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Why Did the Reorganization of Baosteel’s Companies Fail? Financial Assets Mo

SGIS Songshan, which has received the second warning, is on the verge of delisting this time. On Jun. 13, ST SGIS announced to terminate its major assets reorganization and vowed not to have any such reorganization within 6 months from then on.  
In Jan. 30 this year, ST SGIS said it would sell all its steel business while purchasing the assets of financial business of Baosteel. According to the announcement, it was delisted from the opening on Feb. 1 and would be listed again on Jun. 13. 4 months later. This is seen as a big event for state-owned listed enterprise reorganization but turns out to be a failure. The reason for this failure, according to the announcement, is the involvement of numerous regulatory reviews and high tax Burden
The regulatory halting the cross-domain private placement is believed to be an important factor of this failed reorganization. An industry insider tells The Economic Observer that transforming business from steel to finance is a typical cross-domain reorganization and will definitely attract extra attention from the regulatory authority, much less financial assets’ landing on capital market in itself is a challenging undertaking.
For Baosteel Group, ST SGIS’s fiasco in reorganization is a serious setback. Before that, Xinjiang Bayi Steel, another Baosteel company, was warned of delisting because of two successive years of loss. Baosteel expects to remain it listed through asset organization.
The asset reorganization of Baosteel’s companies is not exceptional. Last year, including ST SGIS, there were 5 listed steel companies attempting to get away from plight by absorbing financial assets. These companies are SGIS Songshan affiliated to Baosteel Group, Jinrui Technology of Minmetals Corporation, Sinosteel Tianyuan of Sinosteel, Chongqing Steel of Chongqing Iron and Steel as well as Valin Steel of Valin Group. Among them, SGIS Songshan and Jinrui Technology have already been labeled as ST; Sinosteel Tianyuan and Valin Steel have been troubled by negative net profit for 4 and 3 years respectively and; Chongqing Steel has been frustrated by the same loss for 4 consecutive years.
Obviously, reorganization is popular to steel enterprises. However, can they succeed?
The graver question is: will they thoroughly change after they succeed in reorganization? What is waiting for them in the irresistible trend of reorganization?
Reorganization abruptly terminated
“Through deliberation, we decided to stop scheduling for the major asset reorganization.” On Jun. 13, ST SGIS’s announcement disappointed its longing investors. The “reorganization” refers to the company’s plan to sell all its steel business and purchase the financial assets of Baosteel Group.
After more than four months since it made the announcement on Jan. 30, ST SGIS’s confidence that it will sure get relief through reorganization has unexpectedly been proved to be an illusion.
According to statutes, SGIS shall not reorganize within 6 months from the termination of reorganization. This enterprise has been losing money for consecutive 2 years but still wants to be a listed company, so what will it do?  
The secretariat of SGIS’s board of directors tells The Economic Observer, “We will probably restart the reorganization plan 6 months later but we may also take other measures to improve our performance.” The head of the company’s general office discloses, “SGIS has been endeavoring to elevate its profitability. Besides its own effort, Baosteel Group and State-owned Assets Supervision and Administration Commission of Guangdong Province will also help it with profitability through a series of methods.”
The announcement on Jun. 13 identifies three causes of the failure: 1) since tremendous asset of relevant financial business contains the stock of listed company, the approval and procedure of divestiture are complicated under the supervision and approvals from state-owned assets supervision and administration departments and regulatory authorities of financial and securities industries and call for the alignment in disclosing the information of the listed company; 2) according to the preliminary communication with tax administration, the divestiture and reorganization of assets will contain heavy tax and; 3) considering the complexity of relevant financial asset divestiture and reorganization, none of the parties can complete the asset divestiture, audit and appraisal of incoming assets or propose corresponding reorganization plan within the estimated timeframe.
The financial business in the aforesaid causes also involves other listed companies and the tax burden of reorganization. SGIS implies to The Economic Observer that they cannot provide more information. “SGIS is in Guangdong while Baosteel’s financial assets are in Shanghai, so the reorganization is more complicated than the inter-city one in the case Chongqing Steel. Besides, SGIS’s high market value and Baosteel’s diverse financial assets have further complicated the situation,” commented by a steel industry analyst from a securities company over the reorganization obstacle of SGIS.
Baosteel’s financial module would have been injected into the reorganization. According to the information available on Baosteel’s website, its financial module contains Hwabao Trust, Fortune SG Fund and Hwabao Securities in addition to Hwabao Investment Co., Ltd., a wholly-owned subsidiary. Moreover, Hwabao Investment holds 14.17% of CPIC, 83.07% of Hwabao Securities and 50% of ALD Automotive.
