Cai Shuo | New shareholders "precisely" entering the market, transaction prices unknown but issuance price already announced, Zhongnan Cultural's "snake swallowing an elephant" style restructuring raises many doubts

Ask AI · What considerations lie behind the precise entry by new shareholders?

Jiemian News reporter | Yuan Yingqi

A single reorganization proposal from Zhongnan Culture (002445.SZ) has set off waves in the capital markets. After the company disclosed its plan to acquire a 57.30% stake in Su Long Thermal Power, its share price rose with consecutive one-word daily limit-ups for five trading sessions. The gain over the period exceeded 60%. The market “cast its vote” in advance for this state-owned-asset-system consolidation by putting in real money.

However, behind Zhongnan Culture’s daily limit-up is an unsettling “big-fish-swallowing-giant” gamble. As of the third quarter of 2025, the listed company’s cash and cash equivalents on its books were 109 million yuan, and its net cash flow from operating activities was even in a severe “bleeding” crisis, at -84.75 million yuan. On the other hand, the target Su Long Thermal Power planned to be acquired has total assets of more than 8.3 billion yuan, and its revenue scale is more than triple that of the listed company.

Zhongnan Culture plans to issue shares to pay for the deal. The transaction consideration has not yet been determined. But with the share price rising, the discount rate on issuing shares (2.16 yuan per share) is approaching 50%. And in the absence of performance commitments, who will shoulder the potential risks?

Three Major Doubts About Transaction Pricing and Valuation

The issue price of 2.16 yuan per share is the first figure in this reorganization proposal to draw market attention.

This price represents a discount of about 22% versus Zhongnan Culture’s closing price of 2.78 yuan before the suspension of trading. In China’s A-share market, it is not uncommon for the issue price to be discounted relative to the market price in major asset restructurings. But the special aspect of this deal is that: the audit and valuation work for the target assets has not been completed, and the transaction consideration remains an unknown. That means that while the most core pricing element of the deal—transaction consideration—hangs in the balance, the price of the issued shares has been locked in in advance.

After the reorganization information was released, Zhongnan Culture’s share price jumped accordingly and is now up to 4.44 yuan per share. Compared with the 2.16 yuan share issue price for this placement, the gap between the issue price and the market price has widened further.

From the deal structure, the counterparty for the share-based acquisition of assets is a power investment company, which is controlled by the same Jiangyin City Xin Guolian Group as Zhongnan Culture. In a related-party transaction, does locking in the issue price at a low price constitute a tilt of interests toward the controlling shareholder side?

A securities investment banker who has worked in mergers and restructurings for a long time told Jiemian News reporters that this kind of pricing model is not uncommon in state-owned backgrounds or related-party transactions. “Typically, it is based on the announcement date of the board resolution, and there is a time gap relative to the final issuance date. Most of the time, it is in deals involving a state-owned background or related parties. Pricing is relatively conservative, but it strictly follows the rule of ‘no less than 80% of the average stock price over the 120 trading days prior to the pricing benchmark date.’” The source pointed out that this pricing approach itself complies with regulatory requirements. However, when the valuation of the target assets has not yet been completed and the transaction consideration is not yet fixed, the large gap between the issue price and the future market price objectively creates a considerable opportunity for the transaction counterparty to capture “paper gains.”

More worth worrying about is that the fundamentals of the target assets are changing visibly.

In 2024, Su Long Thermal Power realized net profit of 621 million yuan; in 2025, it dropped to 347 million yuan, a decline of more than 44%. With profitability weakening, and since the valuation work for the target assets has not yet been completed, the final valuation appreciation rate remains subject to significant uncertainty. If the valuation appreciation rate turns out to be too high, this deal would plant a huge “time bomb” for goodwill impairment for the listed company—at that point, the listed company would not only have to absorb the funding pressure brought by the acquisition, but may also face continuing performance drag in the coming years.

Given the above risks, the proposal does not set performance commitment clauses.

In A-share reorganization practice, performance commitments are an important mechanism to protect the interests of listed companies and minority shareholders. When the target assets’ future profitability falls short of expectations, the transaction counterparty must compensate in cash or shares. Although this transaction is a related-party deal and does not require performance commitments, the absence of this “safety umbrella” is still puzzling. If the transaction counterparty is fully confident in the future earning ability of Su Long Thermal Power, why not proactively set performance commitments to demonstrate confidence and dispel minority shareholders’ concerns? Conversely, if the transaction counterparty itself is not fully sure about the future direction of the target, does the arrangement without performance commitments mean transferring all the risk to the listed company?

According to Jiemian News’ search, besides the acquisition where Zhongnan Culture’s acquisition price has a large placement discount relative to the share price, similar cases with large discounts include Nanjing Fiberglass and Hongqiao Holdings. These two companies are also related parties’ acquisitions. Among them, Nanjing Fiberglass set three-year performance commitments. Hongqiao Holdings set an asset impairment compensation mechanism. In other words, in discounted acquisitions under related-party backgrounds, other companies have all put in corresponding protection clauses.

While the design of the transaction terms may still be seen as a game of commercial bargaining, one name appearing in the shareholder roster pushes this reorganization into even deeper doubt.

According to the shareholder register, Huaxi Xinyu Investment Co., Ltd.—an investment platform under Zhao Yan, the actual controller of Huaxi Biological—entered as the ninth-largest circulating shareholder of Zhongnan Culture on February 12, 2026, holding 11.8926 million shares. Exactly this day was the day immediately before Zhongnan Culture suspended trading to plan the reorganization. After resumption of trading, the company’s stock price posted consecutive limit-ups. The unrealized profit on this position is significant. Huaxi Xinyu’s entry can be called “precise.”

