GAODI HOLDINGS (01676) Suspicious Suspicions of a Flash Crash

Investors holding GAODI HOLDINGS (01676) have not yet awaited the 2024 fiscal year annual report that the company plans to disclose on September 30, but instead were caught off guard by a sudden "flash crash". On September 23, GAODI HOLDINGS plunged in the morning session, with the stock price dropping more than 78% at one point. By the close of trading, the stock closed at 0.54 Hong Kong dollars, down 67.86%. At the same time as the stock price plummeted, the trading volume of GAODI HOLDINGS also sharply increased, with the stock trading 33.727 million Hong Kong dollars throughout the day, corresponding to a turnover rate of 40.45%. Interestingly, GAODI HOLDINGS is set to disclose its 2024 fiscal year annual report in five trading days. The fact that GAODI HOLDINGS plummeted before the annual report "report card" was unveiled may indicate that the trading team behind it may have sensed danger in advance and took the "thirty-six stratagems, with retreat as the best option," or it could be that funds are escaping at any cost for other reasons unknown to the public. Looking back at the company's actions over the past few months, today's flash crash of GAODI HOLDINGS may not be simple. Firstly, the company completed two rounds of refinancing at the end of last year and in August this year. In the first round, GAODI HOLDINGS successfully issued 24 million new shares at a subscription price of HK$1.8 per share. Half a year later, the company issued 10.01 million new shares at a subscription price of HK$1.4 per share, raising over 57 million Hong Kong dollars in total. GAODI HOLDINGS frequent refinancing may be related to its consecutive losses and capital shortages. According to the company's financial report, as of December 31, 2023, GAODI HOLDINGS had cash and cash equivalents of only 41.982 million yuan. Additionally, the shareholding structure disclosed in the announcement of the two successful subscriptions by GAODI HOLDINGS differed significantly. After the most recent subscription, the largest shareholder holding the company was Foton Holdings Limited, whose shareholding was 27.48 million shares, accounting for approximately 17.84%, while the remaining public shareholders held a combined 75.66%. It is worth mentioning that in October last year, GAODI HOLDINGS (formerly known as "China Shenghai Group" at that time) announced that it intended to change its name to "FUTIAN HOLDINGS Limited," with the English name to be changed to "Foton Holdings Limited," which is currently the name of the company's largest shareholder. However, shortly after, GAODI HOLDINGS issued a clarification announcement, stating that the company would change its name to "GAODI HOLDINGS Limited." Comparing the announcement from eight months ago, at that time, the largest shareholder of GAODI HOLDINGS still held 52.5 million shares, while the combined shareholding percentage of the other public shareholders was less than 40%. In addition to significant changes in the shareholder structure, the top management of GAODI HOLDINGS has also undergone changes in recent months. On July 29, GAODI HOLDINGS announced that Hujongchu resigned as chairman of the board and executive director of the company, with the successor being the company's chief executive, 33-year-old Li Tingfeng. After the disclosure of the personnel changes announcement, GAODI HOLDINGS had two consecutive trading days of gains and reached HK$1.8 in intraday trading on August 1, setting a new high for its stock price. However, in less than two months, the stock price of GAODI HOLDINGS had evaporated by 70%. Years of losses cloud the way forward GAODI HOLDINGS can be considered a familiar face in the Hong Kong stock market, as the company first listed on the Hong Kong Stock Exchange in 2017. However, as mentioned earlier, the company's stock abbreviation was "China Shenghai Group" until this year. On January 15, the company's Chinese name was officially changed from "China Shenghai Group Limited" to "GAODI HOLDINGS Limited," and two months later, the company's stock abbreviation was changed to "GAODI HOLDINGS." Compared to the company's current name, the original name with "Shenghai" might have been more helpful for investors to understand the company's business. According to the official website, GAODI HOLDINGS is headquartered in Xiamen, and the company mainly sells dried seafood, algae, mushrooms, seafood snacks, and frozen seafood products under the "Wofeng" brand. However, starting in 2020, perhaps to develop new business or balance business risks, GAODI HOLDINGS has also ventured into daily necessities and cosmetics businesses. According to GAODI HOLDINGS's most recent financial report, the company's performance