The "sequelae" of the merger and acquisition of the game giant Century Huatong is difficult to solve

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"Investor's Network" Zhang Wei

Century Huatong (002602. SZ), or will suffer the "backlash" caused by the rapid mergers and acquisitions.

In April, Century Huatong announced that after receiving the "Prior Notice of Administrative Punishment", the China Securities Regulatory Commission decided to warn 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 related parties based on the facts ascertained in the administrative penalty decision.

Century Huatong said that the company has conscientiously learned from experience, carried out important personnel adjustments and system repairs, strengthened the standardization of internal governance, improved the quality of information disclosure, and strictly abided by 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 fined by the regulator is related to the false record of goodwill, inflated or inflated profits in the annual report from 2018 to 2022. Why Century Huatong continues to falsify goodwill has to start with its mergers and acquisitions.

The "counterattack" of foreign directors

Wind data shows that as of the close of trading on April 22, the share price of Century Huatong closed at 4.1 yuan per share, and the company's market value was 30.6 billion yuan. In July 2020, the market value of Century Huatong was as high as 107.3 billion yuan. At that time, some analysts even believed that the market value of Century Huatong was just around the corner to 130 billion yuan, but the result was reversed quickly.

From a market value of 100 billion yuan to only a little more than 30 billion yuan at present, what happened to Century Huatong in four years? As a traditional auto parts manufacturer and a traditional manufacturing enterprise with a market value of less than 2 billion yuan in the three years after the company went public (2011-2014), why can the market value of Century Huatong be pushed up to 100 billion yuan?

Everything is related to an outside director of Century Huatong.

According to Wind information, Century Huatong was established in 2005 and has been in continuous operation for nearly 20 years, during which the main business has undergone major changes. Before 2014, Century Huatong was an auto parts supplier, engaged in the research and development, manufacturing and sales of automotive plastic parts and molds, with customers including Volkswagen, General Motors, FAW, Dongfeng and Guangben.

After 2014, Century Huatong started a series of mergers and acquisitions, and successively acquired game companies such as Shanghai Tianyou and Wuxi Qiku, realizing the transformation from auto parts production to game operation. In particular, the acquisition of Shengqu Games (formerly Shanda Games) for 29.8 billion yuan made Century Huatong famous in the industry, and it also became the largest game company in A-shares.

It is worth mentioning that the "gorgeous turn" of Century Huatong's business was accompanied by the company's founder Wang Miaotong's huge cash-out 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, and his career began with an investment of 50,000 yuan to establish an auto parts factory. After years of hard work, Wang Miaotong has developed this small factory into a listed company. In 2019 and 2020, Wang Miaotong and his family were on the Forbes Global Billionaires list twice.

However, according to industrial and commercial information, the current top ten shareholders of Century Huatong are Wang Ji, Linzhi Tencent, Jin Danliang, Shenzhen OCT Capital, Shanghai Jiyunsheng (Wang Ji holds 99% of the shares), Hong Kong Securities Clearing Corporation, Shanghai Daoying Investment (Zhongrong Trust holds 99% of the shares), Shanghai Jiyufan (Wang Ji holds 99% of the shares), Shanghai Yiqusheng and Shanghai Huacan.

The shareholding composition shows that Wang Ji and Linzhi Tencent are the "talkers" of Century Huatong, and they are also the only two shareholders among 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 is this? According to the company's information, when it was listed in 2011, the largest shareholder of Century Huatong was Huatong Holdings, with a shareholding ratio of 18.71%. Wang Miaotong and his family together hold 100% of the shares of Huatong Holdings. In other words, Wang Miaotong became the actual controller of Century Huatong through Huatong Holdings.

Wang Ji first entered 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 at a total price of 950 million yuan through the issuance of shares and cash acquisition. After the completion of the transaction, Wang Ji became a director of Century Huatong and served as the CEO. The acquisition of Century Huatong is part of its business transformation, aiming to enter the game industry, and at the same time, it also allows Wang Ji to gradually move to the forefront.

