LanZhi Shares, which transitioned from "clothing beauty" to "medical beauty," has once again expanded its medical beauty empire through acquisitions, this time directly spending 324 million yuan to acquire two "negative asset" medical beauty hospitals. This acquisition involves related party transactions and has been questioned by the Shenzhen Stock Exchange regarding why the industrial fund "bought low and sold high" to the listed company.
On June 10th, LanZhi Shares announced that its subsidiary, Beijing LanZhi Medical Management, signed a "Share Transfer Agreement" with BoChen No.8, Zhuo Shuying, and Pingtan Zhuo's Family, planning to acquire 90% of Wuhan Wuzhou's shares and 70% of Wuhan Hanchen's shares for a cash consideration of 324 million yuan.
As a company that started with high-end women's wear, as early as 2016, to overcome the difficulties faced by the traditional women's wear industry, LanZhi Shares transformed into the medical beauty sector. Since then, the company has also established a medical beauty industry fund to promote the external incubation and merger and acquisition of high-quality medical beauty institutions through capital investment.
The continuous external merger and acquisition layout has gradually increased the revenue proportion of the medical beauty sector. However, although medical beauty has supported half of the performance, its net profit margin and gross margin have both declined in recent years, and the company's overall performance has shown a downward trend.
In addition, continuous acquisitions have led to a large amount of goodwill hanging over the company. As of the end of 2022, the company's goodwill exceeded 800 million yuan.
Spending 320 million yuan to acquire two "negative asset" medical beauty hospitals
According to the announcement recently disclosed by LanZhi Shares, Beijing LanZhi Medical Management plans to acquire 75% of Wuhan Wuzhou's shares and 70% of Wuhan Hanchen's shares held by BoChen No.8 in cash; at the same time, it plans to acquire 10% and 5% of Wuhan Wuzhou's shares held by Zhuo Shuying and Pingtan Zhuo's Family in cash, respectively.
After negotiation and agreement between the transaction parties, the transfer prices for 75%, 10%, and 5% of Wuhan Wuzhou's shares are 211 million yuan, 28.088 million yuan, and 14.044 million yuan, respectively; the transfer price for 70% of Wuhan Hanchen's shares is 70.861 million yuan. After the transaction is completed, LanZhi Shares will obtain 90% of Wuhan Wuzhou's shares and 70% of Wuhan Hanchen's shares.
In addition, this transaction constitutes a related party transaction. Since Beijing LanZhi Han Asia Asset Management Co., Ltd. (hereinafter referred to as "Han Asia Asset Management") and the company's actual controllers are Mr. Shen Dongri and Ms. Shen Jinhua, and Han Asia Asset Management serves as the executive affairs partner and fund manager of BoChen No.8. LanZhi Shares, as one of the limited partners, holds 49.80% of the shares of BoChen No.8.
Perhaps because it is a related party transaction, the Shenzhen Stock Exchange requires the company to explain why it does not directly acquire 10% of Wuhan Wuzhou and Wuhan Hanchen's shares from Wuhu Chengzhong at a lower valuation, but instead, shortly after BoChen No.8 acquires the corresponding shares from Wuhu Chengzhong, it acquires the corresponding shares from BoChen No.8 at a higher valuation. The reason and rationality for this are questioned.It is worth mentioning that by the end of 2022, Wuhan Wuzhou's net assets were -763.015 million yuan, already insolvent, and during the same period, Wuhan Hanchen's net assets were -411.653 million yuan, also insolvent.
Such insolvent companies, however, were appraised at high values. In this transaction, the appraisal result for all equity of Wuhan Wuzhou was 281 million yuan, with an appraisal increase of 352 million yuan, and an appreciation rate of 496.65%; the appraisal value result for all equity of Wuhan Hanchen was 101 million yuan, with an appraisal increase of 139 million yuan, and an appreciation rate of 364.84%.