does not have many highlights. In the first half of the 2024 fiscal year (July-December 2023), GAODI HOLDINGS achieved revenue of 196 million yuan, all of which came from the food business. During the same period, the consumer goods and other businesses did not generate any revenue; in comparison, the revenue from these businesses in the same period the previous year was 581,000 yuan, accounting for only 0.5% of the total revenue. Although the company's total revenue increased by 60% year-on-year due to increased food sales, profitability remains a major challenge for GAODI HOLDINGS. During the reporting period, GAODI HOLDINGS had a gross profit of 6.59 million yuan, with a gross profit margin of only 3.4%, a slight increase of 0.8 percentage points compared to the same period last year. At the same time, the company's net loss was 40.312 million yuan, narrowing slightly from 44.631 million yuan in the same period last year, but the turnaround seems distant. Significant changes in shareholders and management add to uncertainty Due to poor management, the already thin financial base of GAODI HOLDINGS is facing significant financial pressure. In order to ensure sufficient financial resources to cope with the increasingly complex business environment, GAODI HOLDINGS conducted two refinancing activities in November 2023 and July of this year.Although in terms of results, GAODI HOLDINGS' two private placements were successful, raising a total of over 57 million Hong Kong dollars in funds, the company's problems may not be limited to the financial aspect, considering the series of operations leading up to this point and the significant fluctuations in stock prices today. Looking back in time, GAODI HOLDINGS may have encountered a major operational crisis as early as 2022. In September of that year, GAODI HOLDINGS, then known as China Shenghai Group, announced that Li Yinglin and Ma Demin from the firm Luo Shenmei Corporate Advisors had been appointed as the receivers of the company's controlling shareholder, Raychi Limited. Raychi Limited was originally fully owned by Liu Rongru, the executive director, co-chairman, and CEO of China Shenghai. According to the announcement at the time, the reason for the receivership of Raychi Limited, the major shareholder of China Shenghai, was that Liu Rongru failed to fulfill his repayment obligations under several loan arrangements with Ultima Prime. As a pledgee, Ultima Prime, according to the share pledge agreement between Liu Rongru and Ultima Prime, appointed the receivers. It is worth mentioning that the former chairman of the board of directors of GAODI HOLDINGS, Hu Hongchu, took office in April 2023, just over a year ago. It was in August of that year that Liu Rongru stepped down as CEO and director of the company, appointing Li Tingfeng to replace him. According to the Tianyancha app, Raychi Limited has been dissolved. A search for "FOTON HOLDINGS LIMITED" yields "FUTIAN HOLDINGS LIMITED," which was established one year ago. As mentioned at the beginning of this text, as of August 14, FOTON HOLDINGS LIMITED was the largest shareholder of GAODI HOLDINGS, holding 17.84% of the shares. This suggests that the ownership structure of GAODI HOLDINGS may be quite dispersed. A search through the Hong Kong Exchanges and Clearing Limited Central Clearing and Settlement System also reveals that there are a large number of brokerage firms currently holding GAODI HOLDINGS, with relatively dispersed stakes. The top three brokers, including KGI ASIA LIMITED, Central Rich International Limited, and Great Wall Securities, hold stakes of 8.62%, 6.47%, and 6.31%, respectively. Furthermore, GAODI HOLDINGS has had frequent transfer and storage activities in April and August this year, which may be a prelude to major shareholders divesting shares. For example, on August 9, there was a transfer activity involving GAODI HOLDINGS where Central Rich International Limited transferred out and Hong Kong Shanghai HSBC Bank transferred in, with a transfer ratio of 3.86%; seven days later, there was a storage activity with a storage ratio of 6.95 and Central Rich International Limited as the storage broker. Considering all the information, GAODI HOLDINGS currently seems to be in a precarious situation, with uncertainty still building up. Apart from changes in the ownership of the management and major shareholders, GAODI HOLDINGS' business strategy appears to have deviated from its previous course. According to GAODI HOLDINGS' previous interim report, the company planned to actively engage in new business ventures, with a focus on internet services less related to its traditional business. This may indicate that the company is abandoning its previously promising fast-moving consumer goods business.