Falsely inflated revenue by 181 million, and suffered losses for six consecutive years. Hengxin Orient is about to be ST.

Hengxin Dongfang (300081.SZ) recently announced that it received an “Advance Notice of Administrative Penalty” (hereinafter referred to as the “Notice”). Due to the inflation of operating revenue by 182 million yuan in its 2022 annual report—accounting for 37.12% of the revenue disclosed for the period—the company and four former senior executives are proposed to be collectively fined a total of 12.5 million yuan.

Affected by this matter, the company’s stock will be subject to other risk warnings starting April 8, and the securities abbreviation will be changed to “ST Hengxin.”

Meanwhile, the company’s disclosed 2025 performance forecast shows that the full-year loss has expanded further. This is also the sixth consecutive year since 2020 in which the company has suffered performance losses, with the dual issues of internal control deficiencies and ongoing pressure on its core business becoming increasingly prominent.

Inflated Revenue of 181 Million

According to the Notice, Hengxin Dongfang’s financial fraud was mainly concentrated in the 2022 computing power system integration and technical services business.

In that year, the company conducted relevant business with two enterprises—Chuangyi Information (ST Chuangyi, 300366.SZ) and Nobikan (02635.HK). It respectively sold servers and supporting software, as well as related software products to them. However, in the above transactions, Hengxin Dongfang did not have control over the goods, yet it improperly used the gross method to recognize revenue from the relevant business, directly resulting in false records in the 2022 annual report.

Upon investigation, this violation led to Hengxin Dongfang’s 2022 operating revenue being overstated by 181 million yuan, with the inflated amount accounting for 37.12% of the company’s operating revenue disclosed for the period. In response to this violation related to information disclosure, the Beijing Securities Regulatory Bureau plans to issue an administrative penalty decision: to issue a warning to Hengxin Dongfang and impose a fine of 5 million yuan; to issue warnings to four involved executives—former chairman and general manager Meng Nan, deputy general manager Chen Wei, chief financial officer Wang Linhai, and deputy general manager Li Xiaobo—and impose fines of 2.5 million, 2.3 million, 2.0 million, and 0.7 million yuan, respectively. The total fines for the company and individuals amount to 12.5 million yuan.

According to relevant regulations, transactions of Hengxin Dongfang’s stock will be subject to other risk warnings. According to the announcement schedule, the company’s stock will be suspended for 1 day from the market open on April 7, then resume trading from the market open on April 8 and be subject to risk warning measures. The securities abbreviation will change from “Hengxin Dongfang” to “ST Hengxin,” while the stock code will remain unchanged and the daily price fluctuation limit will continue to be 20%. The company stated that it has completed financial retrospective restatement and rectification for the matters involved. It will apply to the exchange for removal of the risk warning after 12 months have passed since the issuance of the formal administrative penalty decision from the CSRC.

It is worth noting that the involved former deputy general manager, Li Xiaobo, had just left his position before the Advance Notice of Administrative Penalty was issued. On March 27, Hengxin Dongfang issued an announcement stating that Li Xiaobo resigned from the positions of deputy general manager and chief technology officer due to personal reasons. After his resignation, he no longer held any positions in the company. As of the date of the announcement, Li Xiaobo held 122.1k shares of the company.

In fact, this is not the first time Hengxin Dongfang has faced violations regarding accounting and information disclosure. In July 2023, the company received an administrative supervision measures decision from the regulatory authorities due to multiple issues, such as insufficient basis for impairment of intangible assets and incorrect settings of goodwill impairment parameters. In subsequent years, the company made multiple accounting error corrections to its annual and quarterly reports. In April 2024, it reduced the 2023 third-quarter operating revenue by 34.5132 million yuan; in August 2024, it further corrected errors in the listing of intangible assets in that year’s first-quarter report. Deficiencies in the internal control system have continued to be exposed.

A Dual Bind: Core Business Pressure and Management Flaws

Alongside the financial fraud and internal control irregularities is Hengxin Dongfang’s long-running slump in performance. According to available information, Hengxin Dongfang’s main business covers three segments: digital creative products application, internet video application services, and computing power system integration and technical services. The company has been trapped in losses for six consecutive years.

The company’s profitability has dropped sharply since 2020. From 2020 to 2021, Hengxin Dongfang’s net profit attributable to shareholders累计 recorded a cumulative loss of 8B yuan, wiping out all the profits earned after listing. The undistributed profits fell to a negative value. From 2022 to 2024, Hengxin Dongfang’s performance decline continued unchanged. The net profit attributable to shareholders for these three years was loss of 421 million yuan, 281 million yuan, and 346 million yuan, respectively. The loss amount of undistributed profits also expanded at the same time. By the end of 2024, the cumulative loss exceeded 1.5 billion yuan.

In 2025, Hengxin Dongfang’s loss amount continued to expand. According to the latest disclosed performance forecast, the company expects its full-year net profit attributable to shareholders to be between a loss of 365 million yuan and 475 million yuan. Compared with the loss in the same period last year, this represents an increase in the loss of 5.39% to 37.15%. After excluding non-recurring items, the net profit attributable to shareholders is expected to be at a loss of 355 million yuan to 452 million yuan, indicating that the core business’s profitability continues to worsen. Based on this estimate, by the end of 2025, Hengxin Dongfang’s loss in undistributed profits will exceed 2.0 billion yuan.

As for the reasons for continued losses, Hengxin Dongfang stated that fluctuations in industry conditions and its own operational and management issues have had a dual impact. From the industry perspective, although the computing power industry has been in a high-boom cycle in recent years, competition has intensified. Leading manufacturers, leveraging technical capabilities, scale, and supply-chain advantages, have captured most of the market share. Hengxin Dongfang’s computing power system integration business is still in the market cultivation stage, and has not formed a stable revenue scale or core competitiveness.

At the same time, due to demand from downstream customers, Hengxin Dongfang’s digital creative and internet video businesses have seen their overall gross margin continue to decline. In addition, there are indications that related assets in this business segment have goodwill impairment risks. The company expects that recognizing impairment losses will have a negative impact on profit for the current period. In the reporting period, the company’s finance costs also increased significantly year over year due to accounting treatment related to unrecognized financing costs, further dragging down net profit for the period.

It is also worth noting that the company’s controlling shareholder and actual controller, Meng Xianmin, has shares pledged at a high proportion. As of the date of the announcement, Meng Xianmin held 63.5448 million shares, representing a 10.51% ownership stake. Of these, 122.1k shares were pledged, accounting for 93.56% of his shareholding. Hengxin Dongfang said that the reason for Meng Xianmin’s high-proportion share pledges is due to personal financing needs and assurance measures he provided for the company’s financing. For the financing funds whose share-pledge terms have expired but have not yet been repaid, Meng Xianmin is actively communicating with creditors regarding the transfer of creditor claims and debt settlement.

As of the latest closing date, Hengxin Dongfang’s share price was 4.39 yuan, with a total market capitalization of 2.7 billion yuan. The stock price has fallen cumulatively by 15.41% within the year.

(This article comes from First Financial Daily.)