Recently, Zhonggan Communication (Group) Holdings Co., Ltd. (hereinafter referred to as "Zhonggan Communication") submitted a prospectus to be listed on the Hong Kong Stock Exchange.
Titanium Media APP noticed that during the reporting period, the performance of Zhongjiang Communication showed an upward trend, and almost all of them came from the company's top five customers. In terms of internal control, Zhongjiang Communication still has many irregularities, such as failing to pay social security and provident fund to employees, and having loan entanglements with channel parties.
Almost all of the performance comes from the top five customers
Zhonggan Communication is an integrated service provider and software developer, focusing on providing telecommunications infrastructure services and infrastructure digital solution services in China.
From 2020 to 2023 (hereinafter referred to as the "reporting period"), Zhongjiang Communication achieved operating income of 336.547 million yuan, 479.118 million yuan, 413.091 million yuan and 609.301 million yuan respectively, and the profit during the year was 32.306 million yuan, 36.173 million yuan, 34.975 million yuan and 68.646 million yuan respectively, showing an upward trend in performance.
It should be noted that although the performance of Zhongjiang Communications is better, the quality of its earnings is declining. During the reporting period, the net cash flow generated by the operating activities of Zhongjiang Communication was 68.764 million yuan, -12.246 million yuan, -36.687 million yuan and 48.438 million yuan respectively, and at the same time, combined with the net cash flow and net profit generated by the operating activities of Zhongjiang Communication in the same period, the ratio of the two can be calculated to be 2.13, -0.34, -1.05 and 0.71 respectively. It can be seen that the ratio has not exceeded 1 since 2021, and at the same time, the net outflow of operating cash of Zhongjiang Communications in 2021 and 2022 will be more than 10 million yuan.
Titanium media APP noticed that the reason why Zhongjiang Communication was able to achieve the above performance was almost dependent on 5 customers. During the reporting period, the sales revenue generated by Zhongjiang Communication to the top five customers were 327.708 million yuan, 476.291 million yuan, 237.66 million yuan and 297.25 million yuan respectively, accounting for 97.4%, 99.4%, 99.2% and 97.2% of the current operating income, of which the sales revenue generated to the first largest customer A was 207.259 million yuan, 332.929 million yuan, 237.66 million yuan and 297.25 million yuan respectively, accounting for 61.6% of the current operating income respectively. 69.5%、57.5%、48.8%。
Deficiencies in internal controls
In terms of internal control, there are also irregularities in Zhongjiang Communication. According to public information, in 2019, Zhonggan Communication was awarded contracts for a number of telecommunications infrastructure service projects, and subsequently, Zhonggan Communications entered into a number of purchase agreements with channel party A, and in order to increase the liquidity of Zhonggan Communications to implement these projects, Zhonggan Communications applied for bank loans from the lending bank according to the purchase agreement signed with channel party A. Subsequently, the lending bank disbursed the loan proceeds to channel party A through the entrusted payment arrangement, and then channel party A transferred the loan proceeds back to Zhonggan Communication, which then used the proceeds to settle its trade payables due to channel party A.
However, due to the epidemic situation, the customer of Zhonggan Communication did not issue any work order for the project, so Zhonggan Communication did not issue a work order to channel party A. According to the relevant regulations issued by the People's Bank of China, since there was no relevant transaction between Zhonggan Communications and Channel A to support the lending bank's payment to Channel A, the financing arrangement did not comply with the relevant loan agreement and PRC laws and regulations.
Secondly, in 2019 and 2020, Zhonggan Communications and certain suppliers (they incurred large procurement costs with Zhonggan Communications and \ or have a relatively long-term business relationship) entered into a number of purchase agreements, and in order to increase the liquidity of Zhonggan Communications to execute the projects, Zhonggan Communications applied for bank loans from the lending bank in accordance with the purchase agreements entered into with the supplier in 2019 and 2020, and the supplier transferred the loan proceeds back to Zhonggan Communications. The act still violates the relevant loan agreements issued by the People's Bank of China and Chinese laws and regulations.
Thirdly, Zhonggan Communication and its subsidiaries failed to pay social insurance contributions to some employees and failed to pay social insurance contributions in full for their employees according to the actual salary level of their respective employees. For the years ended December 31, 2020, 2021, 2022 and 2023, the total amount of underpaid social insurance premiums of Zhonggan Communications was approximately 80,000 yuan, 660,000 yuan, 140,000 yuan and 210,000 yuan, respectively.
Finally, in terms of provident fund, Zhonggan Communication also failed to pay social insurance contributions to some employees and did not pay the full amount for its employees according to the actual salary level of their respective employees. For the years ended December 31, 2020, 2021, 2022 and 2023, the total amount of housing provident fund underpaid by Zhonggan Communications was approximately 320,000 yuan, 140,000 yuan, 160,000 yuan and 270,000 yuan respectively.
It should be noted that Zhongjiang Communication has also repeatedly confronted employees in court. Tianyancha shows that there are 34 legal litigation cases in Zhongjiang Communications, of which 9 are labor disputes and 4 are disputes over the liability of labor service providers, and the litigation cases related to labor providers account for 38.24%.
In addition, Zhongjiang Communication has also become a historical executor for 3 times. So, why are there so many litigation disputes in Zhongjiang Communication? (This article was first published in Titanium Media APP, author|Deng Haotian)