The confidence for the high valuation comes from the performance commitments given by the two target companies to Langzi Shares. Among them, Bo Chen No. 8 promised that Wuhan Wuzhou's net profit after deducting non-recurring gains from 2023 to 2025 would not be less than 17.1 million yuan, 21.47 million yuan, and 24.66 million yuan, respectively, with a cumulative amount not less than 63.23 million yuan; Wuhan Hanchen's net profit after deducting non-recurring gains from 2023 to 2025 would not be less than 9.07 million yuan, 9.92 million yuan, and 11.13 million yuan, respectively, with a cumulative amount not less than 30.11 million yuan.
It is unknown whether the two companies can fulfill their performance commitments, but for now, the operating conditions of the two target companies are not very good.
In 2022, Wuhan Wuzhou's operating income was 181 million yuan, and its net profit was 3.5574 million yuan. In the first quarter of 2023, its operating income was 59.261 million yuan, and its net profit was 5.4892 million yuan.
In 2022, Wuhan Hanchen's operating income was 78.0255 million yuan, and its net profit was 3.7481 million yuan. In the first quarter of 2023, its operating income was 28.5277 million yuan, and its net profit was 2.9419 million yuan.
Since its transformation in 2016, Langzi Shares, which smelled the business opportunity in the medical aesthetics industry, has successively established six medical aesthetics merger and acquisition funds through two development methods of external expansion and internal growth, for professional acquisition and incubation of medical aesthetics targets.
However, despite the large-scale development of the medical aesthetics business, the company's stock price and performance have suffered a "double kill". Now, Langzi Shares' stock price has fallen by nearly 70% from its historical high, and its market value has also once fallen into the tens of billions, evaporating nearly 20 billion. On the other hand, the performance of the medical aesthetics segment is also not ideal.
"Honey" and "arsenic" of the asset management model
In order to boost performance, the company decided to cooperate with medical aesthetics industry funds and listed companies to achieve business recovery through mergers and acquisitions and other means.By the end of 2022, Longzhi Shares had invested in six medical beauty industry funds, including Bo Heng No.1, Bo Chen No.5, Bo Chen No.8, Bo Chen No.9, Bo Chen No.10, and Wu Fa Fund, with a total fund size of 2.756 billion yuan. As of the end of 2022, the six medical beauty funds had actually invested approximately 764 million yuan. In addition, the company has already owned 30 medical beauty institutions, including 6 comprehensive hospitals and 24 outpatient departments or clinics.
In 2020, Longzhi Company established its first medical beauty industry fund - Bo Chen No.5, officially launching the dual-track medical beauty business expansion model of "internal growth + external extension". Currently, the company's six major industry funds have covered many well-known medical beauty institutions such as Beijing Lidu, Wuhan Wuzhou, and Hangzhou Glamour. Last September, Longzhi Company demonstrated the potential cultivated by industry funds through the acquisition of the Kunming Han Chen project.
According to the annual report disclosed by Longzhi Shares Company, Han Ya Asset Management is currently the main operating company of Longzhi's medical beauty funds, and the company's performance is affected by various factors such as equity acquisition and investment income.
Not long after the release of the 2022 financial report, Longzhi Company released a performance report for the first quarter of 2023. The company's net profit for the first quarter was 62.05 million yuan, a year-on-year increase of more than 6985%.
For this performance, Longzhi Company explained that it is mainly due to the rapid recovery of women's wear and medical beauty businesses this year, as well as the significant increase in profits of the company's participating company, Han Ya Asset Management, in the first quarter.
In 2022, Longzhi Shares' investment income was 51.2928 million yuan, accounting for as high as 120.40% of the total profit. Longzhi Shares pointed out that this part of the investment income mainly comes from the confirmation of investment income from invested joint ventures, financial income, and the realization of investment income from the sale of Ruoyuchen stocks.
The financial report shows that Longzhi Shares' joint ventures include Longzhi Han Ya Asset Management, Ruoyuchen, and related to the South Korean Dream Medical Beauty Group, such as Dream Hospital DKH, Dream Hospital DMG, and so on.
For listed companies, merger and acquisition funds are a very flexible method that weakens the impact of new institutions on the company's performance in the early stage, and after the operation is mature, it can help the company's performance. However, the risk lies in that if the out-of-body projects are not profitable for a long time, it may bring repurchase pressure.
With Longzhi Company's continuous investment in the medical beauty business sector, its demand for funds is also increasing. If the company's own funds are insufficient or cannot obtain more external financial support, the pressure will inevitably increase further.
