Tianze Information's M&A loan overdue case is sentenced, Youkeshu's equity may be sold

In 2019, Tianze Information completed the acquisition of Youkeshu, and Youkeshu officially became a subsidiary of Tianze Information. After the acquisition, Tianze Information did not thrive as expected, but suffered losses for three consecutive years. The loans obtained from banks to complete the acquisition were also overdue to varying degrees, and even reached the point of selling buildings to repay the loans...

Recently, the first-instance judgment was announced in the M&A loan dispute between Tianze Information and Pudong Development Bank. Part of the equity of the subsidiary Youkeshu may be sold. How should Tianze Information stop the loss in the future?

First-instance judgment on Tianze Information's M&A loan overdue dispute

There has been new progress in the dispute over overdue M&A loans between Tianze Information and Nanjing Branch of Shanghai Pudong Development Bank Co., Ltd. (hereinafter referred to as "SPD Bank").

Tianze Information recently issued an announcement stating that the company received the Civil Judgment No. (2021) Su01 Minchu 2120 delivered by the Nanjing Intermediate People's Court. The Nanjing Intermediate People's Court has made a first-instance judgment on the above-mentioned dispute. The main contents of the judgment are as follows:

(1) Tianze Information shall pay the principal of the outstanding debt to Pudong Development Bank within ten days from the date when the judgment becomes legally effective.

184.92 million plus interest, penalty interest and compound interest;

(II) Tianze Information shall pay the attorney's fees to Shanghai Pudong Development Bank within ten days from the date when the judgment becomes legally effective.

150,000 yuan;

(III) With respect to the claims determined in the first and second judgments above, SPDB has the right to receive priority payment from the proceeds of the discount, auction or sale of the 48.9991% equity interest in Shenzhen Youkeshu Technology Co., Ltd. pledged by Tianze Information;

(IV) Yuanjiang Information Technology Co., Ltd. (hereinafter referred to as “Yuanjiang Information”), Sun Borong and Jin Wei shall bear joint and several liability for the payment obligations of Tianze Information as determined in the first and second judgments above; after Yuanjiang Information, Sun Borong and Jin Wei assume the guarantee responsibility, they shall have the right to seek compensation from the Company;

(V) Dismiss the other litigation requests of Pudong Development Bank.

This judgment is a first-instance judgment and has not yet taken effect. It is currently impossible to determine the specific impact of the progress of this lawsuit on Tianze Information's current or future profits.

According to the Civil Procedure Law of the People's Republic of China, the courts of China implement a two-instance final judgment system for civil cases. That is to say, Tianze Information can appeal to a higher court within the statutory period. If Tianze Information agrees with the first-instance judgment, then Pudong Development Bank will have the right to discount, auction or sell off 48.9991% of the shares of Shenzhen Youkeshu.

In 2019, Tianze Information paid RMB 3.4 billion to purchase 99.9991% of the shares of Shenzhen Youkeshu held by 32 counterparties including Xiao Siqing. Youkeshu officially became a subsidiary of Tianze Information.

As the supporting funds raised for this restructuring have not yet been in place, Tianze Information applied for RMB 210 million in M&A loans from the Nanjing Branch of Shanghai Pudong Development Bank Co., Ltd. and the Nanjing Branch of China Minsheng Bank Co., Ltd., totaling RMB 420 million. At the same time, Tianze Information also pledged 48.9991% and 51% of Youkeshu’s equity to the two banks respectively.

However, affected by its operating conditions, Tianze Information's funds available to maintain basic operations have become increasingly tight, and its M&A loans from the two banks have been overdue to varying degrees.

In August 2020, Minsheng Bank filed a lawsuit with the Nanjing Intermediate People's Court. Given that Tianze Information's available funds could not fully cover the principal and related interest of Minsheng Bank's RMB 89 million overdue M&A loan, after full communication with Minsheng Bank, Minsheng Bank planned to initiate judicial proceedings to auction the Tianze Star Network Building to repay the company's overdue M&A loan.

