“Investor Network” Zhang Wei

Game giant Century Huatong (002602.SZ), which has achieved transformation through mergers and acquisitions, may endure the “backlash” caused by rapid mergers and acquisitions.

In April, Century Huatong issued an announcement stating that after receiving the “Advance Notice of Administrative Penalty”, the Securities Regulatory Commission decided to issue a warning to the company and related parties and fine 14.1 million yuan. Subsequently, the Shenzhen Stock Exchange issued a letter of concern, stating that it would initiate disciplinary proceedings against Century Huatong and the parties concerned based on the facts found in the administrative penalty decision.

Century Huatong said in this regard that the company has carefully learned from experience, carried out important personnel adjustments and system revisions, strengthened the standardization of internal governance, improved the quality of information disclosure, strictly complied with relevant laws and regulations to fulfill information disclosure obligations, and safeguard the interests of the company and investors.

In fact, the reason why Century Huatong was heavily penalized by regulation is related to falsely recording goodwill, inflated, or diminished profits in the 2018-2022 annual report. Why does Century Huatong continue to falsify its goodwill still have to start with its mergers and acquisitions.

The “counterattack” of foreign directors

According to Wind data, as of the close of April 22, Century Huatong's stock price closed at 4.1 yuan/share, and the company's market value was 30.6 billion yuan. Meanwhile, in July 2020, Century Huatong's market capitalization reached 107.3 billion yuan. At the time, some analysts even believed that Century Huatong's market capitalization surged to 130 billion yuan within a few days, but the results were rapidly reversed.

What happened to Century Huatong in four years from a market capitalization of 100 billion dollars to only around 30 billion dollars at present? As a manufacturer of traditional auto parts and a traditional manufacturing enterprise with a market capitalization of less than 2 billion yuan three years after the company went public (2011-2014), how could Century Huatong's market value be boosted to 100 billion yuan?

Everything is related to an outside director of Century Huatong.

According to Wind, Century Huatong was founded in 2005 and has continued to operate for nearly 20 years. Major changes have taken place in its main business during this period. Prior to 2014, Century Huatong was an auto parts supplier, engaged in R&D, manufacturing and sales of automotive plastic parts and molds. Customers include Volkswagen, GM, FAW, Dongfeng and Guangben.

After 2014, Century Huatong began a series of mergers and acquisitions, successively acquiring game companies such as Shanghai Tianyou and Wuxi Qiku to achieve a transformation from auto parts production to game operations. In particular, the acquisition of Shengqu Games (formerly Shengda Games) for 29.8 billion yuan made Century Huatong famous in the industry, and also became the largest A-share game company.

It is worth mentioning that the “gorgeous transformation” of Century Huatong's business was accompanied by a huge cash out of the company's founder Wang Miaotong and the “counterattack” of foreign director Wang Ji.

According to public information, Wang Miaotong was born in 1957 and is a native of Shaoxing, Zhejiang. He began his career by investing 50,000 yuan to establish an auto parts factory. After years of hard work, Wang Miaotong developed this small factory into a listed company. Wang Miaotong and his family twice appeared on the Forbes Global Billionaires List in 2019 and 2020.

However, according to business information, Century Huatong's top ten shareholders are Wang Ji, Linzhi Tencent, Jin Danliang, Shenzhen OCT Capital, Shanghai Jiyunsheng (Wang Ji holds 99%), Hong Kong Central Clearing Company, Shanghai Daoying Investment (China Finance Trust holds 99%), Shanghai Jiyusheng (Wang Ji holds 99% of shares), Shanghai Yichusheng, and Shanghai Huacan.

According to the shareholding structure, Wang Ji and Linzhi Tencent are “speakers” of Century Huatong, and they are also the only two shareholders of the top ten shareholders with a shareholding ratio of more than 10%. The founder of the company is not among the top ten shareholders. Why? According to enterprise research information, at the time of listing in 2011, Century Huatong's largest shareholder was Huatong Holdings, with a shareholding ratio of 18.71%. Wang Miaotong and his family together hold 100% of Huatong Holdings. In other words, Wang Miaotong became the actual controller of Century Huatong through Huatong Holdings.

Wang Ji first joined Century Huatong in 2014.

According to the announcement, in January 2014, Century Huatong acquired 100% of the shares of Shanghai Tianyou, founded by Wang Ji, for a total price of 950 million yuan through the issuance of shares and cash purchases. After the transaction was completed, Wang Ji became the director and CEO of Century Huatong. Century Huatong's acquisition is part of its business transformation. It aims to enter the game industry while also gradually moving Wang Ji to the front office.

