The debt-to-equity ratio of ZALL SMARTCOM (02098), which has doubled its net profit, has rapidly exceeded 50%. The future outlook is far from optimistic.

Recently, several industrial e-commerce companies have successively released mid-term performance reports, showing a positive development trend in general. Among the 10 listed industrial e-commerce companies, 4 have revenue exceeding 10 billion yuan, 8 have achieved positive revenue growth, 7 have positive net profits, and 6 have positive net profit growth. Among them, ZALL SMARTCOM (02098), with a scale of over 100 billion, also achieved significant growth in performance, with revenue of approximately 68.276 billion yuan in the first half of the year, a year-on-year increase of 24.29%; the net profit attributable to equity shareholders of the company was 49.817 million yuan, an increase of 122.76% year-on-year. However, while the performance is improving, the company has significantly reduced pledged bank deposits and the asset-liability ratio has been steadily climbing, seemingly hinting at risks and concerns behind the fundamentals. By the close of September 11th, the company's stock price fell by over 6% intraday, with trading volume further shrinking, reflecting market pessimism towards ZALL SMARTCOM. It is worth noting that despite the improvement in revenue indicators in the first half of the year, the company's financial situation is difficult to be optimistic. As of June 30, 2024, the company had current liabilities of 42.346 billion yuan, non-current liabilities of 7.309 billion yuan, and current liabilities accounting for 85.3%. Among them, loans from banks and other financial institutions due within one year amounted to 5.657 billion yuan (fixed annual interest rates ranging from 3.45% to 11.75%), and other loans due within one year amounted to 2.594 billion yuan (fixed annual interest rates ranging from 4.00% to 12.00%). Industry insiders point out that the high proportion of current liabilities reflects the increasing difficulty for ZALL SMARTCOM to obtain long-term, stable, and low-cost loans from banks. The company's adjusted net debt increased by 185% to 7.187 billion yuan from 3.878 billion yuan in the same period last year, and the asset-liability ratio surged from 28.09% in the same period last year to 51.90%, mainly due to a significant decrease in pledged bank deposits. Previously, in order to alleviate financial pressure, ZALL SMARTCOM had announced at the end of 2022 that it would sell its Tianjin e-commerce mall project at a low price to recover 1 billion yuan in cash, with 95% of it used to repay various debts. The net asset value of this project was about 1.205 billion yuan, resulting in a loss of about 205 million yuan for the company. "Zuoer Group" has a huge empire, but negative news keeps coming In fact, in recent years, the "Zuoer Group" to which ZALL SMARTCOM belongs has frequently been associated with unfavorable news, and there are still many hidden worries about the security of the company's capital chain. In February 2022, the Zuoer Group was embroiled in a "wage arrears" storm when the football player Hao Junmin posted on Weibo, demanding back pay from the Wuhan Zuoer club, which was owned by Zuoer at the time. He stated, "The salary was promised to be resolved by the end of the year, then before the end of the year, and now they say after the Lunar New Year." In this public post demanding back pay, Hao Junmin also specifically mentioned Zuoer's actual controller Yan Zhi. Yan Zhi is a football enthusiast. At the end of 2011, Zuoer spent a huge amount of money to take over the Wuhan Football Team, operating for more than 11 years, with a total investment of over 3 billion yuan. However, after being publicly accused, a series of behind-the-scenes operations involving this huge investment gradually came to light. In January 2024, in a CCTV annual anti-corruption documentary, the former chairman of the Wuhan Zuoer Club, Tian Xudong (who had served as Zuoer Holdings' vice president), admitted to engaging in transactions of power and money with the former head coach of the national football team, Li Tie, at the club, with the club offering huge sums to bribe relevant personnel. Shortly after the case came to light, the Wuhan Zuoer club was disbanded. Football is just a part of the Zuoer commercial empire. Yan Zhi is adept at telling the story of an industrial ecological circle to external parties, and likes to pursue a diverse, large-scale business empire. Public information shows that the "Zuoer Group" includes 5 listed companies including ZALL SMARTCOM, China Tongshang, Lanting Jieshi, Wuhan Huazhong Numerical Control, and Hanshang Group, and is involved in various industries such as e-commerce, textiles, agriculture, aviation, finance, medicine, real estate, and sports. Among them, real estate, football, private banks, P2P, and other high-risk projects have been repeatedly exposed for various irregularities. ZALL SMARTCOM is the core enterprise of the group, and