July 10, Tuesday, Shan City.
The day after Board of Directors ended, Chen Qiming took a thick folder and knocked on the door of Zhao Chen's office.
Chen Xi, Su Wantang and Zhang Qingxue are already inside. Several people are sitting around the sofa, and several documents are spread out on the coffee table.
"Zhao Zong, the first draft of the semi-annual report is out."
Chen Qiming placed the folder in front of Zhao Chen, with a hint of complicated emotions in his voice.
"I've gone through the data and it's generally looking good, but there is one number that may worry the market."
Zhao Chen took the folder and opened the first page.
Chen Qiming sat down opposite him and began to report verbally.
"As of June 30, 2018, Henglong Group had consolidated total assets of 17.7 billion yuan, total liabilities of 5.85 billion yuan, net assets of 11.85 billion yuan, and an asset-liability ratio of 33%.
This debt ratio has dropped by 16 percentage points from 49% at the end of last year, and is 13 percentage points lower than the 20% target we set at the beginning of the year. However, the intensity of debt reduction in the first half of the year has far exceeded expectations.
Mainly because we adjusted our strategy later and increased the discounts during the sale."
Zhao Chen nodded and said nothing.
Chen Qiming continued:
"Of the total liabilities of 5.85 billion yuan, most of them are operating liabilities and a small amount of long-term borrowings.
The financing liabilities of Henglong Capital are not consolidated because Henglong Capital is an independently accounted subsidiary and the financing liabilities are at the subsidiary level and do not affect the debt ratio of the group Consolidated Statements.
If Henglong Capital's financing is included, the group's overall debt ratio will be higher, but Henglong Capital's financing is pledged with stocks and does not occupy the group's credit line."
Su Wantang asked softly from the side:
"Total assets have dropped from 22.85 billion at the end of last year to 17.7 billion, a decrease of more than 5 billion. What is the main reason for the decrease?"
Chen Qiming said, "The main reason is that we took the initiative to shrink our main real estate business, resulting in fewer sales and lower inventories.
In addition to selling Henglong Property last year and selling some non-Core Assets this year, the asset size has naturally come down.
But this is a good thing - the scale of assets has fallen, and liabilities have fallen faster, so the debt ratio has actually come down."
Zhao Chen Turn to the second page, which is a cash flow statement.
His eyes paused at the line "Cash and Cash Equivalents". "How much cash is there?"
Chen Qiming said, "As of June 30, Henglong Group Consolidated Statements's cash and cash equivalents were approximately 5 billion yuan.
Among them, Henglong Capital has nearly 2 billion yuan on its account - including the first-phase capital injection of 500 million, the second-phase capital injection of 500 million, and the equity investments of Bubble Mary and Yunnan Agriculture.
Henglong Group Headquarters has 4 billion yuan in its account.
Yesterday Board of Directors approved another 1 billion capital injection into Henglong Capital, but the money has not been transferred yet.
If transferred, the group's cash will drop to 3 billion, and Henglong Capital's cash will increase to 3 billion."
He paused and added:
"In addition, the 360 million we invested in Bubble Mary and the 390 million invested in Yunnan Agriculture Group were both included on the balance sheet based on the purchase price.
Bubble Mart's 26.3% shares, if calculated according to the market Fair Value, are far more than 360 million.
But we have not revalued, so the asset side is conservative."
Zhang Qingxue turned over the report in his hand and asked:
"The net assets are 11.85 billion, and the cash and equivalents are 6 billion. Including the potential appreciation of Bubble Mary and Yunnan Agriculture, the actual net assets are much higher than the book?"
Chen Qiming nodded. "Yes. Of the net assets of 11.85 billion, cash accounts for nearly half.
If you add in the implied appreciation of investment assets, Henglong's family fortune is much stronger than it appears on the books."
Zhao Chen leaned on the sofa and was silent for a while.
Then he asked the question everyone was waiting for. "Where's the profit?"
Chen Qiming's expression became more cautious.
"The net profit of the main real estate business in the first half of the year was approximately 200 million yuan, halved from 400 million yuan last year.
The main reasons are the active shrinking of sales, discounts to remove inventory, and larger profit margins when non-Core Assets is sold.
Although Haoyu Construction has contributed tens of millions in profits, the overall decline has been significant."
The office was quiet for a few seconds.
Chen Xi spoke first.
"With a net profit of 200 million yuan, will the market feel that Henglong is no longer good? It was 400 million yuan in the first half of last year, and it has been cut in half this year. Investors may panic."
Su Wantang also nodded.
"Retail investors look at profits, while institutions look at trends. The figure of profits cut in half does not look good when placed in a semi-annual report.