After serving as the CEO of Century Huatong, Wang Ji led the acquisition of Diandian Interactive and Shengqu Games (formerly Shanda Games). In particular, in June 2019, Century Huatong acquired Shengqu Games (formerly Shanda Games) at a price of 29.8 billion yuan, which can be called a "snake swallowing elephant" transaction.

In July 2020, the market value of Century Huatong was as high as 107.3 billion yuan, more than 23 times higher than the 4.6 billion yuan when it was listed in 2011.

On the other hand, Wang Ji also made some moves. According to industrial and commercial information, Shanghai Jiyunsheng and Shanghai Jiyufan (both holding 99% of the shares) controlled by Wang Ji were established in August 2017 and December 2017 respectively. After the establishment of these two companies, the foreign investment pointed to Shengqu Games (formerly Shanda Games). After the completion of the acquisition of Shengqu Games (formerly Shanda Games), Shanghai Jiyunsheng and Shanghai Jiyufan held 2.63% and 2.01% of the shares of Century Huatong respectively.

However, at this time, Wang Ji was only a minority shareholder of Century Huatong. The significant shareholding change of Century Huatong occurred in 2021. According to the announcement of Century Huatong, in March 2021, Wang Miaotong traded with Wang Ji and Linzhi Tencent, and Wang Miaotong reduced his holdings of 10% of Century Huatong's shares, and Wang Ji and Linzhi Tencent each paid 2.794 billion yuan to Wang Miaotong.

After the completion of the transaction, Wang Ji became the largest shareholder of Century Huatong with a shareholding ratio of 10.22%, Linzhi Tencent was the second largest shareholder with a shareholding ratio of 10%, and Wang Miaotong, who cashed out 5.588 billion yuan, reduced its shareholding ratio to 7.44%, becoming the third largest shareholder.

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

In 2023, with Wang Miaotong's equity in Century Huatong being auctioned by the judiciary, Wang Miaotong's shareholding in Century Huatong will be further reduced. According to the "Daily Economic News", in June 2023, 400 million shares of Century Huatong held by Shanghai Yao Quru were auctioned and sold on the Jingdong judicial auction platform, with a total transaction price of 2.868 billion yuan, and the auction winners were Jiaxing Xukai, Guohua Life Insurance, Wang Jie, Jiangxi Wanplay, and Zheshang Securities.

Equity penetration information shows that the actual controller of Shanghai Yao Quru is Wang Miaotong and his family. Since then, Wang Miaotong has basically faded out of Century Huatong. Century Huatong has completely entered the era of Wang Ji from the era of Wang Miaotong.

However, Wang Ji, who "counterattacked" from a foreign director and became the actual controller of Century Huatong, also had some pressure. According to Wind information, Wang Ji and the unreleased shares of Shanghai Jiyunsheng controlled by Wang Ji are 715 million shares and 196 million shares respectively, accounting for 94% and 100% of the shares held in Century Huatong respectively.

Goodwill exceeds 12 billion yuan

Through the acquisition of a number of game companies, Century Huatong has achieved business transformation, but it has also generated huge goodwill. At the end of each period from 2017 to 2022, the goodwill of Century Huatong 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.

As of the end of the third quarter of 2023, Century Huatong's goodwill reached 12.201 billion yuan. Although it fell by more than 30% year-on-year, the goodwill of Century Huatong in the same period still far exceeded that of Kunlun Wanwei (5.011 billion yuan) and Zhejiang Digital Culture (4.317 billion yuan). Wang Ji once publicly said, "It (goodwill) is like a heavy 'burden', pressing on the body of Century Huatong."

The huge goodwill has also brought about a "backlash". In 2022, Century Huatong's net profit will be a loss of 7.092 billion yuan. Since its listing in 2011, Century Huatong has lost money for the first time. In the previous three years (2019-2021), Century Huatong's profit totaled 7.558 billion yuan. The reason for the loss of three years of profit in one fell swoop is the huge impairment of goodwill.