On one side are the discounted issuance and the absence of performance commitments; on the other side is the target asset with sharply declining earning capability; combined with the mysterious new shareholder appearing right before the suspension, Zhongnan Culture’s reorganization has many unresolved points.

Financial Concerns Behind a Glossy Revenue Picture

Zhongnan Culture’s predecessor was Jiangyin Zhongnan Heavy Industry. Its main businesses were traditional manufacturing operations such as metal pipe fittings and pressure vessels. But around 2014, it completely shifted in a “film and television dream.” At that time, the company made a major cross-industry move into cultural and entertainment. It acquired Datang Huighuang and took part in producing hit films such as “I Am Not a Medicine God.” However, as the winter of the film and television industry arrived, the company fell into huge losses and a debt crisis. In the end, in 2020, with restructuring led by Jiangyin state-owned assets, it managed to “turn things around” and revive. After the restructuring, the company nominally kept a diversified framework of “machinery manufacturing + cultural media + new energy,” but in reality: in the first half of 2025, the cultural media business revenue was only 5.69 million yuan, accounting for just 1%; the photovoltaic business revenue was 10.6 million yuan, accounting for 1.9%. Nearly all of the company’s revenue came from manufacturing segments such as automotive components.

Judging from revenue data, Zhongnan Culture seems to have moved out of trouble. Operating revenue grew steadily from 482 million yuan in 2021 to 910 million yuan in the first three quarters of 2025, showing double-digit growth trends. However, in contrast to revenue expansion is the ongoing deterioration of profitability and severe cash “bleeding.”

Unlike the stable double-digit growth in operating revenue, Zhongnan Culture’s net profit attributable to shareholders fluctuated sharply. The growth rate in the first three quarters of 2025 was 130%, while in 2024 it was -55%. Jiemian News reporters noted that changes in the financial assets held by Zhongnan Culture can have a significant impact on net profit.

Source of the image: Wind, Jiemian News research department charting

More compelling is net profit after deducting non-recurring gains and losses. This metric removes one-off gains such as government subsidies and asset disposals, and more accurately reflects the true profitability of core operations. The data show that Zhongnan Culture’s net profit excluding non-recurring items has been on a continuous downward trend: 770 million yuan in 2023, falling to 530 million yuan in 2024, and further to 430 million yuan in the first three quarters of 2025, with a year-on-year decline of 33.69%.

This means that although the automotive components business has driven a continued expansion in revenue scale, Zhongnan Culture’s core operating profitability has not improved in tandem—and is instead steadily worsening.

Now look at cash flows. In 2021, Zhongnan Culture recorded net profit of 207 million yuan on its books, but its net cash flow from operating activities was -80 million yuan. In the first three quarters of 2025, the company’s net profit was 82 million yuan, and its net cash flow was -85 million yuan.

There is no match among Zhongnan Culture’s revenue, net profit, and cash flows.

A deeper look at the balance sheet shows that the risk signals are even clearer. First is accounts receivable. In the first three quarters of 2025, Zhongnan Culture’s accounts receivable were 518 million yuan, up 37% year over year, accounting for 57% of sales in the same period.

As for why accounts receivable has risen so sharply, Zhongnan Culture has not clearly explained the specific reasons.

Such a high share of accounts receivable implies that a large portion of sales revenue has not yet been converted into actual cash collections, creating a significant risk of bad debts. However, Zhongnan Culture’s provision ratio for bad debts has been declining continuously: the ratio of bad debt provisions to the balance of accounts receivable at the beginning of 2022 was 24.45%, but by the end of the year the provision ratio had dropped to 16.59%. In 2023, the ratio fell further to 10.94%, and in 2024 it slightly rebounded to 11.66%. In mid-2025, the ratio dropped to 9.78%.

Wang Min, an accountant, told Jiemian News reporters that “a too-high proportion of accounts receivable, along with a continuously declining bad debt provision ratio, is a very dangerous signal.” Wang Min reminded that “against the backdrop of weak demand in downstream industries and increased difficulty in collections, the company not only does not increase bad debt provisions to hedge risks, but instead keeps lowering the provision ratio. This may indicate a possibility of underestimating bad debt risk and artificially inflating profits.”

Inventory also raises concerns. In 2023, Zhongnan Culture’s inventory jumped from around 200 million yuan to 337 million yuan, and then gradually rose to 398 million yuan in the third quarter of 2025. The proportion of inventory relative to sales in the same period has generally stayed above 40%.

However, the provision for inventory impairment runs counter to the inventory scale. In 2024, inventory impairment provisions were 169 million yuan, corresponding to inventory of 549 million yuan. In the first half of 2025, inventory increased to 611 million yuan, yet inventory impairment provisions fell to 165 million yuan.

Wang Min told Jiemian News reporters that “this kind of operation can mislead investors’ judgment of the company’s operating situation. If the inventory cannot be digested smoothly later on, large impairment losses will directly drag down the company’s performance.”

In addition, starting in 2024, Zhongnan Culture added 208 million yuan of “contract assets” on its books, which increased to 301 million yuan by the third quarter of 2025. However, the company has not disclosed the specific composition and business background of this asset.

Source of the image: Wind, Jiemian News research department charting

At present, Zhongnan Culture has not yet responded to market questions such as the transaction pricing, the absence of performance commitments, and the elevated level of accounts receivable. Whether this heavily scrutinized “big-fish-swallowing-giant” style reorganization can ultimately break through layers of doubts and achieve a win-win outcome still needs to be tested by time.