initially, real estate was one of ZALL SMARTCOM's core businesses. In addition to wholesale markets, it also ventured into the development of office buildings, large urban complexes, and residential projects. Since 2015, ZALL SMARTCOM has transitioned from a traditional real estate development company to an e-commerce enterprise, but the Zuoer Group has not completely abandoned the real estate market, instead engaging in real estate development through two companies, Zuor Culture and Tourism (now known as Huazhong Hualv Group) and Zuoer Zhicheng. However, progress in the real estate sector has not been smooth for Zuoer. For example, the Zuoer Shenyang Living Room project, which has attracted attention, has made significantly delayed progress compared to expectations, and in recent years the company has added a lot of information on persons being executed. According to statistics, since 2022, Zuoer Culture and Tourism and its subsidiaries have been executed for a total amount of 108 million yuan. Zuoer Zhicheng was also listed as a dishonest executor by the court on December 1, 2022. On the other hand, the financial sector under the "Zuoer Group" has also faced challenges. Previously, Jiashi Fund had ventured into P2P business, trying out the P2P lending platforms "Qianduoduo" and online lending information intermediaries.Platform "Jiashiliu". However, against the backdrop of increasingly stringent regulation of Internet finance, Jiashiliu announced its withdrawal from the online lending industry in June 2020. In 2019, ZALL SMARTCOM divested its financial assets and sold all the equity in ZALL Financial Services.In addition to P2P business, Zhuoer also lays out multiple business sectors through Zhongbang Bank, Zhongbang Fund, Zhongbang Gold Control, including industrial finance, wealth finance, supply chain finance, as well as investing in government public projects (PPP, characteristic towns, industrial parks) and personal life (health, culture, tourism) and more. The 2023 annual report shows that Zhongbang Bank is now in a difficult situation: its asset size has fallen out of the top three, the non-performing loan ratio has been rising for three consecutive years, its capital adequacy ratio ranks last among 18 private banks, it ranks first among private banks in terms of the amount of fines and number of penalties received for violations of laws and regulations. In addition, half of the bank's shareholders are involved in legal disputes. From a media person running advertising business, Yan Zhi has gradually become the richest man in Hubei Province, and he can be said to be an expert in playing the capital market. By holding shares with the Fullshare Group, he once single-handedly pushed ZALL SMARTCOM's market value to exceed HK$100 billion, with Fullshare's holding of ZALL SMARTCOM shares appreciating by more than HK$6.6 billion at its peak. However, with the stock price of the controlling shareholder Fengsheng Holdings being shorted and ZALL SMARTCOM's share price dropping significantly, the investment returns of both companies turned into losses, and the game of cross-shareholding gradually came to an end. Through a series of operations in the capital market in recent years, the "Zhuoer Group" has successively controlled Hanshang Group, Wuhan Huazhong Numerical Control and other listed entities, using them as pawns and tools for the next capital operation. In February 2023, Wuhan Huazhong Numerical Control announced plans to invest a total of 321 million yuan to buy the rights to use two pieces of land and 11 buildings developed on those lands from Wuhan Zhuoer Aviation City Investment Co., Ltd. (referred to as "Zhuoer Aviation City"), but because the transferring party Zhuoer Aviation City and Wuhan Huazhong Numerical Control have the same actual controller Yan Zhi under control, this related party transaction has caused market controversy, prompting the Shenzhen Stock Exchange to issue a special inquiry letter requesting the company to explain the necessity and reasonableness of this transaction. It is understood that as of the end of 2022, Zhuoer Aviation City's total liabilities amounted to 371 million yuan. If the transaction is successfully completed, the "Zhuoer Group" will receive cash inflow, helping to ease the debt problem. According to data from Hithink RoyalFlush Information Network iFinD, since its listing in 2011, ZALL SMARTCOM has only distributed dividends 5 times, with the most recent being the annual dividend in 2018 of HK$0.0258 per share. From 2018 to 2023, despite the company's revenue increasing from 56.116 billion yuan to 125.29 billion yuan, a growth rate of 123%, the company has not distributed any dividends during this period, indicating the company's financial situation is not robust. In the face of the pressure of macroeconomic recovery, ZALL SMARTCOM's debt ratio has risen rapidly, coupled with adverse news about the "Zhuoer Group" constantly emerging, these undoubtedly will further shake market confidence in the company.