According to the annual report, the goodwill impairment loss of Century Huatong in 2022 will be 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 the significant goodwill impairment, the level of goodwill of the Company remains high, which has a significant impact on the Company's financial position.

If the goodwill is too high, it is a business problem, and the goodwill fraud is suspected of violating laws and regulations.

According to the announcement, in July 2023, Century Huatong was investigated by the China Securities Regulatory Commission on suspicion of illegal information disclosure. According to the "Advance Notice of Administrative Punishment" issued by the China Securities Regulatory Commission, there were false records in the goodwill of Century Huatong's 2018-2022 annual reports, and the fictitious software copyright transfer business or early recognition of revenue led to false records in the 2020-2021 annual report and the interim report on the completion of performance commitments.

Specifically, Century Huatong 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 of the year, an inflated profit of 762 million yuan in 2020, accounting for 22.24% of the total profit of the year, and a fictitious profit of 345 million yuan in 2022, accounting for 4.95% of the total profit of the year.

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

In this regard, some financial professionals told the "Investor's Network" that the main purpose of inflating profits is to reflect less business results under specific conditions, and to reduce profits by not following the requirements of the financial system, such as artificial operations such as over-mentioning, over-apportioning, multi-expenditure, and postponing the income that should be recorded in the current period or withholding and not reporting.

This person believes that the inflated profits may be due to the behavior of the management of the enterprise in making accounting policy choices for the purpose of realizing its own utility or maximizing the market value of the company, so as to regulate the company's earnings, which is a means adopted to cover up its true situation. The person also pointed out that whether it is inflated or inflated, it is a kind of profit manipulation, and this kind of behavior will have an adverse impact on 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 recognition of revenue, resulting in an inflated revenue and profit in 2020 and a fictitious decrease in revenue and profit in 2021.

Judging from the timeline, Wang Ji has served as the director and CEO of Century Huatong since April 2015 and the chairman of the board since August 2021, and is the person in charge directly responsible for the illegal acts of disclosing the completion of the annual report and performance commitment from 2018 to 2022, and Wang Miaotong served as the chairman from September 2008 to August 2021, and is the person in charge directly responsible for the illegal acts of the 2018 annual report, 2020 annual report and the announcement of the completion of the performance commitment of Century Huatong.

Nearly 9 months after being filed by the China Securities Regulatory Commission, in April this year, Century Huatong received the "Prior Notice of Administrative Punishment". According to the notice, Century Huatong was given a warning and fined 8 million yuan, Wang Ji and Wang Miaotong were given warnings and fined 2 million yuan respectively, Qian Hao, Xian Guoliang and Ji Min were given warnings and fined 1 million yuan, 600,000 yuan and 500,000 yuan respectively, and 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 it would subsequently initiate disciplinary procedures against Century Huatong and related parties based on the facts ascertained in the administrative penalty decision. The Shenzhen Stock Exchange hopes that Century Huatong and the parties concerned will earnestly learn lessons and rectify them in a timely manner to prevent the recurrence of the above problems.

After the China Securities Regulatory Commission and the Shenzhen Stock Exchange issued documents one after another, many investors also questioned whether Century Huatong could disclose its 2023 annual report as scheduled. In this regard, Century Huatong said that at present, the company's operation is normal, and the 2023 annual report will be disclosed in a timely manner in accordance with the rules of information disclosure. According to the announcement, Century Huatong is expected to disclose its 2023 annual report on April 30, and relevant investors can pay attention to it at that time.

According to the performance forecast, Century Huatong is expected to achieve a net profit of 400 million yuan to 600 million yuan in 2023, the company's consolidated operating income will increase by about 20% year-on-year, and the total income 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, and the performance is in a rapid growth trend. (Produced by Thinking Finance)■