2023 Bankruptcy Reorganization Investment Strategy Research Report

Chapter 1 Strategy Overview

1.1 Meaning of bankruptcy reorganization investment strategy

The bankruptcy reorganization investment strategy refers to the strategy in which investors purchase the equity or bonds of a bankrupt company at a price lower than the real value of the company, and then restore the company to health through restructuring and optimization of operations, thereby achieving a high return on investment. This investment strategy is usually suitable for enterprises with sustainable profitability and core competitiveness, but are insolvent due to short-term liabilities, high cost structure and other reasons.

1.2 Investment Opportunities for Bankruptcy and Reorganization

For investors, bankruptcy reorganization may provide some potential investment opportunities. That's because during a bankruptcy reorganization, a business typically needs to raise additional capital to pay off debt and assets in order to restore its financial health. This can lead to businesses needing to sell their assets or shares to raise capital. For those investors interested in participating, these sold assets or shares may represent investment opportunities.

In addition, during the bankruptcy reorganization process, companies may also re-evaluate their operating models and business strategies. This may lead companies to start looking for new partners or business models, providing investors with new investment opportunities.

1.3 Types of bankruptcy reorganization of listed companies

The bankruptcy reorganization of listed companies is mainly divided into five stages: application for reorganization, pre-reorganization, entry into reorganization procedures, implementation of reorganization plans, and completion of reorganization. As of the end of March 2023, a total of 143 listed companies have undergone bankruptcy and reorganization, of which 110 have completed reorganization. For companies that apply for reorganization plans and pre-reorganization, investors can obtain information from multiple sources, and strive for the positions of reorganization investors or shareholders and creditors, so that the company can resume normal operation and the stock price will rise in the future. For companies that are undergoing reorganization and execution, investors can buy and sell stocks through the secondary market to earn price differences.

Figure Bankruptcy Reorganization Listed Company Types

Source: Qianji Investment Bank iFinD

Chapter Two Strategic Ideas

2.1 Bankruptcy restructuring investment methods

The current main methods of social capital investment restructuring include asset investment, equity investment and debt investment.

asset-based investment

Asset-based investment means that investors can obtain the ownership of high-quality assets by participating in the auction of high-quality assets of bankrupt companies, but it still has certain shortcomings:

Investors cannot obtain the shell resource advantages of the target company;
If assets such as land use rights of enterprises are auctioned, extremely high taxes and fees will be incurred;
If the asset acquisition is within 1 year before the court accepts it, it can be revoked on the grounds of unreasonable price transactions. Therefore, it is more suitable for restructuring enterprises with many creditors and complex legal relationships.

equity investment

It mainly refers to investors investing in the acquisition of the target company’s equity, purchasing the equity of the company’s shareholders, debt-to-equity swap, and subscribing for the new shares issued by the target company. Among them, the most widely used are the following three types:

Equity transfer: The original shareholder of the target enterprise directly transfers the equity of the enterprise to the investor. First, it can be carried out through an agreement transfer, that is, the original shareholder reduces its own equity in the bankruptcy reorganization plan of the enterprise, and under the coordination of the administrator, transfers the equity of the enterprise to the investor. The shares are transferred to the reorganizing party; investment can also be made through a judicial auction. The reorganized company can see the equity as the target and let the court implement a compulsory auction operation, thereby allowing investors to participate in the equity auction.
Capital reserve transfer: Investors’ investment can be seen as the follow-up operating capital of the reorganized enterprise, thereby reducing the shareholding ratio of the original shareholders. Therefore, after the reorganization is successful, it is more dependent on the cooperation of new and old shareholders.
Debt-to-equity swap: If the investor is the creditor of the bankruptcy reorganization company, the debt-to-equity swap can be implemented through bond capital, so that the investor becomes a new shareholder, so that the investor can enjoy the shell resources while obtaining the equity income of the target company Advantage.

debt investment

It mainly refers to the fact that before or during the implementation of the selected bankruptcy reorganization plan of the enterprise, the investor chooses to acquire its creditor's rights from the creditors of the enterprise at a price within the acceptable range.

There are five main types of investment opportunities for bankruptcy and restructuring companies. Including bank non-performing debt investment, industrial investment, financial investment (including mutual benefit debt), inefficient asset disposal investment and secondary market investment. The process of generally becoming a financial investor or an industrial investor is shown in the figure below.

