Caixin
Dec 17, 2019 08:30 PM
BUSINESS & TECH

Creditors’ Woes Deepen as Gionee Liquidation Hits Another Snag

Bankruptcy administrators have found a big hole in smartphone-maker Gionee’s assets as most of its stake in WeBank appears to be owned by two other companies. Photo: VCG
Bankruptcy administrators have found a big hole in smartphone-maker Gionee’s assets as most of its stake in WeBank appears to be owned by two other companies. Photo: VCG

Bankrupt smartphone-maker Gionee Communication Equipment Co. Ltd. is illegally holding shares in Tencent-backed online bank WeBank, Caixin has learned, complicating efforts to liquidate the once high-flying tech group whose debts have been estimated at between 17.4 billion yuan ($2.49 billion) and 21 billion yuan.

When bankruptcy administrators were appointed to Gionee in December 2018, they found the Shenzhen-based company held 90 million shares in WeBank, headquartered in the same city, which were bought for 90 million yuan when the lender was set up in 2014. That amounted to a 3% stake that was estimated to be worth 3.1 billion yuan at the end of 2018 and was seen as an important asset that could be sold to pay off Gionee’s creditors.

However, it has now transpired that 72 million of the shares are not actually owned by Gionee but were being held on behalf of two small investment and business management companies — Shenzhen Huaan and Guangzhou Xingyuan. Under Chinese law, shareholders in commercial banks are not allowed to entrust their shares to a third party.

The true ownership of the WeBank shares came to light during the liquidation process after administrators set a March deadline for creditors, from lenders to suppliers, to submit the size of their claims against the company.

The two shareholders tried to retrieve their holdings to prevent them from being used to repay Gionee’s debt. In April, they applied to bankruptcy liquidators to request that Gionee help register a change of ownership of the shares into their names or those of other appointed third parties so that they could reclaim ownership of their 72 million WeBank shares, according to a report by the liquidators dated Nov. 22 and obtained by Caixin. That amounts to 2.4% of the bank’s share capital and was worth 2.5 billion yuan at the end of 2018, based on a valuation of WeBank at the time. Gionee’s own shares were worth just 600 million yuan.

No white knight

The administrators had planned to approve the request of the two shareholders, but have been challenged by Gionee’s creditors and have now set a deadline of one month for creditors to review the relevant materials, according to the report.

Sources close to the matter have told Caixin that some creditors have already sent objections to the liquidators’ plan to approve the share retrieval. They argue that the shareholding was illegal in the first place and that the sum involved is significant enough to greatly harm creditors.

Gionee was declared bankrupt by a court in Shenzhen on Dec. 10, 2018, after one of its creditors applied for the company to be liquidated. Under a bankruptcy reorganization plan announced earlier that month as the company fought to avoid being liquidated, a consultant hired by Gionee said it could repay some of debts over the subsequent five years if WeBank went public and Gionee sold its 3% shareholding.

This latest setback further deepens Gionee’s financial woes and makes it less likely creditors will be able to recover what they are owed. Founded in 2002 by businessman Liu Lirong, Gionee was one of China’s earliest mobile phone brands. It produced a record 40 million cellphones in 2016, making it the country’s fifth-largest manufacturer. But its finances began to deteriorate as competition intensified in China’s smartphone market and it embarked on a debt-fuelled expansion, making investments in financial institutions and property.

Liu, who held a 41.4% stake in Gionee, spent much of 2018 scrambling to find investors and a white knight to save the business. But his efforts failed, and as the company’s financial problems mounted it was cut off by its suppliers who applied to the courts to force the company into bankruptcy reorganization.

An initial review of the business by the bankruptcy liquidators found that Gionee had total assets of about 3.84 billion yuan and liabilities of 9.64 billion yuan at the end of 2018. But the true scale of its liabilities may be much higher. At the end of March 2019, some 324 creditors reported being owed a total of 17.4 billion yuan, according to another review by the liquidators.

Contact reporter Timmy Shen (hongmingshen@caixin.com, Twitter: @timmyhmshen)

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