Semir Apparel (002563.SZ) has received multiple notices due to the sale of KIDILIZ Group The exchange inquired, and the capital market also had doubts about this. On August 12, Semir Clothing determined the price for selling KIDILIZ Group, with the final price being 680 million yuan. Previously, the consideration paid by Semir Clothing for the acquisition of KIDILIZ Group was 110 million euros (equivalent to 840 million yuan). In less than two years, Semir Clothing had a net loss of 160 million yuan. It was Qiu Guanghe, Zhou Pingfan, Qiu Yanfang, Qiu Jianqiang and Dai Zhiyue who jointly owned Semir Group Co., Ltd. (hereinafter referred to as Semir Group). As of the first quarter report of 2020, Semir Group holds 12.45% of the shares of Semir Apparel. Is it reasonable for Semir Apparel to sell KIDILIZ Group at a low price in a short period of time? Does this transaction convey benefits to major shareholders? A few days ago, the exchange quickly issued a letter of inquiry regarding this transaction.
Why did you buy it at that time?
In 2017, Semir Clothing’s children’s clothing business surpassed women’s clothing and became the largest source of revenue. Semir Clothing is optimistic about the development prospects of the children’s clothing subcategory and has begun to significantly expand the children’s clothing brand matrix. KIDILIZ Group has entered Semir Group’s vision. In terms of equity, Semir Apparel holds 100% of the assets of French Sofiza SAS through Senkai (Wenzhou) Holdings Co., Ltd. (hereinafter referred to as “Senkai Holdings”), and KIDILIZ Group is the main asset of Sofiza SAS. KIDILIZ Group was founded in France in 1962 and is still held by the founder’s family. KIDILIZ Group has 8 subsidiaries, 11,000 sales outlets and 829 stores around the world. It has developed into a leader in the mid-to-high-end children’s clothing industry in Europe. It has 10 self-owned children’s clothing brands and 5 authorized business brands, including Kenzo Kids. Levi’s Kids etc. Brand positioning covers differentiated product selection for multiple age groups, from mid-end to high-end, from newborns to teenagers.
Although KIDILIZ Group has a certain degree of popularity and reputation in Europe, when it was acquired Already at a loss. KIDILIZ Group’s sales in 2017 were 427 million euros, and its net profit after tax was -27 million euros. At that time, some investors also expressed concerns about acquiring loss-making businesses. Semir Clothing said that the Z brand has the greatest impact on the KIDILIZ Group’s business and is also the only loss-making business. Other brands are developing well. KIDILIZ Group only adjusted the Z brand in 2017. Some stores have upgraded their image, but it has not yet achieved the image upgrade of all stores. Stores that have not undergone image upgrade are the biggest reasons for losses. Moreover, the founder of KIDILIZ Group is hesitant to sell the company, so he has invested relatively little in the company’s operations. At that time, Semir Apparel stated that it would achieve a small loss or break even in 2019, the European part would remain stable, and the domestic business would be able to achieve good growth.
Why sell now?
Contrary to expectations, KIDILIZ Group not only failed to turn around losses in 2019, but its losses further expanded to 302 million yuan. In 2019, while Semir Apparel’s operating income increased by 23%, its net profit fell by 8.5% to 1.534 billion yuan. The main reason was the drag of KIDILIZ Group. If the impact of KIDILIZ Group’s losses is excluded, Semir Clothing’s after-tax profits for the year can achieve growth. This has also become the main reason why Semir Clothing sold KIDILIZ Group. But what is strange is that after the acquisition was completed in 2018, what happened in just one year that caused the KIDILIZ Group’s losses to increase significantly instead of falling? In October 2018, after acquiring the KIDILIZ Group, Semir Clothing began to promote the multi-brand business of the KIDILIZ Group in China. Its CATIMINI brand has opened its first store in China.
In 2018, the number of stores of KIDILIZ Group after consolidation was 802, and the number at the end of the period was 782 Home. By 2019, there were 701 companies. It can be seen that Semir Apparel did manage some inefficient stores after the acquisition to reduce losses. However, Semir Apparel’s previous plan to expand the Chinese market and turn around losses did not go smoothly. There were only 5 and 35 new stores opened in 2018 and 2019 respectively. In this regard, this issue was also mentioned in the inquiry letter issued by the exchange recently. The exchange requires Semir Apparel to explain the reasons why the KIDILIZ Group’s operations did not meet expectations, and to explain whether Semir Apparel’s management was diligent and responsible at the time of the acquisition.
Why did the major shareholders take over?
Semmer Apparel’s divestiture of KIDILIZ Group will indeed help maintain current performance growth. However, the fact that Semir Group took over has to raise questions. First of all, because if Semir Group takes over KIDILIZ Group, it will compete with listed companies in the same industry. In the acquisition announcement, Semir Group made almost harsh commitments in order to avoid horizontal competition, but this also made it unprofitable for Semir Group to continue operating. In order to avoid horizontal competition, Semir Group will not develop new business operations or expand existing businesses in China after holding the KIDILIZ Group. If Semir Group violates this commitment, the group will need to obtain more than the amount of this transaction.Any additional proceeds from the transfer price will be given to the listed company free of charge. Not expanding business in the Chinese market is contrary to Semir Apparel’s strategic intention to acquire KIDILIZ Group. How can KIDILIZ Group turn around losses without expanding into the Chinese market? Why did Semir Group take over?
There is also a condition for this transaction, that is, Semir Group needs to receive the transfer of Semir Clothing as of 2020 As of July 31, 2018, it had RMB 1.14 billion of claims against KIDILIZ Group. At first glance, it seems that Semir Apparel not only reduced its debt ratio but also recovered funds while divesting itself of loss-making businesses. However, it is worth noting that the 1.14 billion yuan of liabilities that Semir Group needs to bear does not have a return period specified in the equity transfer contract. In this way, if Semir Group does not repay the loan for a long time, this liability will become a disguised occupation of the listed company’s funds by the controlling shareholder. From another perspective, this arrangement is also suspicious. Semir Apparel’s asset-liability ratio in 2019 was only 29.04%, which was slightly lower than before. From a funding perspective, the operating cash flow generated by Semir Apparel in 2019 was 1.678 billion yuan, and the balance sheet monetary funds were 2.547 billion yuan, with very little restricted funds. It can be seen that Semir Apparel has sufficient funds and a low debt ratio. There is no need to sell assets in order to withdraw funds or reduce the debt ratio. Regarding Semir Clothing’s behavior of buying high, selling low, and disposing of assets, the exchange also quickly issued a letter of inquiry, requesting questions about the basis of its valuation and asking Semir Clothing to explain. </p
