On the evening of March 17, Shenzhou Holdings (00861) issued a “Profit Warning”. The company's main business continued to develop healthily during the reporting period. The profit generated by the main business is expected to increase by about 30% over the same period last year, revenue from big data products and solutions is expected to increase by about 30% during the year, and the net cash flow from operating activities increased by more than 40% year on year.

However, despite strong growth in the company's main business, due to the sharp depreciation of historical investment assets, the expected annual loss attributable to shareholders is approximately RMB 1.7 billion to RMB 1.9 billion.

What is the origin of such an earth-shattering “giant thunder”?

According to the description of the announcement, this large asset depreciation was mainly affected by two major investment issues left over from history. One of these is due to losses and depreciation of investment assets of Huicong Group (02280.HK) and its subsidiary Huicong Microfinance Company. It is estimated that the one-time accrual loss is approximately RMB 1 billion.

Huicong Group was founded in 1992, 7 years earlier than Alibaba. It first started B2B platform business in China and enjoyed a wave of dividends in the early days of the Internet. There was a saying in the industry, “South Alibaba North Huicong”. However, as emerging technologies such as mobile internet, big data, and artificial intelligence continued to rise, Huicong did not adjust its strategy in a timely manner and keep up with the times. In recent years, due to continuous losses due to factors such as executive changes, poor management, and investment losses, etc., the cumulative losses in 2019-2023 reached 37-4 billion yuan, of which the losses in 2023 were almost equal to the cumulative amount of the previous four years.

According to information, Shenzhou Holdings has held Huicong Group shares for at least 10 years. The strategic investment at the time was just right, and the two sides also had good business linkages and mutual empowerment. However, the investment assets, which had a high market value of HK$30.9 billion back then, now only have a market value of HK$300 million, which is astonishing. The main business of Shenzhou Holdings has continued to maintain a high growth trend in recent years, but it has been dragged down by losses of the associated company Huicong Group over the years, and it is difficult to see an inflection point in profits in the short to medium term. The management of Shenzhou Holdings is now determined to reduce the value of the strategic investment it has held for nearly ten years at once, which shows its determination to “break up.”

Another major impact of asset impairment is the one-time depreciation of investment assets of 1 billion to 1.2 billion yuan in historical non-main businesses, especially wealth management products.

As an established listed company for more than 20 years, Shenzhou Holdings also has some investment assets, including property assets such as industrial parks in core locations across the country obtained in the early years at a lower cost. Affected by the downturn in the domestic real estate market in recent years, there is a certain risk of depreciation even for assets located in high-quality locations. Furthermore, after the sensational CITIC Wealth Management product incident in 2016-2017, despite the company's immediate response, it obtained the right to actively dispose of the final underlying real estate assets of the wealth management product, and has always been actively promoting related sales plans and specific action plans. However, due to the impact of the COVID-19 pandemic and the continued decline in the real estate market over the past few years, the disposal progress of wealth management products has been unsatisfactory, and the potential risk of this matter has also become one of the biggest hidden dangers in the minds of investors who have been concerned about Shenzhou Holdings for a long time.

After the one-time depreciation of some investments in properties and wealth management products was completed this year, it can be described as a complete “demining” operation. At the same time, the above impairment provisions mainly come from non-core businesses and assets invested in historical investments. They had no negative impact on current cash flow and did not cause substantial losses to the company. This large impairment is a major defensive measure. The company has sufficient cash flow, sufficient on-hand orders, and the balance ratio is still at a healthy level of around 54%. In the future, as the real estate market recovers, historical assets may be restructured and revitalized, and time may be exchanged for space to obtain returns that exceed expectations to give back to shareholders.

According to people familiar with the matter, most of the company's current management team began taking over the company's business after 2018, and has led the company's main business to achieve continuous high growth in recent years. In particular, in the beginning of 2024, the company successively won bids for the 460 million yuan intelligent computing center project in the Changchun New Area, China Mobile's 467 million yuan supply chain order, cooperated deeply with Nvidia, and participated in the HKSAR Government's nearly 600 million yuan large-scale model project... There was endless good business news. With the support of a series of favorable policies around “Data Factor X” and “Artificial Intelligence +,” Shenzhou Holdings, an AI concept stock, is expected to continue to benefit.

It is in this context that Shenzhou Holdings decided to “break up”, get rid of the burden, go to battle lightly, focus on core businesses such as big data and artificial intelligence, and comprehensively meet the new challenges of the AI era.

Let's wait and see if the company's management can turn the tide and turn the crisis into an opportunity...