Wolong Electric to Sell Unit After Spin-Off Failures

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On January 5, a significant announcement emerged from Wolong Electric Drive (stock code: 600580.SH) regarding a comprehensive strategic shift within the companyThe announcement revealed that the company's board of directors and supervisory board convened to approve the decision for its subsidiary, Long Energy Power (stock code: 874466.NQ), to terminate its plans to go public on the Beijing Stock ExchangeFurthermore, they agreed to apply for the termination of its listing on the National Equities Exchange and Quotations System, commonly referred to as the New Third Board.

This decision unfolded simultaneously with the company's intention to offload stakes in four of its subsidiaries: Long Energy Power, Wolong Energy Storage, Wolong InnoTech, and Shunfeng Power, marking a pivotal moment for Wolong Electric Drive's corporate restructuring.

Diving deeper into Long Energy Power’s history, the company, established in 2013 in Shaoxing, Zhejiang province, has carved a niche for itself as a comprehensive energy service provider, specializing in photovoltaic power plant investment, operation, and EPC (engineering, procurement, and construction) services

This strategic focus aligns with China’s broader push towards renewable energy solutions.

Long Energy Power had initially made headlines back in April 2023 when Wolong Electric Drive announced plans to list the subsidiary on the main board of the Shenzhen Stock ExchangeHowever, projections shifted over time, and by April 25, 2024, the company had opted to abandon that endeavor in favor of exploring a listing on the Beijing Stock ExchangeNotably, following a brief stint on the New Third Board on May 10, 2024, Long Energy Power's operational strategy had to be recalibrated yet again.

By the second half of 2024, the company's semi-annual report pointed to an upward trend in revenue, noting an increase to 147 million yuan (approximately $22 million), which represented a 25% year-over-year growthDespite this, net profits took a downturn, dropping to about 36.6 million yuan (roughly $5.5 million), down 5.73% from the previous year

The report highlighted various challenges, including fierce market competition, operational losses from power plant fires, the burden of listing fees on the New Third Board, and rising personnel compensation costsHence, while revenue figures painted a positive picture, they were not reflective of overall financial health.

The recent decision to withdraw from the IPO process for the second time indicates an introspective analysis of both market conditions and Long Energy Power's growth trajectoryWolong Electric Drive justified this move by stating it was a prudent step in aligning its capital operations more strategically with the subsidiary's development plansThey reassured stakeholders that this cessation of the listing effort would not result in considerable adverse effects on either Wolong Electric Drive or Long Energy Power.

Moreover, the same night, further disclosures from Wolong Electric Drive revealed their strategic intent to concentrate on their core business operations

They proposed the sale of significant stakes in Long Energy Power (43.21% of shares), Wolong Energy Storage (80%), Wolong InnoTech (51%), and Shunfeng Power (70%) to Wolong ResourcesThis maneuver showcases a definitive pivot by the parent company towards refining their focus on electric motor and drive control sectors, which are their primary business avenues.

An inspection of the shared ownership structures offers insight into the interconnectedness of these firmsWolong Electric Drive holds a notable 22.755% equity stake in Zhejiang Wolong Real Estate Investment Co., the major shareholder in Wolong Resources, which establishes a clear relationship with the latterThis level of ownership indicates that Wolong Electric Drive indirectly influences Wolong Resources, forging a tight link between the two entities.

It is also critical to note that Wolong Resources' controlling shareholder is Wolong Holding Group, which similarly holds the reins over Wolong Electric Drive

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Given these intertwined relationships, regulatory definitions classify Wolong Resources as an associated entity of Wolong Electric Drive, necessitating scrutiny on potential conflicts of interest in their transactions.

The impending transactions between these related parties categorize the sales as connected transactionsUpon completion, these sales will decisively alter Wolong Electric Drive's control over its subsidiaries, thus diminishing its influence over corporate decisions, financial oversight, and resource allocation within those divisionsConsequently, this transition signals a shift in decision-making dynamics, as the subsidiaries' paths will now diverge from Wolong Electric Drive's direct steering.

Additionally, changes in control will inevitably transform the scope of Wolong Electric Drive’s consolidated financial statements

As the entities previously included in their reports undergo significant changes in governance, adjustments will be necessary according to accounting standards to reflect the new control attributes accuratelyThis change could impact how Wolong Electric Drive's financial health is portrayed, analysis of operational outcomes, and the integrity of financial information disclosed to stakeholders.

As of September 30, 2024, Long Energy Power reported net assets at approximately 1.423 billion yuan (around $215 million), with revenues clocking in at 266 million yuan (about $40 million) and a net profit of roughly 89.4 million yuan ($13.4 million), albeit these figures being unauditedThis underscores the operational complexities and financial balances that will be in the limelight following the impending changes.

In summary, the restructuring moves by Wolong Electric Drive, including the decision to divest from Long Energy Power and similar subsidiaries, emphasizes a strategic retreat towards their core competencies in the electric motor and drive control sector

Wolong Electric to Sell Unit After Spin-Off Failures

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