Author: Hengxin

Source: Bowang Finance

The once high-flying 'big bull' stock, Tuowei Information, has lost its luster.

According to its official website, Tuowei Information is a leading Chinese provider of integrated hardware and software products and services. It is also among China's top 100 software companies, top 100 information technology innovation enterprises, top 100 Internet companies, a key contributor to the HarmonyOS ecosystem, a strategic partner of Kunpeng, and a strategic partner of Ascend. Established in 1996 and listed in 2008, with its headquarters in Hunan, it has branches in Beijing, Shanghai, Shenzhen, and other locations. Its business covers software/exam services, intelligent computing, open-source HarmonyOS operating system, serving over 1500 government and enterprise customers across industries such as telecommunications, transportation, manufacturing, and education.

In 2017, Tuowei Information experienced a resurgence, partnering with Huawei. Huawei's native HarmonyOS NEXT, which entered public beta on October 8 this year, and the Huawei Mate X2 foldable phone launched in late September, both brought positive impacts to upstream and downstream companies in the industry. Tuowei Information's share price soared, more than doubling since mid-to-late August this year.

However, in reality, there is a divergence between Tuowei Information's performance and share price.

Recently, Tuowei Information released its financial report for the first three quarters of 2024, revealing a vicious cycle of 'increasing revenue without increasing profits.' According to the report, the company achieved revenue of 2.945 billion yuan in the first three quarters, up 57.26% year-on-year. However, its gross margin fell to 15.94%, a decrease of 7.68 percentage points from 23.62% in the same period last year, directly leading to a year-on-year decline of 84.85% in net profit to 11.0132 million yuan. In the third quarter alone, revenue reached 1.216 billion yuan, up 52.15% year-on-year, while net profit attributable to shareholders of the listed company was 7.678 million yuan, down 48.45% year-on-year.

Meanwhile, many senior executives of Tuowei Information are also selling their shares, busy 'cashing out.' According to The Paper, within just over half a month, nine senior executives have completed their share reduction plans, selling a total of 364,300 shares for approximately 5.358 million yuan. This behavior may be interpreted by the market as a sign of insufficient confidence in Tuowei Information's future development among senior executives.

Furthermore, Tuowei Information has also violated disclosure regulations. The Hunan Regulatory Bureau of the China Securities Regulatory Commission found that Tuowei Information had failed to disclose certain external guarantees as required, involving amounts as high as 356 million yuan. As a result, the company was ordered to rectify the situation, and warning letters were issued to five relevant responsible persons.

Has Tuowei Information squandered a good hand?

01

Revenue increased without profit growth in the first three quarters, no dividends for six consecutive years

Riding the industry wave, Tuowei Information's growth has been evident.

In recent years, Tuowei Information has focused on the 'AI + HarmonyOS' main track, deepening its layout in the field of reasoning computation and launching several intelligent computing products, achieving market breakthroughs in various industries. For example, in the field of intelligent transportation, it upgraded the 'High-speed Audit Work Order RPA Robot' and achieved market breakthroughs in multiple provinces; in the telecommunications field, it helped China Unicom Group develop a legal big data model and implemented a digital avatar office big data model in the OA field.

Moreover, Tuowei Information has made significant progress in the open-source HarmonyOS field. Its subsidiary Kaihong Zhigu, based on the '1+3+N' strategy, has launched innovative solutions and integrated hardware and software devices based on the HarmonyOS operating system, achieving market landings in various fields, including significant market breakthroughs in the transportation sector and business expansion in new areas such as energy and parks.

Benefiting from its proactive layout in emerging technologies such as cloud computing, big data, and artificial intelligence, as well as its continued efforts in education informatization and smart city development, coupled with years of accumulated technical advantages and customer resources, Tuowei Information has continued to expand its market share in industries such as government, finance, and telecommunications. Its revenue has increased significantly in recent years. According to the latest financial report, Tuowei Information achieved revenue of 2.945 billion yuan in the first three quarters, a substantial year-on-year increase of 57.26%.

However, it is worth noting that Tuowei Information has not distributed dividends for six consecutive years since 2018.

