The final day before the May Day holiday marks a significant deadline for all publicly listed companies in China's A-share market to release their annual reports for the year 2021. Among these companies, Suning.com, the largest private enterprise in Jiangsu province, made a last-minute announcement revealing their financial performance. The figures revealed were both expected and surprising. The expectation stemmed from the company’s history of significant losses, while the surprise came from the scale of those losses despite local government intervention.

As reported, Suning.com suffered a staggering loss of 43.264 billion yuan in 2021. This figure stood as the largest loss among all publicly listed companies across six provinces and a municipality in East China, surpassing the combined losses of the second and third companies on the loss leaderboard.

Looking back, signs of trouble within Suning emerged three years prior, in 2019. At that time, although the company reported a nominal profit of 9.842 billion yuan, this figure was largely due to asset disposals. Adjusting for non-recurring income—subtracting what the company gained from selling off assets—the adjusted net profit for 2019 was a negative 5.7 billion yuan. In 2020, the situation worsened with a reported net loss of 4.274 billion yuan, and a staggering 6.806 billion yuan when it came to the adjusted net profit.

Advertisement

The loss of 43.264 billion yuan in 2021 was more than ten times that of the previous year, raising questions about the root cause, and whether Suning had any chance of recovery.

To understand these issues, it's essential to consider the role of the Jiangsu Provincial State-owned Assets Supervision and Administration Commission (SASAC) in rescuing the beleaguered giant. As a previous pride of Jiangsu, Suning.com not only contributed significant tax revenues but also generated numerous job opportunities across the country. For local residents, securing a position at Suning was seen as a valid and respectable career path.

When Suning encountered a cash crisis, the Jiangsu SASAC stepped in to provide assistance—not merely for appearances but also to ensure local employment and social stability. In 2021, SASAC intervened twice through its industry fund to acquire stakes in Suning.com.

The first investment totaled 3.182 billion yuan, purchasing 520 million shares, which accounted for 5.59% of the company. The second investment was even more substantial, with an infusion of 8.824 billion yuan to procure 16.96% of Suning.com’s shares. Together, these contributions brought 11 billion yuan into Suning’s coffers, allowing CEO Zhang Jindong to address some of the most pressing internal debts, thereby preventing a potential restructuring or outright bankruptcy.

However, post-rescue, Suning could no longer be categorized as a purely private enterprise, as state ownership exceeded 20%, effectively making SASAC the largest stakeholder behind Suning.com.

Examining the financial data from 2020 and 2021 gives further insights into the insurance of the colossal losses. Suning’s operating income fell sharply from 252.2 billion yuan in 2020 to 138.9 billion yuan in 2021—a staggering decline of 44.92%. Nonetheless, this drop in revenue was part of a broader landscape; with operating costs decreasing as well, from 224.5 billion yuan in 2020 to just 129.7 billion yuan in 2021. The loss came largely from other areas.

Operating profit, computed from the difference between operating income and costs, stood at 27.7 billion yuan in 2020 against 9.2 billion yuan in 2021—a difference of merely 13.5 billion yuan. Moreover, Suning’s financial, managerial, sales, and research expenses decreased year-on-year, suggesting the disparities were relatively minor.

So where did the massive losses arise from? A deeper dive into the financial reports highlighted two major data points: investment losses and asset impairment losses. In 2020, these two categories combined accounted for a mere 2.6 million yuan; however, by 2021, investment losses surged to a staggering negative 11.686 billion yuan, with asset impairment losses amounting to 16.385 billion yuan. Together, these losses culminated in a staggering total of negative 28.071 billion yuan.

Understanding investment losses presents a more straightforward context; for instance, if one invests 100,000 yuan in stocks at the start of the year, and the value declines to 60,000 yuan by year-end, it results in a loss of 40,000 yuan for that year. Similarly, Suning faced significant investment declines, albeit largely across non-listed company shares.

Asset impairment losses are an accounting notion triggered when long-term investments, such as fixed or intangible assets, drop in value below their purchase price. This situation arose for Suning, which had invested heavily in diverse ventures, including real estate, sports, hospitality, and finance, none of which yielded favorable returns. Rather, these investments became anchors weighing the company down, leading to severe debt issues.

A closer look at notable investments reveals stark losses: Suning invested in a finance company, which recorded massive losses, prompting a valuation drop and the recognition of asset impairment reserves amounting to approximately 8.618 billion yuan. Another significant stake held by Suning was with Hengxing, a company co-established with Evergrande, which subsequently floundered, costing Suning an investment loss of 10.285 billion yuan. Alone, these two losses exceeded 19 billion yuan. Adding further losses from investments in other ventures like Tian Tian Express and Carrefour China easily surpasses 20 billion yuan.

Ultimately, the prior reckless expansion translated into tangible financial distress for Suning.com.

The question arises: can ST Suning overcome these challenges? Suning.com remains one of the most important sectors of Suning Group. Despite once boasting a market cap exceeding 100 billion yuan, the company faces delisting warnings as of May 6, 2022, denoting its fall to ST status (Special Treatment). Yet, this development might not be entirely dire.

The loss of 43.2 billion yuan in 2021 is indeed stark; however, much of it stems from impairment charges and investment losses related to earlier misguided investments rather than an actual cash loss. Following this 'cleanup', Suning.com may face future financial assessments with greater clarity and potential recovery.

Alongside the annual report, the company also provided insights into the first quarter's performance for 2022. The company reported a loss of 1.028 billion yuan. While the losses have yet to be fully curtailed, the decline in losses compared to the previous quarter presents a favorable indicator. Furthermore, the EBITDA for the first quarter of 2022 stood at 260 million yuan, marking a significant milestone as the company achieved positive earnings for the first time in multiple quarters. This suggests a gradual return to operational stability.

In the 2021 annual report, Suning outlined their 2022 development outlook across four pages, emphasizing the objective of achieving profitability in the home appliance and consumer electronics sector—an area rooted in the company’s legacy and arguably its core business. Success in this domain could spark a transformational rejuvenation for the group, specially as they reported profitability for the month of March.