On the evening of September 24, Datang Telecom issued a stock trading risk warning announcement, clearly pointing out that the sharp fluctuations and continuous rise in the company's share price recently may trigger short-term risks for investors.

It is understood that Datang Telecom achieved a 10CM daily limit on September 13, 18, 19, 20, 23, and 24. The next day after the risk warning announcement was issued, Datang Telecom once again hit the daily limit in the morning session before plunging straight down to the limit, demonstrating a "sky-to-earth board" market.

The analysis of the reasons may be that there have been frequent favorable news recently, with concepts such as state-owned enterprise reform, mergers and acquisitions, real estate, and 5G being active. Many concept stocks have achieved consecutive board gains, with significant gains, which in turn triggered a batch of high-level popularity callback. In addition to Datang Telecom, Shenzhen Huaqiang, Nantian Information, Guohua Network Security, Qiming Information, Baobian Electric, and Bird Technology also saw significant declines.

'Sell, Sell, Sell' for Profitability

Datang Telecom was listed on the Shanghai Stock Exchange in October 1998 and is a large high-tech central enterprise managed by the State-owned Assets Supervision and Administration Commission of the State Council. The company's main business focuses on four industrial sectors: integrated circuit design, software and applications, terminal design, and mobile internet.

Since its listing, Datang Telecom's performance has fluctuated significantly, with the lowest and highest net profits being a loss of 1.776 billion yuan in 2016 and a profit of 564 million yuan in 2018, respectively. To improve profitability and further focus on its main business, Datang Telecom began mergers and acquisitions in 2020, gradually divesting some non-core businesses and low-efficiency holding and joint-stock enterprises.

Public information shows that in July 2020, Datang Telecom's subsidiary Lianxin Technology transferred 15% of its equity in Chenxin Technology to a consortium through public listing on the Beijing Stock Exchange, with a corresponding listing price of 277 million yuan. After the transfer, Datang Telecom still indirectly held 2.23% of Chenxin Technology's shares.

At that time, Chenxin Technology was in the R&D investment period for its next-generation products, and the short-term benefits of its existing business could not compensate for all investments, which would have a negative impact on the profits of the listed company. Therefore, the company's equity was transferred.

In September 2021, Lianxin Technology once again transferred 6.701% of its equity in its joint-stock company Lingsheng Technology through public listing on the Guangdong United Assets and Equity Exchange. The listing price and final transaction price were both 200 million yuan, of which Xiaomi Industry Fund and Yantai Zhilu each acquired 3.3505% equity in Lingsheng Technology and paid a consideration of 100 million yuan each.

Data shows that Lingsheng Technology continued to incur losses in the first quarter of 2021, 2020, and 2019, with net profits of -129 million yuan, -365 million yuan, and -354 million yuan, respectively. Similar to Chenxin Technology, Lingsheng Technology's main products and technologies at that time were still in the critical period of R&D testing and industrialization, and market recognition was still uncertain, which would put some pressure on the company's overall business development in the short term.

In September 2023, Datang Telecom planned to transfer six non-core assets, including 100% equity of Lianxin Technology, 56.38% equity of Datang Semiconductor, 80.00% equity of Chengdu Information, 30.82% equity of Jiangsu Security, 20.00% equity of Datang Energy Saving, and 14.37% equity of Datang Smart Card, to Datang Development. At the same time, it planned to purchase 71.7862% equity of Datang Microelectronics held by Datang Semiconductor, with a transaction value of up to 968.6946 million yuan. Currently, 35.8473% of the equity in this plan has completed business registration formalities.

It is worth noting that Lianxin Technology, once a core enterprise of Datang Telecom, exited the mobile chip business in 2022 and sold its core technology in a package, contributing to Datang Telecom's financial stability.

It can be seen that in recent years, Datang Telecom has been rushing down the path of asset sales, with the goal of focusing on its two main businesses of "security chips + special communications" to improve the company's operating performance.

Entangled in lawsuits with compensation of 245 million yuan

So, has Datang Telecom's performance really improved due to the "sell, sell, sell" strategy?