It's a pity that the money Shunxin Agriculture made is financially classified as investment income in the third quarter, otherwise the report would look much better."
Zhang Qingxue flipped through the report, his tone calmer than usual.
"But our debt ratio has dropped from 49% to 33%, and our cash has increased from more than 2 billion to 6 billion.
Institutions will look at these numbers.
The problem is, the market's attention tends to be focused on profits, especially short-term investors."
Zhao Chen picked up the tea cup, took a sip, and then put it down.
"Profits are cut in half because we are actively shrinking. It's not that we can't make more profits, it's because we sacrifice short-term profits for healthier finances.
Henglong's current strategy is to reduce debt, hoard cash, and wait for opportunities. Profit is not the first goal, but the quality of the balance sheet is.
I told Board of Directors about this logic, and I told senior executives. Although the market is difficult to understand, strategies cannot cater to the market."
He stood up and walked to the window, turning his back to several people.
"How will the market react after the semi-annual report is released? In the short term, it may fall.
When retail investors see profits cut in half, their first reaction is to run away. But when they finish running, institutions will come in.
Because what institutions look at is the balance sheet, not the income statement.
Net assets of 11.8 billion, cash and equivalents of 6 billion, and debt ratio of 33%.
With this foundation, you can't find another one among A-share Real Estate Sector."
He turned around and looked at Chen Qiming.
"The wording of the semi-annual report needs to be changed. Don't emphasize the decline in profits, but emphasize Strategic Contraction, proactive debt reduction, and Cash Reserves abundance."
Let's put the fact of 'profit cut in half' within the framework of 'proactive Strategic Adjustment for long-term healthy development'.
The market will understand. It doesn't matter if they don't understand. They will naturally understand when we come up with new investment results in the second half of the year."
Chen Qiming was jotting down quickly on his notebook.
"Understood. I will adjust the wording to focus on the improvement of the balance sheet and Cash Reserves."
Chen Xi asked, "Zhao Zong, when will the semi-annual report be released?"
Zhao Chen thought for a while. "At the end of July. No rush, let's review the data first.
In addition, the position building of Bidiya is about to begin. You can mention this in the semi-annual report--
'Henglong Capital has been authorized by Board of Directors and plans to invest in New Energy, a leading enterprise in the automobile industry, at the appropriate time'.
No need to name names, just give the market an expectation."
Chen Xi nodded. "I understand."
Zhao Chen walked back to the sofa, sat down, and picked up the teacup. "Is there anything else?"
Several people shook their heads.
"Then let's adjourn the meeting. Chen Qiming, send me a copy of the semi-annual report after you finish changing the wording.
Just keep an eye on Chen Xi, Bidiya, don't be in a hurry, and buy slowly."
Everyone stood up one after another and walked out.
Chen Qiming was walking ahead, already reorganizing the wording of the semi-annual report in his mind.
Chen Xi and Su Wantang walked side by side, discussing in a low voice the rhythm of opening a position on BYD.
Zhang Qingxue walked at the back, and when he reached the door, he looked back at Zhao Chen.
"Xiao Chen, are you really not worried about the profit being cut in half?"
Zhao Chen looked at her, was silent for a second, and then smiled.
"Aunt Zhang, I'm worried about what I should be worried about. Cutting profits in half is the result of active choice, not the consequence of passive acceptance.
If it was passively cut in half, I would be worried. But this is my own choice, so what do I have to worry about?"
Zhang Qingxue looked at him and smiled. "You're right. Let's go."
The door closed gently.
Zhao Chen sat alone in the office and opened the first draft of the semi-annual report left by Chen Qiming.
Total assets are 17.7 billion, total liabilities are 5.85 billion, net assets are 11.85 billion, debt ratio is 33%, cash is 5 billion, and profit is 200 million.
He read the numbers three times, then closed the folder and leaned back in his chair.
He knew that after the semi-annual report was released, the market would briefly panic.
The stock price may fall, some people in Stock Bar will scold, and the media will write "Henglong Group's net profit in the semi-annual report was cut in half, and the period of transformation pain continues."
But none of this matters.
Importantly, Henglong's balance sheet has never been healthier.
The important thing is that I made 648 million from investing in Shunxin Agriculture, but it was just not reflected in the semi-annual report.
But smart institutions and investors must have discovered it long ago.
Net assets of 11.8 billion, cash of 5 billion, and debt ratio of 33%.
This foundation needs to be accumulated, otherwise it will be difficult for him to free up his hands and feet to make plans for the next ten years.
As for profits - when the investment income of Henglong Capital begins to be reflected in the statements, the market will forget everything today.