Figure Bankruptcy reorganization company investment flow chart

Source: Asset Information Network Qianji Investment Bank

2.2 Stock Investment Strategy

Bankruptcy reorganization companies are different from normal operating listed companies, and investors cannot use traditional fundamental analysis and technical analysis to conduct research on the stocks of bankruptcy reorganization companies. The risk of stock investment based on the traditional volume-price theory alone is huge. Only after the listed company is reorganized and resumes normal operation can technical analysis be used to select the appropriate buying and selling point. A more important investment method is to observe the investors and repayment methods behind the bankruptcy reorganization company.

Understand the background of investors in bankruptcy reorganization

(1) Observing the background of the ownership of investors in the bankruptcy reorganization of listed companies

Ownership background can be roughly divided into state-owned background, private enterprise background and mixed ownership background. The background of state-owned capital can be further divided into the background of financial institutions, the background of central enterprises, and the background of local state-owned enterprises (local governments). Based on the summarization of financial capacity and realistic strategies, investors can find out the investor’s ownership background for rising bankruptcy and reorganization. Some local state-owned enterprises are the spokesperson of the local government to a certain extent. In this way, the reorganization process will be relatively smooth, and the stock price will also help further increase. .

However, the industrial capacity and operational capacity of state-owned capital are not necessarily sufficient and flexible. Private capital has overall advantages in flexibility and professionalism, but government resources and overall financial resources may be insufficient. Therefore, enterprises bound through mixed ownership are more stable, and no one party can decide to sell or exit alone in the future. The overall feeling is that it is conducive to long-term institutional arrangements.

(2) Identify industrial investors and financial investors

Industrial investors are very important investors in the process of bankruptcy and reorganization, especially for listed companies whose main business is declining and need external business empowerment, after the reorganization, these industrial investors can lead the trading of listed companies.

Financial investors should refer to investors whose industrial capabilities do not quite match those of the debtor, but who have the funds and interest to participate in bankruptcy and reorganization. Such investors can be further divided into professional financial investors and special financial investors. Professional financial investors are investment institutions that really understand and are optimistic about the direction of bankruptcy and reorganization investment, among which non-performing asset disposal companies are the representatives. Due to the high risk of bankruptcy and reorganization, choosing stocks of companies with professional investors behind them is more likely to grow.

The most common combination in recent years is the combination of financial investors and industrial investors. The financial investors provide incremental funds, and the industrial investors bring in management experience and teams. The advantage of this combination is that financial investors take smaller risks, and will not fail in reorganization due to their lack of management experience and in-depth understanding of the industry. Industrial investors also bear less financial pressure at the time of investment. In the future, business integration and industrial layout will be more comfortable.

Observe the payment method

The repayment methods mainly include cash repayment and stock repayment (debt-to-equity swap). Among the 119 listed companies that can be counted, 41 repay in cash. In addition, there are a small number of repayments in other ways, such as repayment of debts with receivable claims and trust beneficiary rights. And more than 64% of listed companies adopt the combination of "cash + stock" settlement method, which cleverly binds the interests of various stakeholders together, and creditors who become shareholders through debt-to-equity swaps will be more concerned about performance. The original shareholders avoided the company's bankruptcy, and the new investors became the actual controllers of the listed company, so the company was able to resume operations with the efforts of various parties. Therefore, investors should choose the settlement method of the two combinations.

Figure listed company bankruptcy reorganization liquidation method

Source: Qianji Investment Bank iFinD

2.3 Transfer of capital reserves into stock investment

In the process of bankruptcy and reorganization of listed companies, converting capital reserves into stocks is the most common way to adjust the equity of investors. The turned stocks are often adjusted to industrial investors as consideration for their reorganization, or to creditors who intend to repay debts.

(1) If you are a financial investor, you generally only need to pay the investment consideration, and the manager will use the funds according to the purpose of the reorganization plan (generally used to pay off debts, supplement working capital, and solve historical problems such as shareholder occupation), and then set A share lock-up clause (the lock-up period is generally not less than 6 months), in addition, there are generally no other conditions attached (such as tie-in clauses).

