Qidian Guofeng tries on ‘AI halo’ in move to boost business

The company, which is developing an online-merge-offline (OMO) new consumption platform, swung to a 2.23 billion yuan loss last year on asset impairments 

Key Takeaways:

• Qidian Guofeng has signed a letter of intent to acquire an AI technology company, sparking a rally for its shares
• The company, which mostly engages in appliance and liquor trading, is making the move even as most AI operators continue to lose money

By Bai Xinrui

The “AI halo” is proving quite a draw for many traditional companies these days, attracted by the technology’s potential to transform them from their otherwise ordinary roots.

The latest to jump on that bandwagon is China Qidian Guofeng Holdings Ltd. (1280.HK), which this month announced it had signed a letter of intent to acquire an AI technology company. The news had the desired effect the next day, as Qidian Guofeng’s shares jumped nearly 30%, before paring those gains to close up a more modest 7.6%.

With a market capitalization of less than HK$10 billion ($127 million), Qidian Guofeng is a bit of a jack-of-all-trades, mainly engaged in home appliance and traditional Chinese liquor sales, as well as education training services. Home appliance sales were its biggest breadwinner last year, contributing 61.5% of revenue, followed by liquor at 23.1% and education training services at 15.4%. Such core activities give little or no indication of any direct connection to or expertise in the AI or information technology it’s now pursuing with the latest acquisition plan.

But that may be beside the point, as far as the Qidian Guofeng is concerned. It said the company it plans to buy primarily provides AI-driven “enablement services,” which align highly with Qidian Guofeng’s own strategy of developing an online-merge-offline (OMO) new consumption platform. Qidian Guofeng believes the acquired company could help other companies accelerate their online-offline channel integration and expand their user reach. It also believes the acquisition will provide a sustainable growth engine for its own business.

Enablement services like the ones provided by the acquisition target generally refer to support services provided to enterprise customers to run their businesses more efficiently. AI-driven enablement services help businesses do that by supplying tools like AI chatbots, incorporating AI elements, and supplying machine learning, generative AI and data analytic tools and technology.

Agreement finalization deadline

While the deal looks good on paper, we should note that the signed document is simply a non-legally binding letter of intent and not a definitive agreement. The announcement explicitly states a formal agreement must be signed within three months, or the acquisition will be terminated.

Qidian Guofeng plans to acquire the AI technology company for HK$350 million to HK$500 million by issuing new shares. Such share-based acquisitions appear to be the norm for Qidian Guofeng, allowing it to make acquisitions without using any cash. Just a year ago, the company announced another HK$340 million acquisition of Shengshang Entrepreneurial Services, a training services provider for small and medium-sized enterprises (SMEs). That announcement sparked an even larger jump in Qidian Guofeng’s shares, which doubled the next day. 

That acquisition boosted the company’s revenue by 38.2% to 441 million yuan last year, and lifted its gross profit by an even larger 90.6% to 117.8 million yuan. Still, Qidian Guofeng ended up with a massive loss of 2.23 billion yuan, primarily due to a goodwill impairment related to the Shengshang acquisition. Given that track record, there’s a risk that another goodwill impairment could follow the AI acquisition, should that deal go through.

In search of AI profits

AI has become all the rage among companies looking to attract investors since ChatGPT ignited the AI frenzy in late 2023, leading to major spending spree by companies trying to boost their AI credentials. But apart from well-established chipmakers like Nvidia and TSMC, few have found ways to improve their business from AI maneuvers, especially on their bottom lines. Some observers have even begun questioning whether AI can truly help companies improve their efficiency.

The current crop of top AI investors are primarily major tech companies like Google parent Alphabet, Microsoft, Amazon, Tencent, and Alibaba. But all of those get most of their revenue from other sources, with Alphabet and Meta relying heavily on advertising, Amazon and Alibaba on e-commerce, and Tencent on gaming. AI remains a development area for all of them, with AI revenue contributions still relatively small. All of those giants share a common factor of strong free cash flow, which they can use to support their hefty AI spending.

Big R&D spending

By comparisont ChatGPT developer OpenAI, which is owned by Microsoft, reportedly remained in the red in 2024, even as it generated substantial revenue. CNBC reported that despite earning $3.7 billion in revenue, OpenAI still posted a $5 billion loss for the year, making it unlikely the company will become profitable in the near term. Hong Kong-listed SenseTime’s 2024 revenue rose 10.8% year-on-year to 3.77 billion yuan, but its gross profit grew by a slower 7.9% to 1.62 billion yuan, and the company reported a massive 4.28 billion yuan loss.

Like many AI companies, SenseTime’s huge loss was mainly due to high R&D spending, which amounted to 4.13 billion yuan last year, equal to 360 million yuan more than its total revenue. A similar pattern was present in 2023, when its 3.41 billion yuan in revenue lagged its 3.47 billion yuan in R&D expenses.

Another Hong Kong-listed AI firm, Fourth Paradigm, reported lighter 2024 R&D spending of 2.17 billion yuan, but even that was still 41.7% of its 5.26 billion yuan in total revenue. Such high costs also led to continued losses for the company. The examples of OpenAI, SenseTime, and Fourth Paradigm all highlight the necessity for massive R&D spending by any company that dreams of becoming a major AI company.

That could be problematic for Qidian Guofeng’s AI plans. The company’s plan to fund the acquisition by issuing new shares will also result in share dilution, possibly leading to more volatility for the stock. Accordingly, jumping on the AI bandwagon when the technology is still in an early stage of development may not be the most prudent strategy.

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