The company booked a paper profit by offloading its money-losing soccer club, but its cash-burning new energy commercial vehicle business is in an equally difficult league



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<h4>Key Takeaways:</h4>



<ul>
<li>ZO Future was profitable in the first half of its fiscal year to December, but only thanks to gains from offloading its debt-laden Birmingham City Football Club</li>



<li>The company's ambitious pivot to new energy vehicles also faces a steep uphill climb given its recent arrival to the field</li>
</ul>



ZO Future Group (2309.HK), formerly owner of the Birmingham City Football Club, is following a classic playbook by Chinese companies making foreign acquisitions: take over a high-profile dud asset, rack up years of losses and then pivot to the next big thing. In ZO's case, the foreign asset was a prominent British soccer club, and the next big thing is green vehicles. But as some sports fans may say, you can't just change the game and expect to win the league.



Last Friday, ZO Future, previously known as Birmingham Sports Holdings, released midyear results that featured a headline-grabbing return to profitability that suggested a major turnaround after years of losses. For the six months to last December, the first half of ZO Future's fiscal year, the company scored a net profit of HK$179.8 million ($23 million), reversing a loss of HK$117 million for the same period a year earlier.



But a closer look quickly casts doubt on the turnaround story. ZO Future's profit for its fiscal first half was entirely due to the disposal of its perennially loss-making Birmingham City Football Club last November. The company pocketed gross proceeds of just 5 million pounds ($6.7 million) in cash from the sale of its 52% stake in the team. When ZO Future bought a majority stake of the club in 2016, the team, then under receivership, was worth 12.3 million pounds. So, the team has lost value since then, which isn't surprising given its financial troubles.



In addition to acquiring ZO Future's equity in the Birmingham City club, the buyer, a subsidiary of an investment firm founded by hedge fund manager Wagner in New York in 2008, will also settle 19.2 pounds million of debt owed by the team to ZO Future. The new owner of the Birmingham City Football Club, Shelby Cos. Ltd., already bought part of ZO Future's stake in 2023. 



After eliminating losses and debt related to the club, ZO Future booked a HK$229.1 million net profit from the discontinuation of the business. ZO Future's continuing operations, now almost entirely comprised of a fledgling new energy vehicle (NEV) business, made a net loss of HK$49.3 million in the first half of its current fiscal year, more than double the HK$20.4 million it lost a year earlier.



Revenue from the company's continuing operations during the six-month period did double to HK$56.6 million. But even that was only a tad larger than its administrative and selling expenses totaling HK$52 million. What's more, the company booked a HK$16.1 million loss from an equity-accounted investment.



ZO Future's transformation into an NEV brand marks a certain denouement of an exuberant chapter in outbound investment by Chinese firms. As recently as a decade ago, flush with cash and cheered on by the government, Chinese companies went on a shopping spree for overseas soccer clubs, spending an estimated $2.3 billion on teams from Birmingham City Football Club to Inter Milan to Aston Villa Football Club. The logic behind the purchases was often murky — a mix of soft power projection, personal passion, and occasionally, a convenient conduit for moving money out of China.



The results, however, were predictable. Most of these assets proved to be money pits that required constant new funding, with operating costs far outstripping the modest revenue they generated. ZO Future's journey with Birmingham City was typical of this story, resulting in annual losses and the need for frequent capital injections.



<h4>Big bet on NEVs</h4>



ZO Future is now betting big on NEVs — specifically, commercial trucks under the ZO Motors brand – which at least takes it out of the higher-profile but extremely overheated sector for passenger vehicles. That said, the company's NEV sales aren't anything to get too excited about, amounting to a little over HK$30 million in its fiscal first half. The company's NEV strategy is twofold. In China, it's looking to go asset-light. To that end, it inked an exclusive manufacturing partnership in 2024 with Weichai New Energy, which eliminates the need for ZO Future to spend the big money necessary to build its own factory.  



But the company has its own manufacturing bases overseas, with plants in California and Cambodia. The U.S. facility, in the city of Fontana, serves as a local assembly hub designed to signal its long-term commitment, while also catering to &#34;buy American&#34; sentiment and pre-emptively helping it to navigate local regulations. Its Cambodia factory can help it gain a first-mover advantage in that emerging market, while allow it to avoid import tariffs on finished vehicles and build a local ecosystem, including charging infrastructure.



On paper, ZO Future's NEV ambition looks laudable. The commercial NEV segment is poised for growth as logistics companies and local governments seek to decarbonize their fleets. And seeking a niche in that space avoids a passenger electric vehicle market that has become brutally competitive, both in and outside China, crowded with both traditional automakers like BYD (1211.HK; 002594.SZ) and well-funded startups like Nio (NIO.US; 9866.HK).



ZO Future's NEV business will need to make significant investment to gain traction. But its balance sheet is fragile, with only HK$43.7 in cash at the end of December, as it continues to grapple with negative cash flows. In fact, in its midyear report, the company admitted that its solvency may be in danger after it was hit by a net cash outflow of about HK$200 million from operations in the first half of its fiscal year.



&#34;This condition indicates the existence of a material uncertainty which may cast significant doubt on the group's ability to continue as a going concern,&#34; ZO Future said.



At the moment, financial support from the company's major shareholders is enough to supply it with sufficient working capital. That shareholder group is led by a man named Vong Pech, a former Chinese national previously named Wang Dong, who is now a naturalized Cambodian and owns about 30% of the company. But there's no guarantee that this lifeline will always be there. 



ZO Future shares have slipped about 2% through Tuesday since the release of its midyear report, which suggests that the headline net profit didn't really fool investors. They trade at a price-to-sales ratio of 4.2, higher than 1.3 for BYD, even though ZO Future's revenue base is tiny compared to the NEV titan.



At this point, whether ZO Future will be any better off as an NEV maker than as a soccer club owner is doubtful. The company may end up looking for another business in the latest hot area if it fails to score a big win in the NEV game – a relatively common approach in a landscape of similar publicly traded Chinese &#34;chameleon companies.&#34; But that would only erode investor confidence in its ability to chart a path to sustainable growth.  



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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.

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ZO Future Groupreported a net profit of HK$179.8 million for the first half of its fiscal year, primarily due to the sale of its loss-making Birmingham City Football Club. However, its new energy vehicle (NEV) business continues to struggle, posting a net loss of HK$49.3 million. The company aims to pivot towards NEVs, particularly commercial trucks, while partnering with Weichai New Energy to reduce manufacturing costs. Despite a doubling of revenue from continuing operations, expenses remain high, raising concerns about the sustainability of its turnaround.

ZO Future Pivots From Birmingham Blunder To NEV Longshot