The escalation of the dispute between Yibang and Zhongying Internet will have a huge impact on the layout of "digital currency" by A-share listed companies.

Author: Chain Investigation Bureau

The escalation of the sales contract dispute with the mining machine manufacturer Ebang has pushed the blockchain concept stock "Zhongying Internet" to the forefront. However, before this, this Shenzhen Stock Exchange listed company had already been "famous" for its performance downgrade due to the increase in mining machine-related R&D expenses, the high-priced acquisition of blockchain companies, and the first A-share listed company to deploy a digital currency trading platform.

Since December 20, 2019, Zhongying Internet Technology Co., Ltd. (SZ: 002464) (hereinafter referred to as "Zhongying Internet") issued an announcement on receiving the "Notice of Case Filing" from the public security organs, announcing that the criminal report materials submitted by its subsidiary Zhejiang Yibang Communication Technology Co., Ltd. (hereinafter referred to as "Zhejiang Yibang") and Yunnan Yibang Information Technology Co., Ltd. (hereinafter referred to as "Yunnan Yibang") for suspected contract fraud have been filed for investigation by the Beijing police. So far, this contract dispute, which actually started at the beginning of this year, finally broke out at the end of this year, attracting attention from many parties in a short period of time.

This has since triggered a series of chain reactions. In addition to the mining machine contract dispute, Zhongying Internet has also issued a series of announcements on large goodwill impairment provisions and abnormal fluctuations in stock trading.

Afterwards, within about a week, the Shenzhen Stock Exchange Small and Medium Enterprises Board Company Management Department had sent two letters of concern to Zhongying Internet, requiring Zhongying Internet to make a written explanation on matters related to the "Letter of Concern". Zhongying Internet subsequently issued two announcements of postponed reply.

In its latest reply announcement, Zhongying Internet added details of the litigation, such as the specific circumstances of the mining machine contract signing, contract performance, and cooperation background between it and Yibang, and stated that the amount involved in the relevant "Product Sales Contract" did not reach 50% of the audited total revenue in 2017 and was less than 100 million yuan, which did not meet the disclosure standards. The relevant transactions did not need to go through the review procedures of the company's board of directors and shareholders' meeting, and there was no information disclosure violation. In addition, Zhongying Internet stated that the lawsuit had no significant impact on the company's normal production and operation.

The main business suffered a setback, and the expansion of blockchain business added more than 20 million mining machine "installation fees"

Zhongying Internet's main business operations are divided into two major segments: Internet game e-commerce platform business and mobile Internet advertising and mobile big data traffic distribution business.

As for the Internet game e-commerce platform, Zhongying Internet had previously carried out a major asset reorganization in 2015. After completing the acquisition of the overseas game e-commerce platform Hong Kong Moga Technology Co., Ltd. (hereinafter referred to as "MMOGA"), it divested its original manufacturing business and transformed it into an Internet e-commerce platform enterprise. And because the parent company did not carry out business, the subsidiary MMOGA is the main business entity of this business. It is also one of the largest Internet B2C game vertical e-commerce platforms in Europe, mainly providing related transaction services for genuine authorization/registration codes and game virtual items.

Secondly, the mobile Internet advertising and mobile big data traffic distribution business operated by Beijing Xincailiang Technology Co., Ltd. (hereinafter referred to as "Cailiang Technology" or "Xincailiang"), a subsidiary of Yibang Technology involved in the dispute. Zhongying Internet acquired Cailiang Technology in August 2017.

Combined with Zhongying Internet's "Announcement on Reply to the Shenzhen Stock Exchange's Inquiry Letter" on November 15 and "Reminder Announcement on the Impact of Industry Environment Trends on the Company's Business Operations" on December 23, the production and operation situation in the first three quarters of 2019 was affected by the macroeconomic environment, "deleveraging" and other policy factors, as well as the liquidity difficulties of the company's controlling shareholder. The three business segments of the two subsidiaries were affected, the company's liquidity became tight, and revenue in the first three quarters decreased compared with the same period last year.

