The risk of equity pledge is increasing.

Investor net Wu Wei.

Recently, yonyou network technology (600588.SH) held a 2024 interim performance briefing, addressing some of the issues of concern to investors. However, faced with a significant scale of asset impairment and the situation of increasing revenue without increasing profit, yonyou network's stock price has been continuously low in 2024. Since 2024, the company's stock price has halved.

In order to boost market confidence, yonyou network has made many efforts. In July of this year, the company released the "Action Plan for Enhancing Quality, Efficiency, and Return on 2024". In August, shortly after the company's previous repurchase was completed, the controlling shareholder, Beijing Yonyou Technology Co., Ltd. (referred to as "Beijing Yonyou"), once again proposed to repurchase the company's shares. This time, yonyou network plans to repurchase company shares ranging from 50 million yuan to 0.1 billion yuan, for stock-based incentives or employee stock ownership plans.

It should be noted that due to the continuous low stock price of the company, the equity pledge risk of yonyou network's controlling shareholder Beijing Yonyou and its concerted actions is increasing. At the beginning of 2024, Beijing Yonyou and its concerted actions held 19.39% of the shares in a pledged state, while by September 19, 29.14% of the equity held by Beijing Yonyou and its concerted actions was in a pledged state.

With the company's situation of increasing revenue without profit and the continuous low stock price, how will yonyou network control the equity pledge risk of its controlling shareholder?

Facing strong competition

Yonyou Network Technology is a global leading enterprise cloud computing service and software provider, focusing on the application and service fields of information technology in enterprises and public organizations, dedicated to driving commercial and social progress with innovation and technology. Since its establishment, the company has made significant contributions to the paperless office reform of domestic enterprises.

The company started with financial software, and currently yonyou network technology can provide enterprises with a suite of public cloud services that integrate 'platform, finance, human resources, marketing, procurement, supply chain, manufacturing, assets, projects, and collaboration,' supporting enterprises' global operation and socialized business. The company's main customers are mainly in medical, tobacco, finance, and other large and medium-sized enterprises, in addition to government-related businesses.

It is worth mentioning that while yonyou network technology steadily expands its business scope, internet giants such as Tencent and Alibaba have also entered the SaaS (Software as a Service) field. Alibaba's DingTalk, since its launch of the beta version in 2014, has now been updated to the seventh generation. In September 2024, DingTalk also released a series of new products and features based on 'low code + AI' and 'multi-dimensional table + AI.' By the end of 2023, DingTalk had reached 0.7 billion users, with 1.2 million paid enterprise users, and paid daily active users DAU exceeding 28 million.

Tencent's WeCom, launched version 1.0 in 2016, has now been updated to the fourth generation. In April 2024, according to Tencent Cloud's official announcement, WeCom has integrated Tencent's Hummingbird large model. WeCom currently covers more than 50 industries such as retail, education, finance, manufacturing, internet, and medical, continuing to provide intelligent solutions to various industries. It is noteworthy that WeCom can also access third-party services, interoperate with Tencent's WeChat, and increase information reply efficiency.

With the entry of giants, yonyou network technology faces a sharp increase in competition, leading to a significant growth trend in the company's period expense ratio. In 2021, yonyou network technology's sales expenses only accounted for 22.7% of the company's total revenue. By the first half of 2024, the company's sales expense ratio had risen to 30.04%; yonyou network technology's research and development cost ratio also increased from 16.9% in 2021 to 27.95% in the first half of 2024.

While yonyou network technology's sales expense ratio and research and development expense ratio continue to rise, the company's sales gross margin decreased from 61.25% in 2021 to 52.55% in the first half of 2024. With this trade-off, although yonyou network technology's revenue has shown a significant growth trend from 2021 to the present, the net income attributable to the parent company has been continuously decreasing. In 2023, yonyou network technology even incurred a loss of 0.967 billion yuan; whereas in the previous decade, yonyou network technology was profitable. In the first half of 2024, although the company's losses narrowed, there is still a loss of 0.794 billion yuan in the current period.

In order to break the cycle, yonyou network technology is actively expanding overseas. However, as of the first half of 2024, overseas revenue only accounted for 1.65% of the company's total revenue. The gross margin of overseas business is 36.82%, significantly lower than the domestic 52.12%. In this situation, is going overseas the best choice for yonyou network technology?

Company's assets need to be impaired.

In addition to the increasing period expense ratio consuming the company's profits, the high balances of accounts receivable and notes receivable also increase the risk for yonyou network technology.

In 2021, Yonyou Network's accounts receivable and notes receivable balance was only 1.44 billion yuan, accounting for 16.12% of the company's revenue for the period, and by the end of 2023, the company's accounts receivable and notes receivable balance had soared to 2.66 billion yuan, accounting for 27.15% of the total revenue for the period. As of the first half of 2024, Yonyou Network's accounts receivable and notes receivable balance had reached 2.783 billion yuan.

According to the company's announcement, starting from 2022, Yonyou Network has been making provisions for impairment of accounts receivable, contract assets, and goodwill. In 2021, Yonyou Network accumulated an impairment provision of 0.355 billion yuan; in 2022, it was 0.22 billion yuan, in 2023, it was 0.235 billion yuan; and in the first half of 2024, the company also made an impairment provision of 0.111 billion yuan.

On one hand, the company faces strong competition, with a decline in gross margin and an increase in expense ratio, weakening the company's profitability; on the other hand, the high level of accounts receivable and notes receivable balances, combined with large asset impairment losses, have eroded the company's profits. In this scenario, Yonyou Network's stock price has been on a continuous downward trend since 2021, with an approximately 80% decline in the company's stock price to date.

Faced with the continuous decline in the company's stock price, Yonyou Network's controlling shareholder, Yonyou in Beijing, and its concerted action party face increasing risks from pledged shares. At the beginning of 2021, Yonyou in Beijing pledged only 12 million shares of the company, accounting for 0.37% of the total shares outstanding and 1.3% of the shares held by Yonyou in Beijing and its concerted action party.

After multiple additional pledges, as of September 19, 2024, Yonyou in Beijing and its concerted action party have pledged 0.414 billion shares of the company, accounting for 12.11% of the total shares outstanding and 29.14% of the shares held by Yonyou in Beijing and its concerted action party.

In order to boost market confidence, Yonyou Network has also made many efforts. From 2021 to now, Yonyou Network has completed 3 repurchases, repurchasing a total of over 2.1 billion yuan of company shares. In August 2024, shortly after the completion of the previous round of repurchases, the controlling shareholder of Yonyou Network proposed another share repurchase, with a proposed amount of 50 million yuan to 0.1 billion yuan.

In addition, in July 2024, Yonyou Network also issued the 'Action Plan for Enhancing Quality, Efficiency, and Returns in 2024,' elaborating on how the company will enhance corporate value in terms of focusing on core business, emphasizing investor returns, strengthening investor communications, and enhancing risk management.

However, in the face of continued corporate losses and the company's stock price hitting new lows since 2018, besides repurchasing shares, what other significant actions can Yonyou Network take to boost market confidence and alleviate the risks associated with the controlling shareholder's pledged shares? (Produced by SMI Finance) ■