Semianual report turns loss to profit, yet three independent directors remain dissatisfied, jointly sending a letter demanding improvements in the company's operational status — this is a scene that occurred at *ST Xianfeng (002141.SZ).

On August 21, *ST Xianfeng announced that it had recently received a joint supervision letter submitted by three independent directors. The letter stated that the company's financial indicators such as operating income and net profit for the first half of 2024 were still not ideal, urging the company to actively promote improvements in its operational situation.

Previously, the company had just released its semiannual report. In the first half of this year, *ST Xianfeng achieved a profit of 5.4437 million yuan, turning a loss into profit. The net profit attributable to non-controlling interests was -15.4 million yuan.

Why are the independent directors still dissatisfied despite turning a loss into profit? First Financial noticed that *ST Xianfeng is facing multiple delisting risks. On one hand, the company's operating income in 2023 was only 88.04 million yuan, with a net profit loss of 120 million yuan, and it has been "starred and capped" with a delisting risk warning. Although the performance in the first half of 2024 has improved, there is still a high probability of triggering the new delisting rules. On the other hand, although the company's net profit for the first half of the year turned a loss into profit, it mainly came from asset disposal and investment income from financial management, while the main business is still incurring losses.

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Faced with this predicament, *ST Xianfeng seems to want to place its "bet" on mergers and acquisitions, mentioning several times the intention to implement M&A, but so far no progress on the M&A has been disclosed.

Independent directors have jointly sent letters on multiple occasions.

Unlike other listed companies' independent directors who have recently sent letters focusing on the authenticity of annual reports and non-operational fund occupation, the three independent directors of *ST Xianfeng directly pointed to the company's operations in this letter.

According to the disclosure by *ST Xianfeng, the three independent directors, Xiao Shilian, Deng Yanchang, and Liang Rong, in their jointly submitted "Supervision Letter on Requesting the Company to Actively Promote Measures to Improve the Operational Situation," believe that the company's financial indicators such as operating income and net profit for the first half of 2024 are still not ideal.

In response, the aforementioned independent directors put forward two suggestions. The first is to actively take various measures to truly improve the operational status of the company's veterinary vaccine business, enhance the company's ability to sustain operations, and improve the company's comprehensive service capabilities and market competitiveness in the field of animal health. The second is to actively promote strategic transformation through mergers and acquisitions and other measures according to the established goals, effectively enhance the company's ability to sustain operations, strengthen communication with relevant regulatory departments, and strive to obtain relevant support within an effective time frame.

This is not the first time the company's independent directors have spoken out. In June of this year, the aforementioned independent directors sent a letter to the company's board of directors, requesting the hiring of a third-party intermediary institution to conduct a special audit on the elimination of the impact of the matters involved in the negative opinion on the company's 2023 annual internal control audit report.Multiple Delisting Risks

Behind the frequent voices of independent directors, *ST Xianfeng is facing multiple delisting risks due to an operational crisis.

Public information shows that *ST Xianfeng's business is primarily focused on pig vaccines, currently possessing 6 core pig vaccine products including pig blue ear, roundworm, diarrhea, mycoplasma, pseudorabies, and swine fever.

Starting last year, *ST Xianfeng's performance has rapidly declined. According to financial reports, in 2022, *ST Xianfeng's revenue was 885.7 million yuan, which plummeted to 88.04 million yuan in 2023, a year-on-year decrease of 90.05%. The net profit for 2023 was -120.1 million yuan, a year-on-year decrease of 151.72%.

Due to the net profit attributable to the shareholders of the listed company being negative in 2023, and the operating income after deduction being below 100 million yuan, along with the internal control audit report for 2023 being issued with a negative opinion, *ST Xianfeng has been given a delisting risk warning and other risk warnings.

*ST Xianfeng explained in its financial report that one of the reasons for the performance decline was the accelerated de-capacity of pigs in the second half of 2023, leading to a significant reduction in the demand for animal health products by pig farming enterprises, and animal health companies are facing tremendous operational pressure.

In fact, the industry in which *ST Xianfeng operates is indeed undergoing cyclical adjustments. According to data from Choice, among the 14 listed companies in the animal health sector, 7 companies saw a year-on-year decline in operating income in 2023. Among them, Haili Biology (603718.SH) and Yongshun Biology (839729.BJ) experienced revenue declines of over 9%.

Apart from the cyclical factors of the industry, the significant reduction in *ST Xianfeng's operating income may mainly stem from the company's sale of its original main business. *ST Xianfeng stated at the annual report performance explanation meeting that the change in operating income was mainly due to strategic transformation, with the divestment of the original nearly billion-yuan enameled wire business, leading to a noticeable decline in consolidated performance.