(2) If you are an industrial investor, you should participate in the follow-up restructuring of more listed companies. Formulate different strategies for different reasons of bankruptcy of enterprises:

If you are faced with the situation of low production efficiency and scattered business, you should identify the core business, separate the main and auxiliary businesses, and establish firewalls between various business segments to improve production efficiency and profitability.
If you are faced with false book assets and unclear asset ownership, you should consolidate the asset value, identify high-quality assets, improve property rights procedures, and dispose of redundant assets, so as to define the scope of reorganized assets and ensure the integrity of core asset property rights.
If you are faced with a situation where the scale of debt is large and the assets are mortgaged and seized seriously, you should design a debt restructuring plan (debt retention, debt-to-equity swap, etc.) based on the debt situation, measure debt repayment ability, reduce debt scale, and resolve litigation and off-balance sheet liabilities. It is used to adjust the debt structure, restore a healthy level of assets and liabilities, and ease the financial burden and debt repayment pressure.
If you are faced with a situation where there are many mutual guarantees and capital occupation by related parties, you should clearly reorganize the main body or set up an SPV, set up a firewall between legal entities, improve the management system and internal control system, so as to solve the historical burden and go into battle lightly.
If you are faced with tight cash flow, you should find out the pain points, quickly realize some assets, actively introduce financial investors to solve the working capital problem, so that the company can quickly resume normal operations, and seize the window of market recovery.
If you are faced with heavy personnel burdens and major issues involving social stability maintenance, you should analyze the effective personnel structure and scale after reorganization, seek government resources and policy support, and gradually clear redundant personnel under the premise of maintaining stability, so as to solve the problem of redundant personnel smoothly. , Improve quality and efficiency, establish a sound corporate governance structure and human capital issues. In the face of issues such as taxes, legal compliance, available government resources, and preferential policy support, it is necessary to balance the interests of all parties and obtain support from all parties, so that the subsequent smooth progress of bankruptcy reorganization and exit can be achieved.

Figure capital reserve transfer stock investment process

Source: Asset Information Network Qianji Investment Bank Sohu.com

2.4 Bankruptcy and restructuring debt investment strategy

This strategy refers to the investment strategy in which investors obtain income by purchasing corporate bonds during the process of corporate restructuring. Enterprise reorganization refers to the reorganization of equity, assets, business, etc. in the process of business operation, in order to improve enterprise efficiency, reduce costs, and enhance competitiveness. Debt investment refers to the investment behavior in which investors provide funds to debtors, and debtors return investors by paying interest and other means. Therefore, the debt investment strategy of corporate restructuring is that investors can obtain income such as interest on debts borne by corporate restructuring by purchasing corporate bonds. The risk of this strategy is relatively low, but the income is also relatively stable.

The most popular method at present is mutual benefit bond. Common benefit bonds refer to a bond issued in the process of corporate bankruptcy and reorganization to maximize the interests of creditors, ensure the overall revitalization of bankrupt companies, and promote economic and social development. The target of the issuance of mutual benefit bonds is the creditors participating in the bankruptcy reorganization. The purpose of the issuance is to encourage the creditors to participate in the reorganization, share the risk of bankruptcy reorganization, and share the future profits of the enterprise after the reorganization is successful. Common benefit bonds usually have the following characteristics: relatively high yield, long investment period, return mainly comes from the future business performance of the enterprise, and high risk.

When making a specific investment, the project needs to comprehensively evaluate its social value, restructuring costs, market development prospects, economic benefits, etc. to determine its own advantages and ensure that mutual benefit bond investment can support the revitalization of the project and generate income. When considering a real estate project, it is necessary to consider the regional real estate market environment and relevant policies and regulations, and conduct a comprehensive evaluation of project quality, surrounding terrain and price, renovation cycle, market positioning, sales plan, etc., to judge whether the project has investment value .

The cycle from investment to sales should not be too long, and "short and fast" development projects should be selected for investment. The amount of additional investment in the realizable value of the project is small, so we should try our best to choose projects with relatively small additional investment in the early stage. Priority is given to projects supported by local governments in order to assist in solving problems such as historical legacy and re-handling of various defect procedures, and to maximize the interests of all parties and achieve a win-win situation through the "government-institution linkage" approach.

