0493.HK

The struggling retailer’s shares have been suspended since April for failing to file its annual report on time, and it was forced to hire a new auditor after the previous one resigned

Key Takeaways:

  • Gome’s auditor resigned over a wide range of financial issues disclosed last week, though the company expects to file its overdue 2022 annual report as soon as next month
  • The former retailing highflyer may be considering a transformation to property owner, following an acquisition last year and development of a major mixed-use project

  

By Edith Terry

Huang Guangyu, once China’s richest man, started out as a trash collector and refurbisher of used appliances before striking out in 1987 to start up Gome Retail Holding Ltd. (0493.HK), a name that was once synonymous with cutting-edge retailing in China. Now, the former billionaire, who more recently served prison time for insider trading, needs to pull off a miracle to avoid seeing the Gome name vanish into the history books.

His original chain seems doomed, as evidenced by a recent paper trail of disclosures detailing Gome’s financial woes, including a laundry list of problems uncovered by its former auditor that were disclosed just last week. Yet he may still have a thing or two up his sleeve, as he winds down his retail chain and perhaps looks to cash in on its name to operate commercial real estate instead.

The Gome retail chain itself, once known for its bright interiors filled with the latest gadgets and home appliances, seems headed for scrap heap of retailing history. But that doesn’t rule out an afterlife for the well-known brand, even if it may not evoke such cutting-edge retail associations among China’s younger generation.

Trading in Gome’s shares was suspended on April 23, shortly after it lost its most recent auditor on April 21. Before that, Ernst & Young had resigned in 2021 after Gome stopped paying its bills. Gome has been a financial black box since reporting its interim results last August, with release of its year-end results postponed until at least next month.

The company’s filings over the past week have made it clear just how difficult it will be for Gome’s new auditor, Elite Partners CPA, a Hong Kong firm founded in 2017, to file the overdue report required before trading can resume. A June 23 announcement detailing some “outstanding matters” from former auditor, Shinewing, shows why filing a 2022 financial report looks a mission impossible, despite Gome’s assertion that it expects to file the report around mid-July.

Among other things, Shinewing said it resigned after about 50 bank confirmation letters went missing or were unavailable, according to the announcement. Shinewing added it had not received supporting documents for prepayments made to Gome, nor for the company’s accounts receivable. It added that it was unable to conduct an inventory audit due to the seizure of 540 million yuan ($75 million) in inventory from the company’s retail stores.

And the list goes on, showing just how bad Gome’s situation had become as brick-and-mortar shopping rapidly falls out of vogue in China, replaced by more convenient e-commerce.

Just before the Shinewing salvo, Gome on June 13 disclosed it had 16.16 billion yuan in overdue and unpaid debts as of May 31, with another 5.51 billion yuan in debts not yet due. It said it was involved in a staggering 1,294 pending lawsuits seeking a total of 10.37 billion yuan. Last but not least, Gome reported 166 million yuan of its funds were frozen as of May 31.

Gome released its most recent financial report last August, detailing its results for the first half of 2022. But even before that, it told the Financial Times it would close as many as 35% of its stores to save 1.5 billion yuan. It embarked on a massive layoff campaign starting in March 2022, firing more than 6,500 employees since then, equal to about a fifth of its workforce. Many remaining employees who avoided the axe went unpaid until at least the end of the year.

Where’s the value?

As Gome’s woes mounted, its stock has moved steadily downward. Before the trading suspension in April, the company’s shares were down about 40% from a peak in February this year. The stock has lost almost two-thirds of its value over the last 52 weeks, giving the company a miniscule price-to-sales (P/S) ratio of just 0.09 before the trading suspension.

Gome isn’t alone in its travails. Suning (002024.SZ), China’s other former electronics retailing giant, is going through similar pains in its own downward spiral. Suning has fared just slightly better than Gome thanks to local ties that helped it secure a government bailout. The company also counts e-commerce giant Alibaba (BABA.HK; 9988.HK) as a major stakeholder with 20% of the company. Even so, Suning’s future is anything but guaranteed after it also failed to make the transition from traditional retailing to e-commerce.

Despite Gome’s woes, it’s worth noting the company still had a sizable market cap of about HK$5 billion ($638 million) at the time of its trading suspension, showing somebody still sees some value there despite the recent struggles. The question is where that value is hidden. The answer may lie in what’s next for Huang and his Gome brand.

A clue to what he may try next came at the time of last year’s interim results filing, when the company said it would stick to its brick-and-mortar retailing roots by introducing experiential stores and shopping malls through a share purchase of Eagle Delight Properties (Overseas) from Gome’s affiliated property company.

Huang’s best bet may be to gradually wind down Gome as a retail brand. A multi-use complex called Gome Commercial Capital in Beijing, including an eight-story mall, hotel-apartment building, office tower, and a three-story underground car park, would become the flagship of a new property venture. Gome also said it was also developing a smaller second property in the Central China city of Changsha, called No. 9 Xiangjiang, though in March media reports said the company was pulling out of that project. 

Such a property-focused strategy certainly seems to hold more promise than traditional retailing, though it comes as China’s long-booming property market heads into its own downturn. But that downturn is expected to wreak bigger havoc on the residential property market, with commercial properties like the ones Gome is involved with expected to suffer less.

One thing that seems relatively certain is that Gome will have to undergo a major transformation and won’t be able to continue in its present form as an electronics retailer. Its vision of high-tech “experience centers” could bring it some new life, though first it will have to unwind its current financial mess – quite possibly with the assistance of a bankruptcy court.

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