Hualin Securities became the brokerage with the largest decline in net profit, and the private placement was suspended for filing, and the regulatory letter was received due to the issue of letter disclosure

The only asset management business that grew was suspended from private placement filings and paid high taxes

"China Science and Technology Investment", Zhang Ting, He Ziyan

A few days ago, Hualin Securities (002945.SZ) failed to consider the risk signs in the default arbitration case of the "Red Expo Exhibition Trust Beneficiary Rights Asset-backed Special Plan" (hereinafter referred to as the "Red Expo Exhibition Case") in the performance forecast, and failed to accurately accrue business and management fees, resulting in a large difference between the net profit attributable to the parent in the 2023 annual report and the revised performance forecast attributable to the parent company, as well as the delay in disclosing the Shanghai International Economic and Trade Arbitration Commission's "Award". The Tibet Supervision Bureau of the China Securities Regulatory Commission (hereinafter referred to as the "Tibet Securities Regulatory Bureau") shall take supervision and management measures to issue warning letters to the relevant responsible personnel, and record the relevant circumstances in the integrity file of the securities and futures market.

In addition to saddling Hualin Securities with high compensation and a regulatory warning letter, the Red Expo exhibition case also dragged down Hualin Securities' performance in 2023. In the past, the product filing was suspended for six months due to a number of violations in private placement management, and then it was notified to pay high taxes, and Hualin Securities also faced frequent management turnover and lax internal control.

The knock-on effect of the Red Expo exhibition case

On the evening of May 9, Hualin Securities announced that it had received the "Decision on Administrative Supervision Measures" issued by the Tibet Securities Regulatory Bureau. After investigation, Hualin Securities did not consider the risk signs of the Red Expo exhibition case in the performance forecast, and did not accurately calculate business and management fees, resulting in a large difference between the net profit attributable to the parent company of 172 million yuan to 218 million yuan in the performance forecast of the 2023 annual report and the net profit attributable to the parent of 25 million yuan to 37 million yuan in the 2023 performance forecast revision announcement. At the same time, on February 18, 2024, after receiving the award of the Shanghai International Economic and Trade Arbitration Commission, Hualin Securities delayed the disclosure until February 27, 2024, violating the disclosure regulations. The Tibet Securities Regulatory Bureau has taken the supervision and management measures of issuing a warning letter to Lin Li, chairman of the board of directors, Zhu Song, general manager and chief financial officer, and Xie Yingming, secretary of the board of directors, and recorded the relevant situation in the integrity file of the securities and futures market.

In this regard, Hualin Securities responded in the announcement that the company and relevant personnel attached great importance to it after receiving the "Decision", and will earnestly learn lessons in the future, further improve the awareness of standardized operation, strictly abide by the provisions and requirements of relevant laws, regulations and normative documents, improve the quality of financial information disclosure and the management level of information disclosure affairs, prevent similar situations from happening again, and effectively safeguard the interests of investors.

However, the disadvantages brought by the Red Expo exhibition case to Hualin Securities do not stop there. In September 2017, Hualin Securities, as the manager of the "Hongbo Trust Plan", subscribed for "17 Hongbo 04", "17 Hongbo 05" and "17 Hongbo 06" asset-backed securities. However, due to the failure of the asset-backed special plan to complete the income distribution on time in October 2018, the default clause of the special plan was triggered. Bank of Dalian initiated arbitration against Hualin Securities in May 2022.

In May 2019, Hualin Securities also received a warning letter from the Heilongjiang Supervision Bureau of the China Securities Regulatory Commission due to the above-mentioned dispute, which pointed out that Hualin Securities' due diligence on specific original equity holders and guarantors was not in place, some risk prevention measures for the special plan during the duration management period, credit enhancement measures were not in place, risk monitoring was not timely, and disclosure was insufficient.

On February 27 this year, Hualin Securities disclosed the "Award" made by the Shanghai International Arbitration Center in the above-mentioned case. According to the arbitration results, Hualin Securities was ordered to compensate Dalian Bank for a total of about 230 million yuan, including repaying 228 million yuan for the principal loss of the corresponding asset-backed securities subscribed by Dalian Bank. Hualin Securities did not take into account the possible huge compensation in the case when making the 2023 performance forecast, which also directly led to a sharp downward revision of Hualin Securities' performance forecast and a sharp decline in profits in 2023.

According to the 2023 performance report, Hualin Securities achieved operating income of 1.015 billion yuan, a year-on-year decrease of 27.38%; The net profit attributable to the parent company was 31.69 million yuan, a year-on-year decrease of 93.18%, becoming the listed brokerage with the largest decline in net profit. The performance of Hualin Securities in recent years has also been unsatisfactory, and its net profit has declined for three consecutive years. From 2021 to 2022, Hualin Securities achieved revenue of 1.395 billion yuan and 1.398 billion yuan respectively, a year-on-year increase of -6.34% and 0.17% respectively; The net profit income was 484 million yuan and 465 million yuan respectively, down 40.46% and 3.94% year-on-year respectively.