When choosing an investment time point, it is recommended to focus on the period from the date when the people's court accepts the bankruptcy application to the date when the bankruptcy procedure ends. This is because the intervention before bankruptcy may be restricted, and the intervention in the bankruptcy procedure can communicate with the bankruptcy administrator at any time to understand the actual situation of the project. At the same time, this interval is also the time period when the bankruptcy administrator has basically locked in the total external liabilities of the bankrupt enterprise, which can better control risks.

Chapter III Bankruptcy Restructuring Investment Valuation

The purpose of an enterprise's bankruptcy reorganization is to continue to operate, so the discounted future cash flow method, analogy method and option pricing method are of little significance in this process and should be excluded. However, the use of a single liquidation value method and asset value method will ignore the future profit opportunities of the enterprise, lack of fairness, and may lead to underestimation of the value of the enterprise, causing bad behavior and emotions of the original shareholders and creditors.

liquidation value method

The basic idea is to estimate the value of assets that the company would be able to obtain in the event of liquidation. The liquidation value method can also be used to estimate the value of a company during a bankruptcy reorganization process.

Specifically, when using the liquidation value method for valuation, the following steps need to be followed:

Determine the asset list: list all the company's assets, including fixed assets, inventories, accounts receivable, etc.
Estimated Net Worth: Calculate the sum of all net worth, ie total assets minus total liabilities.
Estimate liquidation costs: Estimate the costs required to liquidate the company, including liquidation costs, legal fees, administrative costs, etc.
Calculate the liquidation value: subtract the liquidation fee from the net asset value to get the liquidation value.
Consider the possibility of reorganization: If it is possible for the company to reorganize and return to business, appropriate adjustments will need to be made to the liquidation value to reflect the company's future operating potential.

Valuation with future profit opportunities

The core idea is to determine the company's valuation based on estimates of the company's future profit opportunities, because these future profit opportunities have a significant impact on the company's profitability.

Specifically, the following steps can be taken for the valuation of bankruptcy reorganization companies:

Analysis of industry prospects: First of all, it is necessary to analyze the industry prospects of the company, including the industry's market size, growth rate, competition pattern and other factors. These factors will directly affect the company's profitability and future profit opportunities.
Evaluate the company's market position: Evaluate the company's market position in the industry, brand value, competitive advantages and other factors, which will directly affect the company's future profit opportunities.
Analyze the company's business model: analyze the company's business model to determine the company's future profitability and profit potential, such as the company's product and service research and development capabilities, marketing capabilities, cost control capabilities, etc.
Use financial analysis tools: use financial analysis tools such as profitability analysis, cash flow analysis, and rate of return analysis to quantitatively estimate the company's future profit opportunities.
Risk assessment and control: In addition to valuing future profit opportunities, risk assessment and control is also required, including assessing industry risks, company financial risks, management risks, etc., to ensure the rationality and reliability of the valuation results.

CHAPTER 4 CHARACTERISTICS OF STRATEGIES

Advantages of bankruptcy reorganization investment strategy:

(1) Low purchase price: Since the equity or bond price of a bankrupt company is lower than its real value, investors can obtain control of the company at a low price.

(2) Earning Potential: If investors can successfully restructure the business, bring it back to health and gain market share, they stand to earn high returns.

(3) Control: Investors acquire control over the company by purchasing equity or bonds of the bankrupt company, which enables them to carry out necessary restructuring and management of the company.

(4) Enterprise value growth: Through restructuring and management, the value of bankrupt enterprises can be increased, which helps investors obtain higher investment returns.

Disadvantages of bankruptcy restructuring investment strategy:

(1) High risk: Due to the insolvency of bankrupt companies, this investment strategy has high risks. Investors could lose money if the business is not successfully restructured or if the market is depressed.

(2) Long-term investment: Bankruptcy reorganization investment strategies need to be held for a long time, because the restructuring of enterprises takes time, and a large amount of money needs to be invested before the return is realized.

(3) Complicated legal procedures: Bankruptcy reorganization involves complicated legal procedures, so investors need to have certain legal knowledge or hire lawyers to assist in handling related matters.

(4) Dependence on external factors: The success of the bankruptcy reorganization investment strategy also depends on external factors, such as market trends and policy changes. These factors are unpredictable and may affect investors' investment returns.

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