According to financial report data, Datang Telecom achieved total operating revenue of 285 million yuan in the first half of 2024, a year-on-year decrease of 33.25%; operating costs were 157 million yuan, a year-on-year decrease of 34.56%; total expenses and other costs amounted to 172 million yuan, a year-on-year increase of 0.71%; net profit was still in the red, with a loss of 61.8174 million yuan, but the year-on-year decline narrowed by 29.67%.

It can be seen that the effectiveness of the "sell, sell, sell" strategy is present but limited.

In addition to normal operational benefits and industry competition risks, the risk warnings in the financial report also mention the litigation risks of Datang Telecom and its subsidiaries.

It is understood that a series of sales contracts signed early on between Taiyue System Integration, a wholly-owned subsidiary of Shenzhou Taiyue, and Datang Semiconductor, Datang Microelectronics, Shilitonghe, led to disputes during the performance process. These contract disputes involved huge amounts of money and lasted for a long time.

As early as April 2018, Shenzhou Taiyue filed a lawsuit with the court, requesting Datang Semiconductor and Datang Microelectronics to pay contract payments and corresponding liquidated damages, with a total amount of approximately 425 million yuan. However, this lawsuit was ultimately dismissed. Shenzhou Taiyue did not give up and went through more trials and dismissals before finally passing the preliminary review of case filing materials in November 2021, with a total of 50 cases accepted and a total amount involved exceeding 703 million yuan.

After judicial adjudication, Taiyue System Integration reached a settlement agreement with Datang, under which Datang would pay half of the non-refundable portion of the payables owed to Shilitonghe in the corresponding cases by Taiyue System Integration, including 50% of the principal, 50% of the interest, acceptance fees, and preservation fees, totaling 245 million yuan.

According to the settlement agreement, Datang Microelectronics paid the full amount to Shenzhou Taiyue on September 23, 2024.

The final payment of 245 million yuan is significantly lower than the initial claim of 703 million yuan made by Shenzhou Taiyue, which to some extent alleviates the company's financial risks. However, for Datang Telecom, which has consistently reported negative net profits, this is still a considerable amount.

Datang Telecom emphasized that this incident did not have a negative impact on the company's overall financial situation and provided a stable legal environment for the company's future development.

However, industry insiders analyzed that Datang Microelectronics and Shilitonghe, subsidiaries of Datang Telecom, faced huge accounts receivable issues as defendants in the lawsuit. If these accounts receivable cannot be collected or need partial compensation, it will directly affect the cash flow and financial position of Datang Telecom and its subsidiaries. Datang Telecom may need to fully provision for bad debts on accounts receivable in its financial statements to prepare for possible financial losses. This will lead to a reduction in the company's total assets, which in turn may affect the company's profitability and shareholders' equity.

Hot money rushes to participate in speculation

On September 25, before the publication of this article, Datang Telecom was quoted at 8.42 yuan per share, with a gain of -9.95% and a turnover rate of 27.84%.

Data from the Dragon and Tiger List shows that the top five buying seats combined to buy 137.8421 million yuan, while the top five selling seats combined to sell 119.2260 million yuan, resulting in a net buying volume of 18.6161 million yuan.

The top buyer was Haitong Securities Co., Ltd.'s Wenzhou Jinxiu Road Securities Business Department, with a purchase of 30.5463 million yuan; the second buyer was Shandong Bang, with a purchase of 30.1006 million yuan; and the third buyer was East Asia Qianhai Securities Co., Ltd.'s Sichuan Branch, with a purchase of 27.9920 million yuan.

The top seller was Fuzhou Changle North Road Securities Business Department of Donghai Securities Co., Ltd., with a sale of 33.5541 million yuan; the second seller was Shanghai Huangpu District Beijing East Road Securities Business Department of Dongfang Securities Co., Ltd., with a sale of 29.5853 million yuan; and the third seller was Hangzhou Daguan Road Securities Business Department of Donghai Securities Co., Ltd., with a sale of 19.1039 million yuan.

Industry insiders said that Datang Telecom is undergoing a major asset reorganization, which has had a positive impact on its share price. The market generally expects that after the reorganization is completed, the company's fundamentals will improve, driving up its share price. However, the computer, communications, and other electronic equipment manufacturing industries in which the company operates are highly competitive. The overall trend of the industry, policy environment, and market demand are all factors that may affect Datang Telecom's share price.