The highest market capitalization reached HK$30.9 billion, but now there is less than HK$300 million left. Recently, it also announced that its performance had exploded and “huge losses”. What happened to Huicong Group (02280)?

The Zhitong Finance App learned that on January 22, Huicong Group issued a performance announcement. In 2023, it recorded a loss attributable to shareholders of 1.72 billion yuan, 7.59-8.93 times the loss for the same period last year, while the loss in the first half of the year was 810 million yuan, which is equivalent to a loss of 889-1.19 billion yuan in the second half of the year, an increase of 4.93-6.93 times over the previous year. The company claims that the losses were mainly due to anticipated impairment losses from the sale of Beijing Huicong Internet, impairment of goodwill intangible assets, and impairment of loan business.

In fact, the company has been losing money since 2019, with cumulative losses of 3.7 to 40 billion yuan over 5 years (2019-2023), of which the losses in 2023 are almost equal to the cumulative amount for the remaining four years. Fundamentals are declining, and market capitalization continues to shrink. Huicong tried to boost market confidence by splitting Beijing Zhaoxin and going public on the Beijing Stock Exchange. However, it did not go well. It was questioned twice by the exchange during the acceptance process, including sharp issues such as whether there was a transfer of benefits from various related transactions.

So, what happened to the Huicong Group, and can the fundamentals be reversed?

Successive losses, huge depreciation in 2023, or going into battle as a light weight

The Zhitong Finance App learned that Huicong Group was founded in 1992, 7 years earlier than Alibaba, but they all enjoyed a wave of dividends from the Internet era in the early 21st century, so there is a saying “South Ali North Huicong”. However, the difference in development direction has led to a widening gap between the two. Ali's ToC model continues to take advantage of the dividends, and also lays out the payment sector. The scale of the business is getting bigger and bigger. Huicong's conservative ToC model is growing slowly.

In 2018, the company tried to overtake cars through the opportunities of the industrial Internet. In 2019, the business was divided into three major business groups (namely, new technology retail, smart industry and platform, and enterprise services) and six major tracks (namely Zhongguancun Online, Zhongmo International, Zhaoxin Co., Ltd., Cotton Union, Merchandise Mall, and the purchase of chemical plastics). In 2020, the company's development focus was on the three major growth poles of “Huicong Network+Zhongguancun Online (ZOL) +Zhaoxin Shares”, which drove revenue to resume double-digit growth in 2021, showing a fluctuating growth trend until 2023. However, large-scale growth did not achieve economies of scale, and losses continued year after year.

In 2019-2023, the company's shareholders' net losses were $376 million, $746 million, $224 million and $1.7 billion respectively (lower than forecast). Among them, 2023 was quite special. The company calculated all the assets it could calculate in one go, and sold related assets “at a low price”, causing huge losses.

In 2023, Huicong's technology retail business group experienced impairment of goodwill and intangible assets, with depreciation of $719 million and $260 million in the first half of the year, respectively; the microfinance business under the platform and enterprise services business group experienced several major overdue loans, which are expected to obtain loans receivable and interest impairment losses of $240 million in 2023; and the sale of Huicong Internet for only 5 million yuan (consolidated net assets of about 250 million yuan) is expected to have a one-time impairment loss of 590 million yuan.

The technology retail business group is an important part of Huicong's implementation of the industrial Internet. Zhongguancun Online is the core, but the value was reduced because it was unable to achieve the expected results. The business achieved revenue of 10.37 billion yuan in the first half of the year, an increase of 41.7% over the previous year, and the sharp decline in value may mean deterioration in the second half of the year; the company built the industrial Internet to provide supply chain services and microfinance services, and had many bad debts. Based on this, the company actively adjusted its strategy to sell the business in an attempt to eliminate the burden of performance.