In the first half of this year, *ST Xianfeng's operating income continued to decline, amounting to only 28.56 million yuan, a year-on-year decrease of 35.82%. The net profit attributable to non-recurring gains and losses was -15.4 million yuan, a year-on-year increase of 58.18%. Although the net profit turned from loss to profit, the profit was only 5.44 million yuan.

According to the delisting rules issued in April this year, for mainboard companies, if the audited total profit, net profit, and net profit after deducting non-recurring gains and losses are all negative in the most recent fiscal year, and the operating income is below 300 million yuan, a delisting risk warning (*ST) will be imposed; if this situation is triggered again in the next fiscal year, the company will be delisted.According to this rule, if *ST Xianfeng fails to turn its non-deductible net profit from loss to profit in 2024, or cannot increase its annual revenue to over 300 million yuan, it will directly face the risk of delisting.

In addition to the financial delisting risk, the risk of delisting due to a low stock price is also looming over *ST Xianfeng. Reporters have noticed that with the performance failure in 2023, the stock price of *ST Xianfeng has been continuously falling. On January 25, 2024, the company's stock price was still at 2.86 yuan per share, and then it fluctuated downwards. On August 22, the closing price was only 1.13 yuan per share, with a drop of more than 55% during the period.

If the stock price of *ST Xianfeng continues to fall and breaks through the 1 yuan warning line, the risk of delisting due to a low stock price may arise.

Can the risk of delisting be avoided?

For *ST Xianfeng, the key to preserving the shell still lies in improving operations.

Against the backdrop of the industry's continued downturn, although *ST Xianfeng turned a profit in the first half of the year, it was not due to an improvement in the main business. The company admitted in its semi-annual report that during the reporting period, it faced fierce price competition and collection risks in the industry, increasing operating pressure, declining sales, leading to unsatisfactory main business performance and an increase in losses for the company during this period.

Asset disposal and financial investment may be the key to turning a profit. *ST Xianfeng mentioned in its semi-annual report that during the reporting period, it actively took measures to reduce overall management costs, continued to promote the disposal of land and property in Zhuhai to achieve some benefits, and achieved profits through prudent financial management while strictly controlling risks.

The company has indeed invested a large amount of its own funds in financial management. According to the 2023 financial report, during the reporting period, the company used its own funds to purchase bank financial products for about 100 million yuan, purchased securities financial products for about 480 million yuan, and other financial products for 350 million yuan, totaling about 930 million yuan.

However, some high-risk investment products of *ST Xianfeng in 2023 have suffered significant losses. For example, the company used 50 million yuan of its own funds to purchase private fund products of Hengqin Chuangsheng Jiarong Fund Management Co., Ltd., with a reference annualized return of 5%, but the actual profit and loss during the reporting period was -63.43%.

Industry insiders analyze that although relying on financial income can increase profits, this part of the income is difficult to fill the "hole" of non-deductible net profit. Moreover, the investment market has been more volatile in recent years, and the return rate is difficult to guarantee.In the long term, *ST Xianfeng's financial situation has not yet emerged from difficulty. A rough estimate, based on *ST Xianfeng's operating income of 28.56 million yuan and non-deductible net profit of -15.4 million yuan in the first half of the year, suggests that to avoid the risk of delisting, the company would need to achieve an operating income of over 270 million yuan in the second half of the year, or turn its non-deductible net profit positive.

Achieving this goal is no small task. Looking solely at non-deductible net profit, *ST Xianfeng has been in the red for several consecutive years. Over the nine-year period from 2015 to 2023, the company has reported losses in non-deductible net profit for eight years.

To rapidly increase performance and escape the risk of financial delisting, mergers and acquisitions (M&A) is a viable option. The company has also frequently mentioned M&A in recent times. In this urging letter, the independent director suggested that the company actively promote strategic transformation measures, including but not limited to M&A.

At the annual performance briefing, *ST Xianfeng also stated that they are actively evaluating and striving to implement measures, including but not limited to M&A, that are effective for the company's continuous operation as soon as possible.

However, the window of opportunity to escape difficulties through M&A is not long, and the conditions and thresholds are relatively high. The industry insiders analyzed that *ST Xianfeng needs to complete the M&A by September in order to consolidate the financial statements of the target company for October, November, and December. However, the process from initial contact, signing of letters of intent, due diligence, business negotiations to the final completion of the acquisition takes a considerable amount of time. So far, *ST Xianfeng has not announced any substantial progress in mergers and acquisitions.

The aforementioned individuals also stated that M&A projects themselves require relatively good performance. From the perspective of revenue, the operating income in the last quarter needs to be able to make up for a revenue gap of over 200 million yuan, which is also quite challenging.