After becoming the CEO of Century Huatong, Wang Ji took the lead in acquiring Diandian Interactive and Shengqu Games (formerly Shengda Games). In particular, in June 2019, Century Huatong purchased Shengqu Games (formerly Shengda Games) at a price of 29.8 billion yuan, which can be called a “snake swallowing elephant” deal.

The 100-billion-level “myth” created by Century Huatong also occurred after the acquisition of Shengqu Games (formerly Shengda Games). In July 2020, Century Huatong's market capitalization reached 107.3 billion yuan, more than 23 times that of 4.6 billion yuan when it was launched in 2011.

On the other hand, Wang Ji also made some moves. According to business information, Shanghai Jiyunsheng and Shanghai Jiyufan, controlled by Wang Ji (both holding 99% of shares), were established in August 2017 and December 2017, respectively. Both companies' foreign investments since their establishment have been directed towards Shengqu Gaming (formerly Shengda Gaming). After the acquisition of Shengqu Games (formerly Shengda Games) was completed, Shanghai Jiyunsheng and Shanghai Jiyufan held 2.63% and 2,01% of Century Huatong's shares respectively.

However, at this time, Wang Ji was only a small shareholder of Century Huatong. Century Huatong's major shareholding changes occurred in 2021. According to Century Huatong's announcement, in March 2021, Wang Miaotong traded with Wang Ji and Linzhi Tencent. Wang Miaotong reduced their holdings of Century Huatong by 10%. Wang Ji and Linzhi Tencent each paid 2,794 billion yuan to Wang Miaotong.

After the transaction was completed, Wang Ji became the largest shareholder of Century Huatong, with a shareholding ratio of 10.22%; Linzhi Tencent was the second-largest shareholder, holding 10%; Wang Miaotong, who cashed out 5.588 billion yuan, reduced his shareholding ratio to 7.44% to the third-largest shareholder.

In fact, with the addition of two companies controlled by Wang Ji, Shanghai Jiyunsheng and Shanghai Jiyu Fan, Wang Ji's shareholding ratio in Century Huatong is 14.92%.

By 2023, as Wang Miaotong's shares in Century Huatong were judicially auctioned, Wang Miaotong's shareholding ratio in Century Huatong was further reduced. According to the “Daily Economic News” report, in June 2023, the 400 million shares of Century Huatong held by Shanghai Yaoqu were auctioned on the JD Judicial Auction Platform, with a total transaction price of 2,868 billion yuan. The auction winners were Jiaxing Xukai, Guohua Life Insurance, Wang Jie, Jiangxi Yufan, and Zheshang Securities.

According to equity penetration information, the actual controllers of Shanghai Yao Qu Ru are Wang Miaotong and his family. Since then, Wang Miaotong has basically dropped out of Century Huatong. Century Huatong completely moved from the Wang Miaotong era to the Wang Ji era.

However, there is also some pressure on Wang Ji from an external director to “counterattack” the actual controller of Century Huatong. According to Wind, Wang Ji and Shanghai Jiyunsheng's unreleased shares were 715 million shares and 196 million shares respectively, accounting for 94% and 100% of Century Huatong's shares, respectively.

Goodwill exceeds 12 billion yuan

Through mergers and acquisitions of many game companies, Century Huatong achieved business transformation, but it also generated huge commercial reputation. At the end of each issue from 2017 to 2022, Century Huatong's goodwill was 2 billion yuan, 15.291 billion yuan, 15.32 billion yuan, 22.05 billion yuan, 16.402 billion yuan, and 12.077 billion yuan respectively, ranking first in the game industry for several consecutive years.

By the end of the third quarter of 2023, Century Huatong's goodwill reached 12.201 billion yuan. Despite a year-on-year decline of more than 30%, Century Huatong's goodwill still far surpassed its peers such as Kunlun Wanwei (5,011 billion yuan) and Zhejiang Digital Culture (4.317 billion yuan) during the same period. Wang Ji once publicly stated, “It (goodwill) is like a heavy 'burden' and weighs on Century Huatong.”

Huge goodwill has also brought about “counterphagy.” In 2022, Century Huatong's net profit was a loss of 7.092 billion yuan. Century Huatong lost money for the first time since it went public in 2011. In the previous three years (2019-2021), Century Huatong's total profit was 7.558 billion yuan. The reason for losing three years of profit in one fell swoop was a huge impairment of goodwill.

