In addition, in March, Beihua Shares (002246) announced that the company plans to issue 180 million shares at no less than RMB 16.79 per share to no more than 10 specific investors. The funds raised will be used to acquire TDI and pump valve assets under China Ordnance Industries Group Corporation. The remaining portion will be used for expansion and technological reform after the acquisition is completed. If Luzhou Laojiao (000568) does not participate in the issuance by then, this portion of long-term equity investment will realize some performance.
Xinjiang Zhonghe (600888), which just completed an issuance on July 5th, saw neither its largest shareholder Tebian Electric Apparatus Stock Company Limited (600089) nor its second-largest shareholder Bowen Technology (600883) participate in this issuance. Their shareholding ratios dropped from 30.34% and 17.43% to 27.14% and 14.93%, respectively. According to the requirements of the "Notice," the third-quarter performance of Tebian Electric and Bowen Technology will also be affected to a certain extent. However, neither company has made an announcement regarding this matter.
In the first quarter of this year, Hubei Energy (000883) benefited from this policy requirement, realizing a gain of RMB 174 million from its long-term equity investment in Yangtze River Securities (000783).
This accounting treatment policy will affect more than just the performance of the "GF Trio."
Cross-shareholding boosts company performance
Therefore, Liaoning Chengda and Jilin Aodong will each record RMB 1.3 billion in gains as part of their third-quarter earnings, while Zhongshan Public Utilities will record RMB 740 million in gains. Liaoning Chengda reported a profit of RMB 514 million in the first half of the year, with a profit of RMB 886 million for the first three quarters of last year; Jilin Aodong reported a net profit of RMB 443 million in the first half of the year, with a profit of RMB 864 million for the first three quarters of last year; Zhongshan Public Utilities reported a profit of RMB 258 million in the first half of the year, with a profit of RMB 442 million for the first three quarters of last year. GF Securities' issuance implementation allowed these three companies to easily achieve performance growth in the first three quarters.
All three companies account for their holdings in GF Securities as long-term equity investments using the equity method. According to the "Regulatory Issues Answering Guide for Listed Companies Implementing Enterprise Accounting Standards," when the investee issues additional shares and the investor does not increase its capital proportionally, leading to a decrease in shareholding ratio, the decreased portion is treated as disposal of long-term equity investment. The difference between the confirmed share of the investee's net asset increase due to the issuance based on the new shareholding ratio and the book value of the long-term equity investment corresponding to the decreased portion is recognized in current period earnings.
As the largest shareholder of GF Securities, Liaoning Chengda held 625 million shares of GF Securities before the issuance, accounting for 24.93% of its total share capital. After GF Securities completed the issuance, Liaoning Chengda's shareholding ratio decreased to 21.12%. Jilin Aodong's shareholding ratio decreased from 24.82% to 21.03% after GF Securities completed the issuance, while Zhongshan Public Utilities' shareholding ratio decreased from 13.7% to 11.6%.
In August 2011, GF Securities issued 453 million shares to 10 specific investors through a private placement. The total amount of funds raised was RMB 12.179 billion. Liaoning Chengda, Jilin Aodong, and Zhongshan Public Utilities all stated in their latest announcements that they did not participate in GF Securities' private placement.
Accounting treatment leads to increased profits in Q3
At the same time, the "GF Trio" — Liaoning Chengda (600739), Jilin Aodong (000623), and Zhongshan Public Utilities (000685) — absent from GF Securities’ (000776) targeted private placement, will see a current-period gain of RMB 3.34 billion in Q3 due to the dilution of their shareholdings.