Despite the significant increase in revenue, Tuowei Information's gross margin has continued to decline, falling from 49.63% in 2018 to 20.52% in 2023. This sustained downward trend indicates weakening profitability, ultimately resulting in a sharp decline in net profit, which also reflects to some extent the company's challenges in cost control.

According to the latest financial report, Tuowei Information's gross margin fell to 15.94% in the first three quarters of 2024, a decrease of 7.68 percentage points from 23.62% in the same period last year, directly leading to a year-on-year decline of 84.85% in net profit to 11.0132 million yuan. Regarding the decline in gross margin and the issue of increasing revenue without increasing profits, Tuowei Information explained that the change in gross margin was mainly due to changes in revenue structure.

Of course, this is also related to the substantial increase in Tuowei Information's period expenses. The current period expenses amounted to 429 million yuan, an increase of 42.3523 million yuan over the same period last year. Among them, sales expenses increased by 19.98% year-on-year, administrative expenses increased by 2.60% year-on-year, research and development expenses decreased by 5.11% year-on-year, and financial expenses increased by 327.822%.

02

Frequent reduction of senior executives' shareholdings, and second postponement of several investment projects

Nothing impresses investors more than outstanding performance. Faced with such a sluggish performance and the continued absence of dividends, senior executives can no longer sit idly by.

On October 16 this year, Tuowei Information disclosed that it would repurchase and cancel 357,000 restricted shares with its own funds. According to the relevant provisions of the '2022 Stock Option and Restricted Stock Incentive Plan,' four former incentive objects and two former incentive objects with reserved restricted stock lost their qualification as incentive objects due to personal reasons and resignation. The total of 357,000 restricted shares awarded to these former employees but not yet released for sale will be repurchased and cancelled. After the cancellation is completed, the number of incentive objects for the first grant of restricted stocks will be adjusted from 83 to 79, and the number of incentive objects for reserved restricted stocks will be adjusted from 5 to 3. The repurchase price of the restricted stocks is 2.94 yuan per share plus bank deposit interest for the same period (calculated daily).

Two months ago, Tuowei Information issued a pre-disclosure announcement regarding the share reduction plan of directors and senior executives, indicating that directors, senior executives Feng Mochun, Wang Weifeng, Xiang Jing, Zhao Jun, Yan Baoqiang, Xing Nihong, Bai Bingjun, Yang Zheng, and Liao Qiulin planned to reduce their shareholdings within three months (i.e., from September 9, 2024, to December 6, 2024) after 15 trading days from the date of the share reduction plan announcement, through centralized bidding and block trading. The total number of shares to be reduced this time does not exceed 407,750 shares, which is not more than 0.0325% of the company's current total share capital and 25% of the shares held by the above nine directors and senior executives.

This is not the first time that Tuowei Information's senior executives have reduced their shareholdings. According to The Paper, from September 9 to October 10, nine directors and senior executives of Tuowei Information reduced their shareholdings by at least 364,300 shares, accounting for 89.34% of the reduction plan; the reduction amount ranged from 11.34 yuan to 20.02 yuan, totaling approximately 5.358 million yuan.

In addition, the postponement of Tuowei Information's investment projects has also been criticized by the market.

To focus on AI development, Tuowei Information completed a round of private placement in 2021. Approved by the CSRC, Tuowei Information issued 147 million shares at a price of 6.22 yuan per share, raising a total of 916 million yuan. After deducting issuance expenses (excluding tax), the net proceeds amounted to 907 million yuan. This private placement planned four investment projects: 'Industry Smart Cloud Solution R&D Project,' 'Cornerstone Research Institute Construction Project,' 'Sales and Service System Construction Project,' and 'HarmonyOS-based Industry Edition R&D Project,' as well as supplementary working capital.

Unfortunately, the first three of these investment projects, which were originally scheduled to reach full production capacity by April 30, 2023, were significantly postponed to the end of 2024 due to 'objective factors such as the socio-economic and macroeconomic environment.' On October 17, it was announced that all four investment projects would be further postponed to the end of 2025.

At present, it seems that Tuowei Information's reliance on Huawei is not yet solid, and it remains to be seen how the company will consolidate its image in the minds of management and investors. However, time is running out.