The operating performance from January to September 2019 decreased significantly. The operating income from January to September 2019 was RMB 460.3284 million, a year-on-year decrease of 22.48%, and the net profit attributable to shareholders of the listed company was RMB 78.1400 million, a year-on-year decrease of 31.82%, and the gross profit margin was 58.13%, a year-on-year decrease of 3.35 percentage points. In the third quarter alone, the operating income decreased by 24.45% year-on-year; the net profit attributable to shareholders of the listed company decreased by 93.74% year-on-year.

In addition, as of the end of September 2019, Zhongying Internet's current liabilities totaled 1.703 billion yuan, and it was under great pressure to repay short-term debts. In addition, its parent company's main bank accounts were frozen due to economic disputes, which had a certain impact on its financing capabilities.

Affected by various factors, Zhongying Internet stated in an announcement on December 23 that the company expects that the total goodwill impairment provision for MMOGA and Cailiang Technology at the consolidated level will be between RMB 1 billion and RMB 1.3 billion, and the impairment provision for intangible assets will be between RMB 20 million and RMB 40 million.

In this regard, some netizens commented: "It was a mistake to spend so much money to acquire Cailiang. Cailiang's main business is unclear and it has no core competitiveness. The contract has been terminated and the high growth is gone. Goodwill must be recorded."

In addition to the above-mentioned businesses, as of now, all blockchain-related businesses of Zhongying Internet are handled by Cailiang Technology and its subsidiaries.

Judging from previous related reports and questions raised by investors, the disclosure of details about the blockchain business is not clear enough, and there may still be some ambiguity and misunderstanding among the outside world.

After sorting out the author's findings, it was discovered that the blockchain business currently involved by Cailiang Technology specifically includes mining machine procurement, mine construction, mining machine leasing, mining pool systems, and the research and development of digital currency exchanges.

However, it now appears that, except for the mining machine procurement business, the other businesses mentioned above have not generated any revenue or profit. In addition, the increase in R&D expenses related to mining machine cluster management in the fourth quarter of last year was one of the reasons why Zhongying Internet's full-year performance in 2018 was lower than expected.

According to public information, Cailiang Technology has been developing business in the blockchain-related field since the end of 2017, trying small-scale digital cloud computing server technology and mining field construction (similar to IDC center computer room, including power supply, network and rack equipment), equipment installation, debugging and other work, and has accumulated experience. The development of mobile Internet (blockchain) infrastructure services will be the future development direction of Cailiang Technology.

In 2018, the sales policy of mobile digital media marketing, the original main business of Cailiang Technology, did not change significantly. However, as the domestic game industry showed a downturn and growth slowed down, Cailiang Technology made certain adjustments to its business strategy and expanded new businesses related to blockchain. Among them, since most of the mining machines are produced by Chinese mining machine manufacturers, Cailiang Technology added the mining machine procurement business in 2018, which is mainly responsible for opening up standardized process solutions for overseas customers in China for the purchase, export logistics, installation and commissioning of mining machines and other technical services.

In February this year, Zhongying Internet attracted attention due to the decline in performance caused by the sharp increase in R&D expenses for blockchain-related businesses. From the current public information, the so-called "blockchain R&D" does not directly involve the R&D of virtual currency mining machines themselves, but the R&D of large-scale cluster management of cloud computing servers (mining machines). For example, Zhongying Internet's subsidiary, Cailiang Technology's American company Cailiang was previously mainly responsible for the technical services of VAST's mines and mining machines' daily operation and management, and was more involved in the construction of mines.

In addition to the mining machine procurement business and mine operation and maintenance, some investors have questioned whether Zhongying Internet is involved in the mining business itself. Zhongying Internet responded on May 23 this year: "The company is currently mainly renting mining machines and has not considered mining itself for the time being."

