expanded, thanks to its excellent technology, into the large-scale Yihua decoration chain, opening nearly 1,000 direct stores in China. It became the first private enterprise in Chaoshan to exceed 10 billion yuan in output value, and saw Liu hailed as "Wood Industry King".

In 2004, Yihua Wood – which was renamed as "Yihua Life" in 2016 – became the first private company to enter the A-share market in Chaoshan, during a period when most of the listed companies were state-owned enterprises.

'Godfather of capital'

Liu Shaoxi was known as the “Godfather of capital” in the Chaoshan business community. According to the "China Times", Liu is well versed in the rules of the capital market and well-known in the Chaoshan region. The name "Godfather" does not seem to be an exaggeration.

After the listing of Yihua Wood, Liu Shaoxi's capital operation took off. In 2007, Yihua Real Estate – renamed "Yihua Health" in 2015 – "backdoored" ST Optoelectronics to complete the listing of its real estate business.

Subsequently, Liu Shaoxi began to be a powerbroker with Yihua Group in several listed companies.

A sponsor of a securities firm told China Bond Watch that listing is a systematic project, involving not only the enterprise itself, but also securities firms, accountants, lawyers, appraisers, and others. The integration and coordination capabilities of these resources are very demanding for entrepreneurs. But the "Godfather of capital" Liu Shaoxi was good at integrating various resources and coordinating various relationships.

However, in recent years, there have been rumours about Liu Shaoxi, notably that his real estate business was questioned by the outsiders. According to the 2018 Hurun Rich List, Liu Shaoxi's family wealth was about 8.5 billion yuan – more than half of the 19 billion he was said to have two years ago earlier.

Today, the dealings of Yihua Group and its subsidiaries are being investigated by the Securities Regulatory Commission, which is pushing the company to open its books, amid fears the group may default on 7 billion-yuan worth bonds.