SINOWEEKLYPLUS

Early analysis of the CCP Fourth Plenum; is Baofeng Group going to collapse?

SinoInsight  1 
On Oct. 30, Baofeng Group Co., Ltd., a listed Chinese company that develops and sells network hardware and software, announced that its deputy general manager, chief financial officer, and securities representative had tendered their resignation with the company. The wave of resignations meant that all top executives at Baofeng have since left the company. Feng Xin, Baofeng’s founder and CEO, was investigated this July because he was unable to fulfil repurchase obligations of about 750 million yuan. On Sept. 2, a local procuratorate approved the arrest of Feng on charges of suspected bribery and “embezzlement against non-state workers.”

Also on Oct. 30, Baofeng Group released its third-quarter report which showed that the company had earned only 93.6 million yuan in the first three quarters of the year, or a 90.95 percent drop in revenue year-on-year; Baofeng’s net profit loss was 650 million yuan.

Before its recent troubles, Baofeng Group was a very well-regarded Chinese company. Baofeng’s digital audio player software was once a staple on every computer on the mainland. After the company was listed on Hong Kong’s Growth Enterprise Market in March 2015, it broke the daily upper trading limit for 36 out of 40 days; at its peak, Baofeng had a market value of over 40 billion yuan.

OUR TAKE
1. Barring unforeseen circumstances, Baofeng Group is likely headed for a collapse.

Baofeng’s rise and fall is a microcosm of China’s internet and technology economy. When there is hot money in the markets and asset prices are rising, internet companies like Baofeng look like the “next big thing.” But once such companies have trouble raising capital, all sorts of problems emerge.

In our China 2019 outlook, we noted that “there is a possibility that big Chinese tech companies (not including Baidu, Alibaba, and Tencent) could collapse in 2019.” If the latest developments at Baofeng Group seal the company’s fate, our prediction will be verified.

2. We believe that more and more Chinese technology companies, especially those who follow the Baofeng model, could fail in the coming months in light of China’s rapidly worsening economy and the effects of economic slowdown on the mainland being compounded by the Sino-U.S. trade war. While China and the United States currently appear to be on track to sign a “phase one” trade deal, we remain pessimistic that a trade agreement of any sort will help the PRC government quickly rescue China’s faltering economy given its severe structural and systemic problems.

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