It is worth noting that Zhongying Internet added a new project under construction in the consolidated balance sheet items reported in the third quarter of 2019, with an increase of 22.34 million yuan. The increase was mainly due to the fact that the mining machines purchased by its subsidiary Cailiang Technology were still in the installation and commissioning stage. The progress of the project for the newly added "installation fee" of more than 20 million yuan for the mining machines has also attracted investors' attention recently. In response to investors' questions, the secretary of the board of directors of Zhongying Internet said: "This project is under construction, please pay attention to the company's announcement." No more project details are available at present.

The mining machines that Cailiang Technology purchased from Ebang at that time were purchased on behalf of overseas customers through the "Cloud Computing Technology Service Contract" signed by Cailiang, a wholly-owned subsidiary of Zhongying Internet, and VAST, an investment and computing service company, and 3G, which is engaged in American electricity and site leasing services. Zhongying Internet once stated that as an important source of income for Zhongying Internet, the mining machine "purchase on behalf of" business revenue of its subsidiary Cailiang Technology in 2018 was 22.34 million yuan, with a gross profit margin of 100%.

However, the mining machine purchasing business, which is currently the only revenue-generating business, is also facing a sales contract dispute with Yibang, a Bitcoin mining machine manufacturer. In order to preserve the property in Zhejiang Yibang's litigation, the amount of money frozen in Cailiang Technology's bank account has reached more than 7.75 million yuan.

In addition to its own blockchain business, Zhongying Internet has also invested in a series of blockchain companies.

On July 6, 2018, it signed the "Investment Framework Agreement" with Shenzhen Hande Maker Financial Investment Co., Ltd., Shenzhen Chengrui Investment Consulting Enterprise (Limited Partnership), and Shenzhen Blockchain Financial Services Co., Ltd., but as of mid-November this year, no further cooperation contracts had been signed, and the asset swap and related transactions with Shenzhen Hande Financial Technology Holdings Co., Ltd. (hereinafter referred to as "Hande Financial Technology") have been terminated.

At the end of 2018, Zhongying Internet also acquired the equity of blockchain technology development company Shenzhen Hande Enterprise Credit Service Co., Ltd. (hereinafter referred to as "Hande Credit") at an assessed appreciation rate of 608.62%, and was questioned by the Small and Medium-sized Board Company Management Department regarding the valuation premium risk.

Hande Credit is controlled by Hande Financial Technology, which holds shares in Zhongying Internet Technology Co., Ltd.

In addition, on April 23, 2019, Zhongying Internet signed a "Strategic Cooperation Agreement" with Hande Financial Technology, Jiujifang Big Data Information Group Co., Ltd., and Beijing Ransheng Asset Management Co., Ltd., and jointly established Beijing Zhongying Data Technology Service Co., Ltd. on June 10. No specific cooperation projects have been carried out yet.

Details of the mining machine dispute with Yibang leaked: the dispute over the chain of evidence and "cooperation with listing"

The escalation of the mining machine sales contract dispute between Zhongying Internet's subsidiary Cailiang Technology and mining machine manufacturer Ebang has been widely reported by the media.

In short, from March to April 2018, Cailiang Technology signed a "Product Sales Contract" with Zhejiang Yibang and Yunnan Yibang for a total of 100,000 cloud computing servers (product model is Yibit E9+, commonly known as "mining machine"), totaling 504 million yuan. From March 23, 2018 to May 18, 2018, a total advance payment of 400 million yuan was paid. From March 26, 2018 to December 31, 2018, the two parties had no objection to the 65,000 mining machines that had been sold (the corresponding payment was RMB 327.6 million), and the dispute was about the remaining 35,000 mining machines in the contract.

Cailiang Technology believes that after paying 380 million yuan to Zhejiang Yibang, it actually only received 65,000 mining machines, and after paying 20 million yuan to Yunnan Yibang, it did not receive any mining machines. Therefore, it intends to file a counterclaim for the overpaid 72.4 million yuan, requiring Yibang to return the overpaid money.