To Baosteel, which has recently been flourishing thanks to diverse development, finance is most profitable among its non-steel sectors. According to information, its current non-steel assets include resource development and logistics, extended processing of steel, engineering technology services, coal chemical industry and services for finance, production and information. Among them, finance has gained the highest gross profit over the past 2 years with profit rate far exceeding the other sectors.  
It is the current priority for Baosteel to remain listed by introducing premium financial assets. However, it is the undeniable truth that a financial business need go through more rigid supervision before going public if compared with an industrial business. This reorganization involves two trust companies which went public in the last century. Thereafter, many trust companies’ attempt to go public fell through, with the only exception being Jingwei Textile that was permitted to purchase Zhongrong Trust.  
Furthermore, SGIS’s reorganization, transforming business from steel to finance, is a typical cross-domain merger and acquisition, so it is doomed to face another impediment. In Feb. this year, ST Jinrui, a similar listed ferrous metal company, announced to reorganize by procuring financial assets including Minmetals Capital Holdings and Minmetals Trust of Minmetals Corporation. At the end of May, ST Jinrui received a correspondence enquiring about its announcement from Shanghai Stock Exchange and the authority questioned the conformity of financial asset acquisition, cross-domain risks, valuation and other issues.
Because of the downturn of the steel industry entered in 2011, Baosteels has many things to worry about besides SGIS. In fact, SGIS is not the only one to undergo delisting and reorganization. The other is Xinjiang Bayi Steel, another subsidiary of Baosteel. It lost RMB 2 billion and 2.4 billion respectively in 2014 and 2015 and was consequently classified as ST. On Jan. 30 this year, it announced its asset reorganization. However, different from SGIS, Bayi Steel incorporated the industrial gas business of Baosteel and did not sell its own steel business. The industrial gas business belongs to Baosteel Gases and is one of Baosteel’s most profitable premium assets.
At present, the reorganization of Bayi Steel is underway.
Baosteel’s Strategy to save its Subsidiaries
In 2015, Baosteel Group, which owns Baosteel Co., Ltd., SGIS Songshan and Bayi Steel, was bothered by a slump in its profit. This year, the net profit of Baosteel Co., Ltd. is RMB 961 million, 83.4% lower than the same period last year while the loss of SGIS Songshan and Bayi Steel totals RMB 2.5 billion and 2.4 billion respectively.  
Encumbered by the performance of its listed companies, Baosteel Group only gained RMB 1.042 billion last year, dropping by 88.94% compared with the RMB 9.416 billion in 2014. Its ranking among domestic steel enterprises in terms of profit fell from the first to the sixth. At the meantime, its credit rating was degraded by several rating institutions.  
Prior to this, Baosteel had begun to “discipline” its subsidiaries to improve their performance. “This is a long ‘winter’, none of our companies should lag behind,” said Xu Changle, chairman of Baosteel, during a meeting of leaders of subsidiaries at the beginning of 2015. Also during this meeting, Baosteel Group signed a Profit Gaining Responsibility with SGIS Songshan, Bayi Steel and Baosteel Engineering, which sustained loss last year. After the meeting, Baosteel sent two supporting teams totaling 100 people in succession to SGIS Songshan. Among these them, 50 permanently stay there to find and solve problems.
Over the past years, SGIS and Bayi Steel were trapped in loss. SGIS gained profit only in 2013 (the year’s net profit was mainly from non-business income) and ends up with substantial loss in other years.
Regarding the existing problems in SGIS, Chen Ying, the deputy general manager of Baosteel, has affirmed to the public that the iron cost and special steel are the two factors affecting its long-term competitiveness. Its iron cost was lowest compared with its peers in the same region in 2013. Its current weaknesses are in procurement, coal allocation, ore allocation and the coordination of blast furnace operation. In addition, since special steel has consumed large investment and inflicted heavy burden upon profitability, Baosteel Group has rated special steel as supported project. SGIS should analyze issues like steel order receiving and steel manufacturing and minimize manufacturing cost by choosing technical approaches on the basis of different products and costs.  
In the aspect of human resources, Baosteel has enhanced its status in SGIS by adjusting the seats of board of directors. In 2015, the chairman of SGIS was no longer elected from inside but delegated from Baosteel. Meanwhile, Baosteel-related personnel occupied a half of the seats in the board of directors.  
Nevertheless, the adjustment is not effective when the entire industry is in recession. SGIS Songshan lost RMB 2.5 billion in 2015, explaining everything.
