Datang Telecom: can the series of restructuring actions of selling Qualcomm's equity joint venture chip company get out of the quagmire?

* ST 600198.SH (Datang) recently announced that it is planning to transfer its 5% Muhami 8% stake in Peugeot Technology Co., Ltd. As a star chip project built in a joint venture with Qualcomm and Chengdu, the equity sale attracted a lot of attention. Recently, * ST Datang asset restructuring actions frequently, in addition to this equity sale slimming down, nearly a month the company has released the introduction of strategic investment, foreign asset acquisitions and other news, whether the series of actions can make * ST Datang get rid of the main business of continuous losses, negative net assets of the situation, worthy of long-term attention.

The assets sold are mainly engaged in chips and rely on Qualcomm.

* ST Datang said in this announcement that Lianxin Technology Co., Ltd., an indirect holding subsidiary, will sell 5% of its 8% stake in Lai Sheng Technology Co., Ltd. through public listing. Data show that at present * ST Datang indirectly holds a 24.13% stake in Lai Sheng Technology through Lianxin Technology. The announcement said that * ST Datang on the sale of the shares of the specific transaction asset scope, transaction price and other elements have not been finally determined, there is significant uncertainty about the relevant matters. The company expects to disclose the transaction plan reviewed and approved by the board of directors in July 2021.

It is reported that in 2019 and 2020, the operating income of Yusheng Technology Co., Ltd. is 837 million yuan and 537 million yuan respectively. Its main business is the hot chip solutions related to design, packaging, testing, technology development, consulting, services and so on. In 2017, Datang joined hands with Qualcomm China and Jianguang Capital to establish Lang Sheng Technology. Qualcomm, as the world's largest mobile chip research and development company, holds 24.13%. Jianguang Guangsheng (Chengdu) Semiconductor Industry Investment Center (limited partnership) holds 34.64%. Zhilu (Gui'an New area) Strategic emerging Industry Investment Center (limited partnership) holds 17.09%.

Analysts here pointed out that * ST Datang's intention to cash in through this equity sale is more obvious. In August last year, Julius Technology officially launched its first AIoT chip, the JA310, smart vision Internet of things market. Xiao Xiaomao, CEO of Xisheng Technology, said to the outside world, "Xisheng focuses on the innovation and application of mobile terminal chip design technology, from 5G to the Internet of things to artificial intelligence, and is committed to leading the development and innovation of the integrated circuit industry with leading IC design capabilities." This means that the Peugeot technology product line covers smart phone chips and solutions, as well as smart Internet of things chips and solutions. In the current industrial and market environment, * ST Datang to realize the relevant equity is less difficult, but also easy to realize capital realization.

Asset reorganization frequently under the warning of delisting risk

* ST Datang Financial report shows that in 2018, the total operating income of the company was 2.344 billion yuan, 1.431 billion yuan and 1.207 billion yuan respectively, and the net profit attributable to the owner of the parent company was 564 million yuan,-899 million yuan and-1.364 billion yuan respectively. After Datang Telecom disclosed its 2020 annual report on April 29 this year, the delisting risk warning was implemented.

The relevant provisions of the rules on Stock listing on the Shanghai Stock Exchange (revised in December 2020), that is, the so-called "new delisting rules", if a listed company touches any index of negative net assets, net profit and operating income or audit opinion type in the first year, its shares will be delisted risk warning. If one of the combined indicators of negative net assets, net profit and operating income is touched again in the second year, or if the annual report is issued with reservations, unable to express opinions or negative opinions, the listing of its shares will be terminated directly. This means that if Datang Telecom's net assets are still negative or other conditions in 2021, it will hit the red line of delisting on the Shanghai Stock Exchange or face compulsory delisting.

