Juli Culture licking its wounds from cross-border expansion alone.
Zebra Consumer Fan Jian
Julii Culture desperately wants to shed the label of "culture," but it has never been able to completely escape the pain caused by its cross-border entertainment ventures.
The protracted lawsuits, settlements, and massive compensations with Tencent Beijing have repeatedly torn open the company's barely healed wounds.
In 2016, the company acquired Meishengyuan Information for 3.4 billion yuan, crossing over from traditional manufacturing to the gaming industry, which once led to a surge in performance.
However, the company also plunged into the abyss of financial fraud, becoming a classic case of failed cross-border transformation.
Endless Settlements
Julii Culture (002247.SZ) has been trying hard to shake off the "culture" label but finds it impossible to do so.
The prolonged lawsuits, compensations, and settlements with Tencent Beijing Culture Media Co., Ltd. (hereinafter referred to as Tencent Beijing) have prevented the company from completely freeing itself from the pain of its failed cross-border transformation.
The story dates back five years.
Tianjin Dianwo, a former subsidiary of Julii Culture, signed the "Tencent Advertising Service Provider Cooperation Agreement" with Tencent Beijing, agreeing to place advertisements through the Tencent advertising platform and pay the advertising fees.
Later, according to Tencent Beijing's calculations, from May to August 2019, Tianjin Dianwo incurred advertising fees totaling 260 million yuan through the Tencent advertising platform but failed to pay on time.
As a result, Tencent Beijing sued Tianjin Dianwo and demanded that Meishengyuan Information (Tianjin Dianwo's shareholder and a former subsidiary of Julii Culture) and Julii Culture bear joint liability.
Neither Tianjin Dianwo nor Meishengyuan Information had any assets available for execution, so the compensation liability naturally fell on Julii Culture.
To avoid this massive compensation, Julii Culture exhausted all efforts and maneuvered among various parties. After hearings by the Shenzhen Intermediate Court and the Guangdong High Court, the courts ruled in favor of Tencent Beijing.
In October 2023, the Shenzhen Intermediate Court ordered the compulsory auction or sale of Julii Culture's 100% equity in companies such as Dilong New Materials to repay debts. These were the core assets of the listed company.
Helplessly, in February of this year, Julii Culture signed a settlement agreement with Tencent Beijing and paid 30 million yuan in execution fees. The settlement was tentatively set to last until May 15, 2024, during which negotiations would be conducted based on a principal of 261 million yuan and interest of 38 million yuan.
On May 16, Julii Culture disclosed that negotiations with Tencent Beijing were still ongoing.
As of the end of March this year, Julii Culture had 354 million yuan in cash and 402 million yuan in net assets. It is struggling to bear the massive compensation to Tencent Beijing.
Failed Cross-Border Venture
Julii Culture was originally named Dilong New Materials, with its main business being the R&D, production, and sales of mid-to-high-end decorative surface materials. The company was listed on the Shenzhen Stock Exchange's main board as early as 2008.
As a traditional manufacturing enterprise, the company's operations and development were relatively stable after its listing, but it lacked growth potential and market attention.
At that time, the trend of traditional enterprises crossing into new industries emerged, and light-asset cultural assets became targets for many A-share companies.
Dilong New Materials saw the potential in the gaming industry and hoped to achieve transformation through mergers and acquisitions to enhance profitability.
In 2016, the company acquired 100% equity in Meishengyuan Information for 3.4 billion yuan, a premium of 1,924.01%, successfully entering the gaming industry. At the time, Meishengyuan Information had only been established for a little over two years and had just begun to turn a profit.
The counterparty promised that Meishengyuan Information would achieve net profits of no less than 180 million yuan, 320 million yuan, and 468 million yuan in 2015, 2016, and 2017, respectively. If achieved, the listed company's performance would soar.
To highlight its transformation resolve and business attributes, the company changed its name from Dilong New Materials to Julii Culture.
The gaming industry indeed exhibited extraordinary growth potential. During the performance commitment period, Meishengyuan Information exceeded its targets.
However, a "Notice of Investigation" from regulators completely exposed this beautiful lie.
It was discovered that from 2016 to 2018, Meishengyuan Information recognized revenue from dozens of companies without actual business operations and facilitated fund flows through multiple third-party companies. During this period, there were massive overstatements of revenue, profits, and accounts receivable, leading to false financial reports and disclosures by the listed company. As a result, over 20 former directors, supervisors, and executives of Julii Culture were penalized.
After retrospective verification, Meishengyuan Information's actual net profits for 2015–2017 were 185 million yuan, 236 million yuan, and 206 million yuan, respectively, failing to meet the performance commitments. According to the agreement, Yu Haifeng, Julii Mutual Prosperity, and other performance commitment parties were required to compensate the listed company nearly 1.2 billion yuan.
However, to this day, the relevant parties have not fulfilled their performance compensation obligations to the listed company, with no assets available for execution. Their shares in the listed company have also been frozen, pledged, or auctioned.
Julii Culture's cross-border transformation ultimately ended in chaos.
Difficult Return
Due to the gaming business's underperformance and massive goodwill impairments related to Meishengyuan Information, Julii Culture suffered a huge loss of 2.995 billion yuan in 2018.
The following year, the company's entertainment business continued to lose money, and large impairments were recorded, leading to another annual loss of 1.583 billion yuan. By the end of 2019, Julii Culture's cultural and entertainment businesses had largely stalled. If this continued, the listed company's performance would remain under long-term pressure.
In June 2020, the company transferred 100% equity in its cultural and entertainment business entity, Dilong Culture, to a third party for 1 yuan, completely divesting the entertainment business. At the time, the company's net assets were -480 million yuan (as of the end of March 2020).
Returning to its familiar business, Julii Culture quickly regained its footing. In 2021, the company's traditional business saw restorative growth, with revenue increasing 16.72% year-on-year to 1.164 billion yuan and non-GAAP net profit surging 295.59% year-on-year to 78.04 million yuan.
However, over the next two years, affected by the broader market environment, the company's performance declined again. In 2023, revenue was 947 million yuan, and non-GAAP net profit was 67.21 million yuan.
Julii Culture had cut its losses and shed the heavy burden of its entertainment business, hoping to return to square one and start fresh.
Unexpectedly, the historical debts of its subsidiaries ultimately had to be borne by the parent company. In 2023, the company recorded a loss of 416 million yuan due to the lawsuit with Tencent Beijing, directly leading to another massive net loss of 336 million yuan attributable to shareholders.
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