Xinjiang Bayi Steel is also worrisome. Over the past two years, it has been bearing loss due to shrunken demand, overcapacity in the steel industry and regional overcapacity especially in Xinjiang.   
According to information, South Xinjiang Baicheng Co., Ltd., a wholly-owned subsidiary of Bayi Steel, shut down its production lines on Jul. 31 last year while the headquarters remained a half of its capacity in action. The website of Baosteel Group shows that Bayi Steel introduced the “winter break” scheme, namely a mode of low-load economical operation, at the end of 2015 while seeking to resettle its employees. In Jan. this year, Bayi Steel established a wholly-owned security service subsidiary and transferred more than 800 employees into it. Additionally, Bayi Steel has also planned to found a security consultation company and a homemaking company and contracted domestic and overseas industrial operation service projects so as to provide its employees with platforms of reemployment.   
The unsatisfactory steel business has forced Baosteel Group to extensively adjust its business.
According to an insider’s analysis, Baosteel is bound to systemize and integrate the business of its listed companies to obtain synergistic effect from its steel business. Notably, the RMB 50 billion project in Zhanjiang to be completed and come into service in Sep. 2016 will unavoidably compete with SGIS Songshan in the steel industry in Guangdong and South China and make its reorganization and integration more pressing.
Some analysts believe that Baosteel will naturally integrate SGIS with high-quality financial assets and Bayi Steel with industrial gas to make the two superior assets listed. The three steel manufacturing sectors may be ultimately combined into Baosteel Co., Ltd., a listed flagship company, to help Baosteel Group’s entire steel business to go public.  
However, in the unsuccessful reorganization, SGIS has not specified how to incorporate the sold steel business of SGIS into Baosteel’s system. In its reorganization, Bayi Steel preserves its steel business.
The Fate of the Reorganized
“The asset reorganization of listed steel enterprises, which just began last year, became a fad this year,” a securities professional said to The Economic Observer when speaking of this year’s reoccurring reorganization among listed steel enterprises.
The advent of this trend is forced out by the harsh situation in the industry. At present, steel enterprises which have been labeled with ST because of 2 consecutive years’ loss include Bayi Steel, SGIS Songshan, Pangang Group Yanadium Titanium & Resources, Shandong Iron & Steel and Jinrui Technology.
Recently, 5 listed steel (iron) enterprises, including SGIS Songshan of Baosteel Group, Jinrui Technology of Minminerals, Sinosteel Tianyuan of Sinosteel Group, Chongqing Steel of Chongqing Steel Group as well as Valin Steel of Valin Group, have planned to save their main business by embracing financial assets. Among them, SGIS Songshan and Jinrui Technology are marked with ST; Sinosteel Tianyuan and Valin Steel have been perplexed by negative profit over the past four and three years respectively and; Chongqing Steel has also been sustaining negative profit for consecutive 4 years.
During reorganization, Chongqing Steel plans to incorporate the assets of Chongqing Yufu. ST Jinrui is set to procure assets covering Minmetals Capital, Minmetals Trust, Minmetals Securities, Minmetals & Jingyi Futures etc.
Similar to SGIS, these listed companies are held by large consortiums or local state-owned assets supervision and administration commissions that control a multitude of resources, and have actual need of remaining listed because of long-lasting loss.
Nevertheless, except ST Jinrui that is being in smooth progress, most of the reorganization projects are obstructed and full of uncertainties. Recently, Sinosteel Tianyuan has declared that its shareholders are devising to modify its reorganization plan.
It can be perceived from the disclosed information that the complexity in the incorporated business is the common feature of the aforesaid reorganizations. Therefore, the fate of the reorganized is hard to tell.
Whether SGIS will recommence the reorganization in 6 months remains unknown so far and impossible to reckon.
A securities analyst tells The Economic Observer that SGIS still have such options as capital subsidy from Baosteel Group, assets replacement, sale of its title and even delisting if it does not restart the reorganization. This is also true to other listed steel enterprises that are under reorganization. Nonetheless, whichever option they choose, they will see their steel business being assimilated rather than vanishing at last.
Take Baosteel as the example, supposing that SGIS will become a pure financial company after the reorganization plan is started again and eventually succeeds 6 months later, its original steel business will still be a liability for Baosteel. Bayi Steel is also the same.  
In the first quarter this year, SGIS lost RMB 230 million and Bayi Steel RMB 440 million. Presently, SGIS has more than 10,000 employees and Bayi Steel more than 20,000 employees. Since they are state-owned companies, their parent company has to weigh too many factors for the countermeasures to deal with their dilemma. SGIS and Bayi Steel will always be troublesome for Baosteel.

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