In terms of business income, in addition to the asset management business, in 2023, the business income of Hualin Securities will decline year-on-year. Among them, the wealth management business income of Hualin Securities was 819 million yuan, accounting for 80.66%, a year-on-year decrease of 5.98%; investment banking business income was 104 million yuan, down 39.33% year-on-year, and other business income was 85.332 million yuan, down 50.83% year-on-year; The self-operated business suffered a loss of 42 million yuan, a year-on-year decrease of 129.66%, due to the overall volatility of the A-share market last year and the obvious impact of industry structure differentiation. The only business with an increase in revenue of Hualin Securities is the asset management business, with an income of 49.7992 million yuan last year, a year-on-year increase of 26.87%. However, in January this year, Hualin Securities was taken by the Tibet Securities Regulatory Bureau to take administrative supervision measures and suspend the filing of new private asset management products for six months, which may affect its performance in 2024.

In the first quarter of 2024, Hualin Securities continued the decline in net profit, achieving revenue of 273 million yuan, a year-on-year increase of 12.02%; The net profit income was 54.8272 million yuan, a year-on-year decrease of 12.83%.

In addition to the huge amount of litigation compensation, on April 8 this year, Hualin Securities received the "Tax Treatment Decision" issued by the Inspection Bureau of the Lhasa Municipal Taxation Bureau of the State Administration of Taxation, which needs to pay 29.3232 million yuan of enterprise income tax from 2018 to 2021, and bear a late fee of 5/10,000 of the overdue tax on a daily basis from the date of the overdue tax, with a preliminary estimate of about 18 million yuan, and a total amount of about 47.32 million yuan, which will also have an impact on the net profit attributable to shareholders of listed companies in 2024.

Internal control issues are worrisome

In addition to being pointed out by the regulator in the Red Expo exhibition case, there are loopholes in the company's internal risk control and compliance, in January this year, Hualin Securities was once again named by the regulator for risk control and compliance issues in private equity management. On January 27, Hualin Securities invested in the related bonds of the ultimate investor due to the private asset management business, which has the characteristics of channel business; Imperfect management of investment targets and counterparty alternative databases; There are defects in the setting of risk control indicators in the trading system; Deficiencies in the management of the duration of non-standard investments; omissions in information disclosure; The control mechanism for related-party transactions is not perfect; A total of seven problems of imperfect personnel and remuneration management mechanisms were ordered by the Tibet Securities Regulatory Bureau to make corrections and suspend the filing of new private asset management products for six months (except for newly issued products for the purpose of continuing the unexpired assets invested in existing products, but no new investments are allowed), and recorded in the integrity file of the securities and futures market.

In recent years, Hualin Securities' compliance and risk control issues have repeatedly stepped on the red line. In April 2023, Hualin Securities was ordered to rectify by the Tibet Securities Regulatory Bureau, and the regulatory letter pointed out that the company had "insufficient internal checks and balances and isolation, inadequate management of post authorization management and business personnel's qualifications, and failure to report or report new business in a timely manner".

Behind the worrying internal control problems of Hualin Securities, it may be related to the frequent turnover of its compliance director. On June 8, 2022, Lei Jie, the compliance director, chief risk officer and member of the executive committee of Hualin Securities, resigned due to personal reasons, and Peng Xiaojia, who had just been appointed as a member of the executive committee, served as the compliance director. On October 28, 2022, Peng Xiaojia resigned as compliance director and member of the executive committee, and then appointed Zhang Dawei as compliance director, who resigned in February this year. On April 26 this year, Hualin Securities appointed Liang Rendong as the compliance director, chief risk officer and member of the executive committee.

In addition to the frequent turnover of compliance directors, the management of Hualin Securities also changes frequently. For example, in October last year, CEO Zhao Weixing and Chief Financial Officer and Chief Risk Officer Guan Xiaobin resigned; Subsequently, he was replaced by Zhu Song, the former deputy general manager of Western Securities, who also served as the chairman of the executive committee, chief executive officer and chief financial officer. From March to April this year, Zhu Wenjin resigned as a member of the company's executive committee, vice chairman and member of the strategic planning and ESG committee of the board of directors; Due to work adjustments, Zhu Song applied for resignation as a director of the company, chairman of the risk control committee of the board of directors, and member of the strategic planning and ESG committee of the board of directors, and only retained the position of chief executive officer and chief financial officer of the company.

The reporter sent a letter to Hualin Securities on issues such as performance and internal control, but has not received a reply as of press time.