Zhejiang Yibang claimed that all 100,000 mining machines had been delivered to Hu Liang, the designated receiver of Xincailiang, in May 2018. Among them, the remaining 35,000 "disputed" mining machines were delivered in the same way as the previous delivery of 65,000 mining machines to Hu Liang, the designated receiver of Xincailiang, and the receiving vehicles and drivers hired by Zhao Junjie. Xincailiang also issued the corresponding delivery list and bank statement for confirmation.

The Hangzhou Intermediate People's Court held the first trial on November 26, 2019, and further proceedings are currently pending. Some details of the trial have been mentioned in previous reports by Securities Times e-company.

The author re-organized the nearly 40-minute live video review of the trial and found that the main point of contention was the dispute over the complete chain of evidence and "cooperation with listing."

Yibang believes that the delivery list, bank statement and other materials provided have formed a complete chain of evidence, which can verify that Xincailiang has received all the mining machines.

However, Xin Cailiang believes that the stamping of the delivery list, bank statement and other materials was not because Xin Cailiang had actually received the mining machine, but was based on the trust in Yibang. It did not conduct too strict review and issued the stamped documents to "cooperate" with the accounting audit standards of Yibang's application for listing on the Hong Kong stock market at that time. Zhang Hao, director of Zhejiang Yibang and legal representative of Yunnan Yibang, went to Xin Cailiang to confirm the customer statement.

In the recording of the conversation between Gu Hongliang, the legal representative of Cailiang Technology, and Zhang Hao, the director of Zhejiang Yibang and the legal representative of Yunnan Yibang, Zhang Hao verbally promised that the statement of account stamped by Cailiang Technology would not be used as evidence for future prosecution of Cailiang Technology. In the recording, Gu Hongliang said: "I transferred the money to you, and you sent the goods to Hu Liang, because you thought Hu Liang collected the money on behalf of Li Yonggang, right? Then the money is owed by Li Yonggang to you." Zhang Hao replied at the time: "Yes."

The case involved Li Yonggang, the actual controller of Yindou.com, a third-party P2P platform. The relationship between the people and companies involved was that Li Yonggang first approached Zhejiang Yibang to buy a batch of mining machines. Since Gu Hongliang had a mine in the United States, Zhejiang Yibang introduced Li Yonggang's team to Gu Hongliang, and finally Gu Hongliang helped Li Yonggang to do procurement on his behalf in the name of Xincailiang Company.

That is, the purchasing business includes two sales contracts: one is between Li Yonggang and Xincailiang, in which Li Yonggang entrusts Xincailiang to purchase mining machines on his behalf, and then Xincailiang will resell them to Li Yonggang after receiving the purchase fee; the other is an independent mining machine purchase between Xincailiang and Yibang Company.

All previous business communications were confirmed and executed by personnel from Cailiang Technology, Yibang Company, and Xiamen Yakxun Electronic Technology Co., Ltd. in the cooperation WeChat group.

Cailiang Technology believes that the receiver Hu Liang was actually someone that Yibang had approached. Although Xincailiang recognized Hu Liang as the designated receiver for the first 65,000 mining machines, Cailiang did not participate in the delivery of the other 35,000 units, that is, the legal representative of Xincailiang was not added to the WeChat group for the delivery of the mining machines. The delivery was made without Cailiang's knowledge and was delivered to a third party (Li Yonggang). As mentioned above, Zhang Hao also mentioned in the conversation recording that Zhang Hao also recognized that Gu Hongliang received the subsequent goods on behalf of Li Yonggang, and the payment for the subsequent 35,000 units should be asked from Li Yonggang.

Xin Cailiang proposed that the turning point of the case was after Li Yonggang returned to China and surrendered himself at the end of September this year. Yibang found Xin Cailiang and asked it to cooperate in stamping relevant documents. The reason may be that Yibang found that it could not get money from Li Yonggang at that time, so it began to find ways to let Xin Cailiang take the responsibility of paying the purchase price. On the grounds of listing, it asked Xin Cailiang to cooperate step by step in stamping a series of seals on the case materials.

