(ATF) Chinese tech firm ECCOM has multiple overdue loans and last week its 500-million yuan (about $71 million) of bonds suffered a "substantial" default, with the capacity to be refinanced deteriorating, Chinese finance news website Zichanjia.com has reported.
The grim financial health of ECCOM is interesting for two reasons – one because it is closely linked to the Chinese military, providing it with high-tech communications and satellite equipment. And two, it is run by Wu Guangsheng, a legendary figure who was named recently by US media outlets as a donor to President Trump's reelection campaign.
ECCOM (Huaxun Technology) has been in trouble for some time with multiple overdue loans. On June 3 this year, United Credit Rating downgraded ECCOM's main rating and debt rating, and included it on its watchlist.
Bloomberg says that Huaxun Fangzhou Co Ltd, one of the companies in the group, is a digital technology firm that develops military communication, special aerocraft, guide weapon systems, radar, and scouting services in the military defence industry.
Huaxun Fangzhou was established in 1997, it said. Huaxun Technology or ECCOM, which emerged later, is a high-tech enterprise focusing on research and the application of high-spectrum technologies. It has been sought to become a global integrated service provider of photoelectric information hyper-convergence.
ECCOM built five major production bases and owns several subsidiary companies, including ECCOM Ark (000687.SZ).
Military, satellite communications
The major shareholder is Wu Guangsheng, who has a shareholding ratio of 33.86%. He is also the actual controller of the company. The founder of Huaxun Technology is a well-known figure in Shenzhen. At the age of 18, Wu Guangsheng was admitted to Wuhan University. After graduation, he entered a military industry group to engage in businesses related to naval communications.
He founded Huaxun Technology and began work in the field of satellite communications. The "Huaxun Department" developed rapidly, from the first seven people to thousands, and the sales went from a billion yuan to tens of billions.
In April 2015, ECCOM went public. According to public information, Wu Guangsheng is a Shenzhen Municipal People's Congress representative, a national science and technology innovation and entrepreneurship talent, a Guangdong science and technology innovation and entrepreneurship leader, and a 2016 national "10,000-person plan" technology entrepreneurship leader.
Wu is a Shenzhen Municipal People's Congress representative and a well-known hi-tech businessman. Photo: China Enterpreneur.
Wu was one of several Chinese nationals linked to the Chinese government who donated hundreds of thousands of dollars to Trump's reelection campaign in an attempt to get closer to the president, according to a Wall Street Journal report on June 23, 2020.
Their efforts to gain political access came shortly after Trump took office, but had "stalled," Business Insider said, because of the trade war with China and the coronavirus. The WSJ report said it was unclear if any contributions or activities conducted by the Chinese nationals violated US laws, though federal law prohibits political donations by foreign entities.
The Journal said Wu and the other donors worked closely with Beijing and briefed high-ranking Chinese officials about their activities. Most of the political donations it identified were provided to a fundraising committee called Trump Victory and were among the largest donations made in 2017.
$219 million in bonds affected
In recent years, ECCOM's performance has fluctuated greatly. Its listed company, ECCOM Ark, has suffered losses for two consecutive years, and the stock will be put on a cap. In the first three quarters of 2019, ECCOM achieved revenue of 4.92 billion yuan and net profit of 394 million yuan.
ECCOM issues bonds under its Chinese name Huaxun Technology and its "18 Huaxun 02" came out in July 2018. The current balance is 500 million yuan, the term is three years, the coupon 7.8%, and the investor has the option to sell back at the end of the second year. Resale and interest payment was due on Thursday July 2 this year.
In addition, a default of 18 Huaxun 02 will trigger cross-default clauses of 18 Huaxun 01, 18 Huaxun 03, 17 Huaxun 02 and 17 Huaxun 03. Trading in these five bonds, which total 1.546 billion yuan ($218.8 million), was suspended on Friday July 3.
In 2019, ECCOM's operating cash flow turned from positive to negative, and the net amount in the first half of the year was -460 million yuan, indicating that its operating capital declined and its ability to protect debt and interest declined.
In terms of bank credit, as of the end of June this year, ECCOM’s total credit was 4.707 billion yuan, with an unused credit line of 914 million yuan. The company's financial flexibility is not very well leveraged and reserve funds are very limited. In terms of financing channels, in addition to debt issuance and borrowing, ECCOM also has two lease financing deals, 31 receivables financing and six equity pledges.
At the beginning of this year, the company hit the rocks due to the impact of the trade war, which local media described as the “targeted strangulation” of ECCOM and other Chinese firms.
As guarantor, ECCOM has taken legal protection measures via its business agent Tianhao Investment, which has resulted in it accumulating frozen shares accounting for 100% of the shares held, and these will be frozen for a period of three years.
So, after many years of entrepreneurship, the "Huaxun Department" debt crisis broke, and the young and promising founders also want to leave the listed company and flee, the Zichanjia.com report alleged.