The main business has been losing money for 4 consecutive years, and the debt ratio has reached 99%, and Huicheng Technology's cross-border game has been "pitted"

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After deducting non-net profit for four consecutive years, Huicheng Technology (002168) is about to lose money. Recently, Huicheng Technology disclosed that the 2023 annual report and the first quarter report of 2024 show that the company's operating performance has continued to decline. Last year, although Huicheng Technology turned losses into profits, it mainly relied on compensation, and the deduction of non-net profit was still negative.

After years of losses in the main business, the sustainable development ability of Huicheng Technology is in doubt. The author noted that as of the end of the first quarter of this year, the asset-liability ratio of Huicheng Technology reached 99.17%. In terms of balance sheets, liabilities are mainly derived from accounts payable, other payables and long-term borrowings.

Under the continuous loss of performance, Huicheng Technology also inflated profits in 2019 and 2020, with a total inflated profit of more than 300 million yuan in the two years. Huicheng Technology's suspected violations mainly involve game-related subsidiaries such as Dokemon, which completed the performance VAM by inflating profits.

Non-net profit was negative for four consecutive years

Recently, Huicheng Technology disclosed its 2023 financial report and 2024 first quarter report, and the company still has not improved the loss of its main business. According to the 2023 annual report, the company achieved revenue of 254 million yuan, a year-on-year increase of 3.99%, and a net profit of 1.897 million yuan, a year-on-year increase of 101.64%, turning losses into profits.

On the surface, Huicheng Technology's performance in 2023 will grow significantly, but it will rely on non-operating profit and loss. Last year, the company's non-operating profit and loss amounted to 123 million yuan, of which about 100 million yuan was received from Kou Han's performance commitment compensation and 41.19 million yuan was received from the government. After excluding non-operating gains and losses, the company's main business net profit loss was 121 million yuan.

In terms of business, Huicheng Technology is mainly distributed in three major sectors, namely the power industry, the new energy industry and the game industry. Among them, the sector with the largest revenue is the power industry, accounting for 53% of revenue in 2023, and the gross profit margin will be 16.47%, a year-on-year decrease of 8.23 percentage points.

The gross profit margins of the new energy industry and the game industry have increased significantly, reaching 25.67% and 88.58% respectively in 2023, a decrease of 21.57 percentage points and 17.20 percentage points respectively from the same period last year.

In addition, Huicheng Technology also disclosed that in the first quarter of 2024, the company's revenue was 31.24 million yuan, a year-on-year decrease of 31.28%, a net profit of 37.63 million yuan, a year-on-year decrease of 79.60%, and a non-net profit loss of 37.22 million yuan, a year-on-year decrease of 72.66%.

The author is concerned that Huicheng Technology has deducted negative non-net profit for 4 consecutive years. From 2019 to 2022, the company's non-net profit was -1.182 billion yuan, -184.2 million yuan, -205.5 million yuan and -125.6 million yuan respectively.

The main business continued to lose money, and the debt ratio of Huicheng Technology continued to rise. As of the end of the first quarter of 2024, the total liabilities of Huicheng Technology were 884 million yuan, and the asset-liability ratio reached 99.17%. In other words, Huicheng Technology's finances are close to the edge of "insolvency".

From the perspective of the balance sheet, Huicheng Technology's liabilities are mainly composed of three parts, namely accounts payable, other payables and long-term borrowings, with the amounts of 209.8 million yuan, 279.1 million yuan and 163.9 million yuan respectively. Judging from the 2023 financial report, other payables are mainly shareholder borrowings.

Inflated profits were punished by regulators

On February 1 this year, Huicheng Technology announced that the company received the "Prior Notice of Administrative Punishment" from the China Securities Regulatory Commission. Due to suspected violations of information disclosure laws and regulations, as early as November 2022, Huicheng Technology received the "Notice of Case Filing" issued by the China Securities Regulatory Commission, and the China Securities Regulatory Commission filed a case against the company for investigation.

The main company suspected of violating laws and regulations is Dokemon, a subsidiary of Huicheng Technology. In 2017, Huicheng Technology acquired Dokemon, which made a move for the layout of the game field. At that time, Huicheng Technology acquired 77.57% of the shares of Dorkomon at a consideration of 1.383 billion yuan, with an appreciation rate of 2759.59%.

Huicheng Technology and Dokemon signed a performance valuation adjustment agreement, in which the latter promised that the net profit realized from 2017 to 2019 (calculated on the basis of the lower before and after deducting non-recurring gains and losses) would not be less than 145 million yuan, 188 million yuan and 245 million yuan respectively. According to the announcement at the time, Dokémon completed the performance gambling every year.

However, by 2020, once the performance bet was completed, Dokemon's performance quickly "changed face". In the current period, Dokemon's revenue fell 33.32% year-on-year to 462 million yuan, and its net profit fell 82.49% year-on-year to 46 million yuan. To this end, Huicheng Technology also made a provision of 908 million yuan for goodwill impairment.

"When things go wrong, there must be demons." The China Securities Regulatory Commission (CSRC) inquired, compared and calculated the prepaid accounts of Huicheng Technology, and found clues. The prepaid accounts in the financial statements of listed companies are mainly composed of Docomon and related subsidiaries, and are used for the purpose of prepaying promotion fees to game promotion companies.

The CSRC compared the business and financial data provided by Dokemon and its subsidiaries with advertising agencies, and found that Dokemon and its subsidiaries did not include the consumed recharge amount in sales expenses and operating costs, but instead posted a large amount of prepaid accounts.

After the CSRC adjusted according to the calculation method, Huicheng Technology was suspected of underrecording sales expenses of 222.1429 million yuan, underrecording operating costs of 8.000 million yuan, and inflating profits of 230.1429 million yuan in 2019, and in 2020, it was suspected of underrecording sales expenses of 76.2435 million yuan and inflating profits of 76.2435 million yuan.

In other words, Dokemon is using inflated profits to achieve the performance gambling goal in 2019. Due to the failure to complete the VAM, Huicheng Technology requested the relevant compensation obligor to compensate in accordance with the agreement on performance compensation in the Equity Transfer Agreement on Chengdu Dokemon Network Technology Co., Ltd., of which Kou Han should pay performance compensation of RMB 446,989,500.

According to the announcement on the progress of the litigation matters involved in the performance commitment compensation issued by Huicheng Technology, as of December 9, 2023, the compensation obligor Kou Han has paid a total of 100 million yuan in performance compensation to the company, and the balance of performance compensation to be paid to the company is 346.9895 million yuan.

As mentioned above, Kou Han paid 100 million yuan in performance compensation, and Huicheng Technology's net profit in 2023 was able to turn losses into profits, but it did not change the deduction of non-net profit to be negative.