According to the annual report, Century Huatong's goodwill impairment loss in 2022 was 5.428 billion yuan. Century Huatong said that this is due to the high goodwill accumulated by the company over the years to expand its business scale through mergers and acquisitions. Despite significant impairment of goodwill, the company's goodwill level is still very high, which has had a significant impact on the company's financial position.

If goodwill is too high, it is a business problem, and goodwill fraud is suspected of breaking the law.

According to the announcement, in July 2023, Century Huatong was investigated by the Securities Regulatory Commission for suspected information disclosure violations. According to the “Advance Notice of Administrative Penalties” issued by the Securities Regulatory Commission, there are false records relating to goodwill in Century Huatong's 2018-2022 annual report; fictitious software copyright transfer business or early confirmation of revenue led to false records in the 2020-2021 annual report and interim report on the completion of performance promises.

Specifically, Century Huatong has repeatedly failed to carry out goodwill impairment tests in accordance with regulations, resulting in an inflated profit of 62.363 million yuan in 2018, accounting for 5.94% of the total profit for the year; an inflated profit of 762 million yuan in 2020, accounting for 22.24% of the total profit for the year; and 345 million yuan in 2022, accounting for 4.95% of the total profit for the year.

Generally speaking, inflated profits are easy to understand; that is, to beautify financial reports, so why is the purpose of reducing profits?

In response, some financial professionals told “Investor Network” that the main purpose of reducing profits is to reduce operating results under specific conditions, and to reduce profits by not complying with the requirements stipulated in the financial system, using artificial operations such as adding more, paying more, and delaying or withholding revenue that should be recorded in the current period.

The source believes that profit reduction may stem from the act of enterprise management making accounting policy choices for the purpose of achieving its own utility or maximizing the company's market value, thereby adjusting the company's surplus, as a means of concealing its true situation. The source also pointed out that regardless of whether it is an inflated increase or decrease, it is profit manipulation, and this kind of behavior will adversely affect the long-term development of enterprises and the stability of the capital market.

In addition, Century Huatong also has fictitious software copyright transfer business or early revenue confirmation, leading to inflated revenue and profits in 2020 and reduced revenue and profits in 2021.

Looking at the timeline, Wang Ji has been the director and CEO of Century Huatong since April 2015, and has been the chairman since August 2021. He is the supervisor directly responsible for illegal letter disclosure of the completion of the 2018-2022 annual report and performance commitment; Wang Miaotong served as chairman from September 2008 to August 2021, and is the supervisor directly responsible for the illegal disclosure of Century Huatong's 2018 Annual Report, 2020 Annual Report and Performance Commitment Completion Notice.

Nearly nine months after the case was filed by the Securities Regulatory Commission, Century Huatong received an “Advance Notice of Administrative Penalty” in April of this year. According to the notice, Century Huatong was warned and fined 8 million yuan; Wang Ji and Wang Miaotong were warned and fined 2 million yuan respectively; and Qian Hao, Shang Guoliang, and Ji Min were fined 1 million yuan, 600,000 yuan, and 500,000 yuan respectively. The company and related personnel were fined a total of 14.1 million yuan.

Subsequently, the Shenzhen Stock Exchange issued a letter of concern to Century Huatong, stating that in the future, it will initiate disciplinary proceedings against Century Huatong and related parties based on the facts found in the administrative penalty decision. The Shenzhen Stock Exchange hopes that Century Huatong and those involved will earnestly learn the lessons and rectify in a timely manner to prevent the above problems from happening again.

After the Securities Regulatory Commission and the Shenzhen Stock Exchange published documents one after another, many investors also questioned whether Century Huatong could disclose the 2023 report as scheduled. In response, Century Huatong said that the company is currently operating normally and will promptly disclose the 2023 annual report in accordance with credit disclosure rules. According to the announcement, Century Huatong is expected to disclose its 2023 report on April 30. Relevant investors can pay attention at that time.

According to the performance forecast, Century Huatong expects to achieve net profit of 400 million yuan to 600 million yuan in 2023. The company's consolidated revenue will increase by about 20% year on year, and total consolidated revenue after deducting costs, expenses, taxes and additional expenses will be about 1.5 billion yuan, an increase of about 600% over the same period of the previous year. (Produced by Thinking Finance) ■