6689.HK
Hongjiu shares remain suspended

The fruit seller has yet to issue a 2023 annual report since KPMG resigned as its auditor in April, as top executives pledge shares to raise cash and an investigative journalist sniffs for fraud

Key Takeaways:

  • China’s self-proclaimed ‘number one fruit stock’ has raised the equivalent of over $200 million using share pledges, as its stock has remained suspended since March
  • The company, whose business model depends on price stability, is being undermined by falling durian prices due to e-commerce price wars and oversupply

  

By Edith Terry

It’s known for its stinky smell that repels many but has gained it a huge following from fruit lovers in China. But the durian fruit may be having an equally repulsive financial effect for Chongqing Hongjiu Fruit Co. Ltd. (6689.HK), a former highflying fruit seller whose shares have been suspended since March.

Some of the earliest public warning signs from the company, which likes to call itself China’s “number one fruit stock,” came with the abrupt resignation of its auditor, KPMG, in April, after the March 20 trading suspension of its shares. Not long after that, Hongjiu announced a delay in the release of its 2023 annual results, a move that often hints at disagreement between the company and its accountant behind the scenes.  

A similar announcement followed in August saying the company’s interim results for the first half of 2024 would be published “as soon as possible” after vetting by its new auditor, Zhonghui Anda CPA. Meanwhile, Hongjiu’s top executives have been steadily pledging their shares in exchange for cash, in what looks like efforts to keep the company operating in a difficult environment.

Founder and Chairman Deng Hongjiu has pledged shares to lenders in no fewer than 13 tranches to raise $207.9 million in Thai baht, U.S. dollars and Chinese yuan. More recently, his wife and executive director Jiang Zongying has also been pledging her shares in the company for similar fundraising.

So, where do durians come into this messy story? At the time of its listing in September 2022, Hongjiu was China’s largest durian distributor, operating an “end-to-end” supply chain covering 49 fruit categories linking its directly owned farms in China, Thailand and Vietnam to its national network of stores in China. The company was said to be one of the largest suppliers in a Chinese durian market that was the world’s largest, with 47.23 billion yuan in imports in 2023. Durian sales accounted for 3.9 billion yuan in Hongjiu’s sales in 2022 alone, or 26.3% of its total revenue that year.

In addition to durians, Hongjiu Fruit is one of China’s top five distributors of dragon fruit, mangosteen and longan by sales revenue. It was the first Mainland Chinese fruit distributor to conduct an IPO in Hong Kong, although it raised just $63 million instead of the $200 million to 300 million it was reportedly aiming for.

The company’s relatively long turnover period from its customers and relatively short 30-day turnover for payables to its own suppliers can create problems when fruit prices are falling.

That’s exactly what happened in China’s durian market this year. Durian prices fell by half in May in some markets as imports from Southeast Asia led to a glut. A 6 kg durian was priced at 179 yuan to 209 yuan on the online shopping platform Pupu in mid-May, down from 279 yuan in April, and some vendors dropped their prices to as low as 10 yuan for half a kilogram.

‘Celebrity effect’

Observers point out there has been a “celebrity effect” in China’s durian market, with the fruit’s soaring popularity attracting more capital and investors. China has authorized imports from other countries besides Thailand since 2022, including Vietnam, the Philippines and Malaysia, leading to big increases in supply of the fruit.

Adding to the mix – and headaches for traditional sellers like Hongjiu – is growing competition from livestreaming e-commerce, pressuring prices even more. The threshold for market entry is relatively low, although some barriers do persist due to the need for specialty cold storage and shipment services.

One analyst commented that the confluence of intense competition, combined with falling prices, has caused the fruit industry to “meet its Waterloo,” a reference to the battlefield where Napolean met his downfall in the 19th century. Hongjiu has been trying to keep up with the times by experimenting with e-commerce on popular platforms like Tmall, Douyin, Kuaishou and Pinduoduo. It has also reportedly outsourced its wholesale center in Chongqing to save money and is trying to expand beyond its traditional B2B business model to sell directly to consumers.

On top of everything else, weak consumer sentiment in China’s slowing economy is putting even more pressure on fruit sellers to lower prices, especially hurting pricier fruits like the durian and dragon fruit that are two of Hongjiu’s mainstays. Facing similar pressures, shares of fruit retailer Shenzhen Pagoda Industrial (2411.HK) have fallen by 80% since the company’s listing in February 2023, although its forward price-to-earnings (P/E) ratio still looks relatively healthy at 18.

Meantime, Hongjiu is presumably working hard to issue its 2023 annual report and 2024 interim report, necessary conditions for trading of its shares to resume. After the March trading suspension, the company initially promised to produce the 2023 annual report by July. KPMG reportedly resigned because of 4.47 billion yuan in unexplained advance payments to suppliers with questionable backgrounds. In some cases, reports said, the suppliers had high registered capital, no previous transaction records with Hongjiu and no insured personnel. KPMG reportedly asked for more information and resigned when it didn’t get what it wanted.

An investigation by online media Qingliu Studio claimed that Hongjiu’s accounts receivable ballooned in 2022 through alleged non-existent companies that signed large orders. Site visits by the media found that some of the customer addresses were in residential premises next to Hongjiu’s registered offices. Monthly rents in the buildings were about 2,000 yuan, far lower than would be expected for legitimate offices.

Hongjiu’s last financial report was for the first half of 2023, issued in August last year. Revenue increased by 19.4% for the six months to 8.5 billion yuan, though its net profit declined by 6.5% to 802.9 million yuan. In one potentially troubling sign, the company’s impairment losses on trade receivables jumped by 47% to 183.7 million yuan, as trade and other receivables rose by 12.9% to 10.1 billion yuan.

Analysts point to the fact that receivables made up a huge 92.4% share of the company’s assets at the end of June 2023 as a potentially troubling sign, as well as the increase in trade receivable turnover days from 144.8 days at the end of 2022 to 188.5 days just six months later. All that shows that signs of trouble may have been building as early as 2023, though this year’s durian crisis most likely took the pressure to a new level.

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