Huicong Internet includes Tianjin Leasing, Chongqing Microfinance, and Huixiang Network anticipates Jingu Bank, but the selling price left investors suspicious. The company said that when valuing target groups, independent valuers used asset-based methods, and used market methods for valuing the equity values of Chongqing Microfinance and Jingu Bank. The adoption of the market law for the two companies with heavier assets has led to a serious divergence between costs and net assets, which is clearly not convincing to investors.

It is worth noting that after this large loss, future loss reduction is basically a definite event. The goodwill of the technology retail business group has been reduced and will not be reduced in the future, while the other two major business groups have basically no goodwill. After the sale was reduced in value once, microloans such as loans receivable had no impact on the company. In 2024, it can be said that Huicong will go to battle lightly, or prepare to fully advance by focusing on the industrial Internet.

Facing many risk points, it is still unknown whether Liu Jun can turn the tide

From an industry perspective, the industrial Internet market is large, and the growth rate is slow, but it is highly resilient. In the three years since the epidemic, the market size has maintained a growing trend. According to third party agencies, the size of the industrial Internet market in 2022 was 20.1 trillion yuan, with a compound growth rate of 5.2% over five years. Huicong already had a comprehensive layout in 2018. With its B-side online and offline resources and integration advantages, it has achieved a closed loop of industrial Internet commerce.

Liu Jun can be said to be a leading figure in pioneering the Internet transformation and development path of Huicong's industry. In 2017, Liu Jun was appointed as CEO, proposing the development path of the industrial Internet and leading the team to sprint to the 10 billion revenue mark; after stepping back in 2019, Zhang Yonghong came to power. Although it was unfortunate to experience the epidemic for three years, the revenue side continued to rise steadily, and all businesses performed well, but maintained revenue but not profit; in 2023, Liu Jun once again became the head of Hui Cong and carried out drastic reforms. The divestment of the small loan business this time is also likely to be one of its strategies.

Judging from the results of the transformation, the performance on the growth side is fair. The three major business groups and six tracks have all driven the company's large-scale growth. However, in the face of huge demand from the industrial Internet on the capital side, the company integrated into the middle role through small loans. Due to its heavy assets and high cost, it paved the way for future risks to explode. The small loan business was meant to take advantage of a wave of industrial Internet dividends; however, it did not eat the “market cake”; on the contrary, it brought about a large amount of bad debts.

It is worth mentioning that Liu Jun also actively deployed in the capital market after coming back to power. Zhaoxin Co., Ltd., one of its core tracks, submitted a listing application to the Beijing Stock Exchange in May 2023. However, the subject received two successive inquiry letters from the exchange in June and September, and received letters of regulatory concern due to inaccurate financial disclosure information. In the second round of inquiries, the authenticity and rationality of related transactions was the focus of market attention. The financial authenticity of Zhaoxin shares also involves Huicong Group. If there is a problem, it will have a huge impact on the company's listing status and continued operation.

Huicong Group is in a difficult situation. Currently, it is facing many risks: first, the reputation of the technology retail business group may be completely depreciated, which means that the business is facing huge risks and challenges; second, selling small loan platforms at low prices involves shareholders' interests and may be subject to regulatory voices or variables; third, the risk of inquiries about Zhaoxin shares still exists, and financial reliability is being questioned by the market; fourth, it is difficult to see profit inflection points in the short to medium term.

In the secondary market, the company's market capitalization has dropped by as much as 96% since the transformation of the industrial Internet (2018). It has become a fairy stock. It has basically no trading volume, and is not covered by investment banking research reports. Furthermore, the company lost money year after year, did not pay dividends or buybacks all year round, and no shareholders' holdings have increased in recent years, making it difficult to find the bottom. The PB value of 0.15 times is certainly cheap, but considering the risk that fundamentals may face, there are valuation pitfalls.

The future of Huicong Group is unspeakably optimistic. After Liu Jun took office, it was indeed observable that it was implementing a basket of policies, including business focus, divestment of loss-making assets, reducing business burdens, and reducing financial burdens, etc., but it is still unknown whether it can turn the tide.