According to the financial report, as of 2022, the total amount of short-term loans and non-current liabilities due within one year of Longzhi Shares Company is 929 million yuan, while the balance of cash and cash equivalents is 409 million yuan, and its coverage rate for short-term liabilities is less than 50%. This indicates that the company is facing a relatively large short-term debt repayment pressure.Aesthetic Medicine Business Falls Short
Reviewing the three major business segments of Langzi Shares, the traditional women's wear business still holds a dominant position. However, the decline in revenue from fashion women's wear, as the company's most important business segment, has become one of the main reasons for the company's sluggish growth. According to financial report data, women's wear revenue decreased by 9.26% in 2022.
Although Langzi's revenue in 2022 only slightly increased by 1.19%, sales expenses increased by 6.13%, reaching 1.645 billion yuan; administrative expenses increased by 11.07%, reaching 331 million yuan; and financial expenses increased by 42.19%, reaching 91 million yuan.
The total amount of these three expenses increased by 155 million yuan in 2022. The growth rate of expenses is higher than that of revenue, which naturally affects the company's profitability.
As for the reasons for the decline in profits, the increase in expenses is only one aspect. In addition, the asset impairment losses caused by the backlog of women's wear and children's wear inventory also increased significantly in 2022, further eroding the company's profits.
Financial report data shows that the company's asset impairment losses were 31.41 million yuan in 2022, compared to only 185,900 yuan in the same period of 2021, an increase of 16,796%.
This loss was mainly caused by the devaluation of inventory and the impairment of contract fulfillment costs. In 2022, the original value of the company's women's wear inventory was 787 million yuan, with a turnover period of 455 days, an increase of 122 days compared to 2021.
The women's wear business drags down the overall profitability, and the most fatal for Langzi Shares is the goodwill risk brought by external mergers and acquisitions. According to the consolidated balance sheet data as of the end of 2022, Langzi Shares' goodwill reached 811 million yuan, accounting for 15.97% of the non-current assets of 5.078 billion yuan, and 11.41% of the total assets of 7.17 billion yuan.
What is the quality of Langzi Shares' aesthetic medicine business?
In 2022, Langzi's aesthetic medicine business achieved a revenue of 1.406 billion yuan, with a net profit margin of 0.15%, and the net profit of the aesthetic medicine business was about 2.11 million yuan. However, the company's aesthetic medicine net profit mainly comes from the contribution of Kunming Hanchen.In 2022, through equity investment by its subsidiary, Langzi acquired a 75% stake in Kunming Hanchen Medical Aesthetic Hospital (hereinafter referred to as "Kunming Hanchen"). The company included the operating results and cash flows of Kunming Hanchen from January 2021 to the end of 2022 in its consolidated financial statements.
In the previous year, due to the consolidation of Kunming Hanchen, its net profit attributable to the parent company in 2022 was 11.1039 million yuan, accounting for 69.07% of Langzi's net profit attributable to the parent company. In this way, nearly 70% of Langzi's net profit in 2022 was obtained from the consolidation of the newly acquired company. However, if the profit from the consolidation of Kunming Hanchen is excluded, Langzi's medical beauty business actually incurred a loss, with a loss amount of about 899 million yuan.
In fact, as early as the first half of 2022, Langzi's medical beauty business had fallen into a loss dilemma, with the net profit margin plummeting to a low of -1.70%. It is worth noting that as a downstream institution in the industry chain, Langzi's gross profit margin is not high, only 52.12%, ranking last among its three major businesses.
From 2019 to 2022, the gross profit margins of Langzi's medical beauty business were 57.74%, 54.34%, 51.83%, and 49.54%, respectively, showing a straight downward trend.
At the same time, the net profit margins of Langzi's medical beauty business were 14.38%, 9.85%, 1.45%, and 0.15%, respectively, with a net profit margin decrease of more than 14% over the past four years.
In fact, Langzi's net profit in 2022 fell by 90.73%, which is still based on the consolidation of the medical beauty institutions outside the body incubated by its medical beauty fund. If the net profit brought by the consolidation is excluded, the company's net profit decline is more than 90.73%.
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