2019-2021 is the period of explosive growth of cross-border e-commerce. Tianze Information completed the acquisition of Youkeshu in 2019. Logically, it should have been able to reap the huge dividends of cross-border e-commerce. Then why does its cash flow have frequent problems, and even has to sell buildings to repay loans?

Data shows that Tianze Information's operating income from 2019 to 2021 was 3.867 billion yuan, 5.027 billion yuan, and 1.764 billion yuan, respectively, while the net profit attributable to shareholders of the listed company after deducting non-recurring gains and losses was -1.31 million, -910 million, and -2.68 billion yuan, respectively.

It is reported that Tianze Information has suffered losses in recent years. In addition to the fluctuations in some business operations due to the COVID-19 pandemic and platform policies, the other losses were mainly due to the impairment of assets such as goodwill, inventory, and accounts receivable . However , the losses in 2021 are closely related to the losses in cross-border e-commerce business.

How will Tianze Information respond to a net profit loss of 2.676 billion?

In 2021, Tianze Information achieved operating income of 1.764 billion yuan, a decrease of 64.91% compared with the same period last year ; of which the net profit attributable to the parent company's owners was -2.676 billion yuan , a decrease of 207.30% compared with the same period last year .

Tianze Information said that the main reasons for the decline in performance and losses were the adverse effects of changes in Amazon platform policies and fierce competition in the European and American markets. In 2021, Amazon platform policies have become increasingly stringent in controlling Chinese cross-border sellers. A large number of Shenzhen Youkeshu’s stores on the Amazon platform were closed, sales channels became narrower, and a large amount of inventory was unsalable.

In order to avoid further unbearable losses and reduce inventory management costs, Shenzhen Youkeshu continued its past inventory clearance method and was forced to sell at low prices through offline channels. It is reported that Youkeshu's offline sales gross profit margin was -906.87% in 2021, resulting in a lower gross profit margin for cross-border e-commerce throughout the year.

Under this circumstance, Tianze Information's cross-border e-commerce operating performance declined sharply in 2021, with revenue down 66.55% year-on-year. However, Tianze Information stated that under the influence of multiple unfavorable factors, its cross-border e-commerce business still achieved a revenue of 1.588 billion yuan . In the future , Tianze Information will continue to optimize its operating efficiency and business model to cope with changes in the external operating environment and market competition pattern , and its future development prospects are still relatively optimistic.

When talking about the business plan for cross-border e-commerce business in 2022 , Tianze Information stated that it will further improve the construction of the internal control system, pay more attention to the analysis, identification and prevention of platform policies and operational risks, balance the relationship between operational efficiency and compliant operations, and strive to reduce the adverse impact of changes in the policy environment of mainstream platforms such as Amazon on the company's subsequent operations, and strive to achieve stable operation of cross-border e-commerce business.

In order to cope with the operating losses , Tianze Information said that it will adjust its product development strategy, focusing on expanding product categories that are still in the blue ocean market, have a relatively long product life cycle, and are relatively slow to update. At the same time, it will further strengthen cooperation with high-quality and core supply chains to improve the overall turnover efficiency of products from development and launch, procurement and sales to inventory management.

Tianze Information also stated that it will strategically reduce the scale of its business, abandon product lines with little marginal contribution, and adjust its manpower to business teams with greater development potential. At the same time, it will sort out the management system, implement flat management, reduce management costs, and reduce cost losses caused by internal information blockage.

In the first quarter of 2022 , Tianze Information's cross-border e-commerce business achieved operating income of approximately 180 million yuan, and the net cash flow generated by overall operating activities has turned from negative to positive, an increase of 104.66% compared with the same period, and operating income in the second quarter has shown signs of stopping the decline.

Generally speaking, the various unfavorable factors facing the cross-border e-commerce industry in 2021 may just be temporary "inadaptability", and the overall trend of the industry continues to improve .

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