IPO Observation: Three-Year Cash Dividend of Nearly 6 Billion, Eastern Group Listed on Main Board: Unqualified Fire Products Fined and Half Revenue "Relies" on Dongfeng Group

Despite high debt, Eastern Group has been distributing large amounts of cash dividends for three years, with a cumulative dividend payout of nearly 6 billion yuan, accounting for 62.54% of its net profit during the period. The company went public on the main board and plans to raise approximately 18 billion yuan.

One side is high debt, the other side is high dividend

Three-year cash dividend payout nears 6 billion, asset-liability ratio nears 70%

From January 2020 to June 2023 (hereinafter referred to as the reporting period), Eastern Group has been distributing large amounts of cash dividends while also accumulating high debt. The company's cumulative cash dividend payout for the three-year period reached nearly 6 billion yuan, with an average asset-liability ratio of over 70%.

The prospectus shows that during the reporting period, Eastern Group distributed cash dividends totaling 10.00 billion yuan, 18.00 billion yuan, 18.00 billion yuan, and 12.00 billion yuan, respectively, for a cumulative payout of 5.80 billion yuan.

Furthermore, during the reporting period, Eastern Group's net profit was RMB 28.22 billion, RMB 29.28 billion, RMB 21.77 billion, and RMB 13.48 billion, respectively, for a cumulative total of RMB 92.74 billion. The cash dividend payout accounted for 62.54% of the period's net profit.

However, what is puzzling is that Eastern Group has been distributing six-tenths of its profits as dividends while still having high debt. According to the prospectus, the company's asset-liability ratio for the reporting period was RMB 76.76%, RMB 76.58%, RMB 51.37%, and RMB 50.31%, respectively, with an average of RMB 63.74%.

From a debt structure perspective, during the reporting period, Eastern Group's debts were RMB 532.36 billion, RMB 458.01 billion, RMB 305.15 billion, and RMB 309.78 billion, respectively, with a flow ratio of over 70%.

According to the consolidated profit and loss statement, during the reporting period, Eastern Group's interest expenses were RMB 65.17 billion, RMB 55.17 billion, RMB 35.65 billion, and RMB 14.46 billion, respectively.

It is worth noting that compared to comparable companies' asset-liability ratios, Eastern Group's asset-liability ratio is significantly higher. The prospectus shows that during the reporting period, the average asset-liability ratio of comparable companies was RMB 43.55%, RMB 41.40%, RMB 42.90%, and RMB 37.68%, respectively.

Eastern Group explained that the company's asset-liability ratio is higher than comparable companies because it has taken advantage of its comprehensive strength and reputation to improve financial efficiency, fully utilize supplier accounts, and mainly use vouchers for settlements. The company also pointed out that in 2017, it reorganized and distributed accumulated undistributed profits, while also bearing the costs of reorganization personnel and forming a large amount of debt.

Eastern Group further explained that its current debt is mainly composed of operating debts formed during the reporting period, including accounts payable, notes receivable, and employee compensation expenses.

However, Eastern Group's dependence on its largest customers has become more pronounced. According to the prospectus, the sales volume of its largest customer, Dongfeng Group, accounted for an average of 55.41% of the company's revenue during the reporting period.

Risk warning: If the main customers experience major negative changes due to their own operations or macroeconomic environment, or if they fail to meet the company's product quality, technical innovation, and product development requirements, leading to changes in customer relationships, then the company may face the risk of losing its main customers. Due to the concentration of customers, this will have a significant negative impact on the company's operating performance.

At the same time, Eastern Group's profitability is also heavily dependent on joint ventures. The prospectus shows that during the reporting period, the company generated investment income through joint ventures totaling RMB 17.97 billion, RMB 13.90 billion, RMB 9.51 billion, and RMB 6.45 billion, respectively, accounting for an average of over 47% of its net profit.

Risk warning: If there are major changes in the macroeconomic environment or the financial situation of joint ventures, or if their operating strategies change significantly, it will have a significant impact on the company's overall profitability and dividend distribution plans.

Subsidiary operations show "bad marks"

Production and sales of unqualified fire products fined

During the reporting period, Eastern Group's subsidiary, Xiangyang Fire Equipment (Xian) Co., Ltd. (hereinafter referred to as Xiangyang), was found to have produced and sold unqualified fire products.

According to the prospectus, on March 6, 2022, Xiangyang was fined by the Shaanxi Provincial Market Supervision Administration for producing and selling unqualified fire products, with a total value of RMB 13.37 billion, and no illegal income was generated. The company was ordered to seize and destroy the defective products and pay a fine of RMB 13.50 million.

Furthermore, it is worth noting that the main component of hand-held foam fire extinguishers is a combination of phosphoric acid and dihydrogen phosphate, which can significantly reduce the fire-fighting level of hand-held foam fire extinguishers. If this component is missing or has an incorrect proportion, it will render the fire extinguisher ineffective.

Since May 25th last year, Eastern Group has been undergoing a second round of inquiries. How the company will continue to "answer" these questions and whether it can pass the exam are issues worth paying attention to.