Under pressure, * ST Datang's self-rescue action has been significantly accelerated recently. A week ago, the company just disclosed a major asset restructuring report (draft). In order to reduce the asset-liability ratio, effectively improve the enterprise capital structure and enhance future profitability, Datang Microelectronics, a subsidiary of the company, plans to introduce Guoxin Construction Fund cash to increase capital, with a total capital increase of 400 million yuan, which will be used to repay interest-bearing financial liabilities such as bank loans and implement market-oriented debt-to-equity swaps. It is understood that the partners of the Guoxin Jianxin Fund are very powerful, among them, the partnership shares of Jianxin Financial assets Investment Co., Ltd., China Guoxin holding Co., Ltd., and Chengdu Jiaozi Financial holding Group are 49.9967%, 33.33% and 13.33%, respectively. The three are wholly owned by the Construction Bank, the State Council SASAC and Chengdu SASAC.

Prior to May 12, * ST Datang disclosed the restructuring plan, the company intends to acquire 100% equity of Datang Liancheng, and raise supporting funds of 1 billion yuan. Datang Liancheng's main business involves dedicated mobile communications, dedicated broadband radio and broadband mobile security applications, raising funds to invest in the research and development of new high-performance series of security chips and industrialization projects. After the completion of this acquisition, * ST Datang will set foot in the defense information industry and open up new business growth points. The transaction will also bring about changes in the controlling shareholder and management level of the company. Before the transaction, the controlling shareholder of * ST Datang was the Telecom Research Institute, and China Xinke Group was the controlling shareholder of the Telecom Research Institute; after the completion of this transaction, the controlling shareholder of * ST Datang was changed to China Xinke Group, which means that the management level of * ST Datang in the holding group has been upgraded.

Can repeatedly wearing stars and hats bring new life to the company?

The series of actions show that * ST Datang and his controllers are eager to get rid of the risk of delisting. But whether ST Datang can embark on a smooth road remains to be seen.

In addition to the difficulties in the main business, the legal risks of litigation in * ST Datang should not be underestimated. By the end of 2020, the rough statistics of the lawsuits involving * ST Datang and its subsidiaries are nearly 700 million yuan. Only China Taiyue (300002.SZ) and its subsidiary Datang Semiconductor, Datang Microelectronics contract dispute, the amount of money involved is as high as 644 million yuan. Analysts pointed out that the series of lawsuits and contract disputes exposed the shortcomings of * ST Datang in corporate internal control, and the time and cost of dealing with the above legal disputes in the future must also be considered in the process of company restructuring.

Wearing a hat on a star has become a common occurrence for Datang Telecom, so it remains to be seen whether this series of asset restructuring will enable the company to have long-term sustainability.

As early as 2007, Datang Telecom encountered delisting risk warning for the first time because of continuous losses in 2005-06. In 2018, Datang Telecom wore a hat again because of two consecutive years of losses in 2016-2017. In 2018, * ST Datang turned losses into profits, but still relied on non-recurring profits and losses.

Accompanied by this is that in recent years * ST Datang assets mobility has become commonplace. Behind the frequent movement of assets, it shows that * ST Datang has poor sustainable management ability. A reporter from the Financial Associated Press noted that * the ST Datang 2020 Annual report was issued with non-standard and unqualified opinions, which is also related to this. The opinion issued by the accounting firm Lixin shows that these events or situations (referring to negative net assets and net profit) indicate that there is significant uncertainty that may lead to significant doubts about Datang Telecom's sustainability.

As far as the company's main business is concerned, * ST Datang said that in the field of integrated circuit design, although the market share of the second generation ID card chip is basically stable, and financial payment chip shipments continue to maintain a high growth trend, but financial social security card chip shipments have decreased; at the same time, affected by the malaise of the overall automotive industry, car light regulator chip shipments and profitability have declined. In the field of information and communication security, the gross margin of terminal sales in the industry decreased significantly compared with the same period last year. In the field of 5G enabling applications, the company's business structure optimization has made progress, but due to the slow expansion of new business, the profit level has not reached the expected level.

At one time, ST had boundless scenery in the Tang Dynasty. In the last century, it was called "Giant China" with Dragon Communications, ZTE and Huawei, and it was a leading enterprise in the field of domestic communications at that time. Now whether ST Datang can get out of the quagmire and regain its strength, the current reorganization is undoubtedly a critical moment of life and death.