New business progresses slowly, and digital currency exchanges are being deployed amid tightening domestic regulation

As the price of Bitcoin has fallen sharply since the second half of 2018, the mining machines previously purchased could not be started and operated as planned. After the price rebounded, the mining machines had low computing power and high power consumption and still could not make a profit. After that, American Color terminated the "Cloud Computing Technology Service Contract" signed with VAST and 3G.

Cailiang Technology's business in the United States is still in the preparation stage. Apart from the additional 22.34 million "installation fee" for mining machines, no further details and revenue have been disclosed.

So far, the new blockchain-related businesses involved in Zhongying Internet have progressed slowly and have not provided much help to the overall revenue setback this year.

In addition to the mining business, the most popular thing about Zhongying Internet is the digital currency exchange that it has previously publicly stated is being prepared. Compared with other concept stocks involving the "blockchain" concept and "mining" business, especially under the current background of stricter supervision, Zhongying Internet is currently the first A-share listed company on the public platform to announce that it will open a digital currency trading platform.

After sorting out, the author found that so far, the main progress of Zhongying Internet in the digital currency exchange business is as follows: the R&D investment projects disclosed in the company's 2018 annual report include investment in digital currency exchanges. Specifically, the exchange focuses on the currency trading and OTC trading platform of mainstream digital currencies such as BTC and ETH. As of the end of October 2018, the project has completed the research and development of all major functions. The proposed goal of the exchange business is to serve as an ecological support for the mining pool project, improve the capital turnover efficiency of the mining pool, and at the same time serve the mine owners and overseas customers to increase revenue.

In response to subsequent related developments, Zhongying Internet revealed that the parent company is not directly involved in the digital trading platform, but its subsidiary Cailiang Technology is responsible for this part of the business. The digital currency exchange platform has the ability to be implemented at any time and is currently in the process of applying for government approval. However, it has not been disclosed which country's government approval is currently being sought, and there is no timetable for when it will be implemented. It only stated that the digital exchange plans to be implemented overseas and will not be launched domestically for the time being.

In addition, Zhongying Internet mentioned that another subsidiary, MMOGA, already has the Bitcoin payment function, but has not yet involved in blockchain business. It does not rule out the possibility of doing so in the future based on industry development, relevant policies and the company's strategic planning.

On November 14, the Internet Finance Regulation Office of the Shanghai Headquarters of the People's Bank of China and the Municipal Financial Stability Joint Office jointly issued the "Notice on Carrying out a Survey and Regulation of Virtual Currency Trading Venues". Subsequently, on November 22, the Shanghai Headquarters of the People's Bank of China issued another announcement "Strengthening Supervision and Prevention to Crack Down on Virtual Currency Trading". In addition to the issue of virtual currency ICO issuance, the announcement also emphasized the phenomenon that ICO projects and virtual currency trading platforms registered overseas continue to conduct ICO and virtual currency trading business for domestic residents. Platforms registered overseas but open to domestic residents for virtual currency trading are one of the key targets of this round of supervision.

At present, most domestic blockchain concept stocks generally state that their blockchain business does not involve digital currency and its transactions. An analyst from a securities firm told me that most blockchain concept stocks do not really involve blockchain business, but are mainly for the expectations of shareholders. It is indeed rare for Zhongying Internet to directly write digital currency exchange business into the annual report of listed companies, but it does not rule out that it is also hyping the value of the "concept".

Regarding the layout of exchanges by A-share listed companies, the author interviewed many industry insiders, and their views on this are relatively consistent. Industry insiders analyzed that there are not many precedents in the entire industry for A-share listed companies to use their subsidiaries to layout digital currency exchanges overseas. The regulatory level has not yet issued corresponding management rules to prohibit such situations. Moreover, since it is overseas subsidiaries that are doing digital currency exchange business overseas, it seems that there is no direct impact on the listed companies themselves.