Finance Talk | Debt, Cash Flow, and Collateral: The Triple Pressure, Is Shenzhen Huaqiang Being "Bleed"?

Ask AI · What capital needs drive the controlling shareholder behind a high dividend policy?

Interface News reporter | Yuan Yingqi

A wealth management investment fund of no more than 1 billion yuan in Shenzhen Huqiang (000062.SZ) is attracting market attention.

Interface News reporters found, in this company’s balance sheet, that as of the end of 2025, Shenzhen Huqiang’s short-term borrowings totaled as much as 5.541 billion yuan; non-current liabilities due within one year were 690 million yuan; and short-term debt accounted for 76.2% of interest-bearing liabilities. Net cash outflow from operating activities was 990 million yuan, and cash flows from financing activities have recorded net outflows for many consecutive years. At the same time, related-party transactions between the listed company and Huqiang Group Finance Co., Ltd. have continued—by the end of June 2025, the listed company’s deposit balance with the finance company reached 1.187 billion yuan.

“Idle funds” for wealth management at Shenzhen Huqiang, large-scale financing by the controlling shareholder, and nearly half of the listed company’s deposits being pooled into a finance company controlled by the large shareholder—are there links among these phenomena? Where, exactly, did the listed company’s funds go?

Threefold pressure: Shenzhen Huqiang’s debt, cash flows, and guarantees

In 2025, Shenzhen Huqiang’s full-year net profit attributable to shareholders was 463 million yuan, up 117.38% year over year, seemingly delivering a steady operating performance. But after delving into the company’s financial data, Interface News reporters found that behind this impressive performance lie three hidden concerns: elevated debt levels, cash-flow pressure, and rising guarantee risks. The company’s capital chain situation is not optimistic.

The divergence between profit growth and cash-flow performance is the primary contradiction in Shenzhen Huqiang’s financial position. In 2025, the company’s net profit attributable to shareholders was 463 million yuan, but net cash flow generated from operating activities was a net outflow of 990 million yuan—there is a clear split between earnings and cash flows.

Behind this divergence are persistently high accounts receivable and declining turnover efficiency. In 2025, Shenzhen Huqiang’s accounts receivable stood at 7.12 billion yuan, accounting for the share of total assets rising from 28.97% in the same period of 2023 to 38.73% in 2025. Days sales outstanding (DSO) for accounts receivable increased from around 69 days before 2023 to the current 92 days. The collection cycle has clearly lengthened, further increasing pressure from capital occupation and directly intensifying pressure on operating cash flows.

Even more severe, cash flows from the financing side were also weak, further tightening the company’s capital chain. The data show that since 2022, the company’s financing-activity cash flows have frequently seen large outflows. In 2024, there was a net outflow of 1.5 billion yuan; in 2022, there was a net inflow of 1.3 billion yuan. In contrast, in 2025 and 2023 combined, there was only a net inflow of 700 million yuan.

“Continuous net outflows from financing cash flows mean either the company is actively de-leveraging and shrinking financing scale, or it is facing a passive situation of tighter bank credit lines and constrained financing channels. In either case, it means the company’s ability to reallocate funds is shrinking over time,” a senior auditor from an accounting firm told Interface News reporters.

An imbalance in the debt structure, combined with cash-flow pressure, further increases the company’s funding pressure. By the end of 2025, Shenzhen Huqiang’s short-term borrowings were 5.541 billion yuan; non-current liabilities due within one year were 690 million yuan; total short-term debt was approximately 6.231 billion yuan, accounting for 76% of the total interest-bearing liabilities. Near-term debt-servicing pressure is highly concentrated. In the same period, the company’s on-balance-sheet cash and cash equivalents were 2.886 billion yuan, insufficient to cover short-term debt, leaving a significant capital gap.

“Using short-term borrowings to support long-term working capital needs is a typical ‘short debt to long investment’ model. This model itself carries substantial liquidity risk,” a person from a bank’s credit department said in an interview with Interface News. Against the dual background of a lengthened collection cycle and persistent net outflows from financing cash flows, the company’s “borrow new money to repay old debt” capital cycle will become increasingly tight. If a financing break occurs, it could face a liquidity crisis.

A breakthrough in external guarantee risk has become another hidden worry for the company’s financial situation. By December 2025, Shenzhen Huqiang and its controlling subsidiaries’ cumulative external guarantee balance reached 7.506 billion yuan, accounting for 107.88% of the latest audited net assets attributable to shareholders. This has already exceeded the 100% risk alert line. Under regulatory rules, when the total guarantee amount exceeds 50% of net assets, any additional guarantees require strict review. Shenzhen Huqiang’s guarantee ratio is far above the normal standard, meaning that if a guaranteed party defaults, the company could face the risk of wiping out net assets. Although the company claims that “guarantee risk is controllable,” that statement lacks specific quantified data support.

What is even more worth attention is that the solvency of the subsidiaries being guaranteed differs significantly, further amplifying guarantee risk. Data as of the end of September 2025 show that the wholly owned subsidiary Hong Kong Xianghai’s asset-liability ratio was 30.7%, indicating relatively strong solvency. However, Huqiang Semiconductor (Hong Kong)’s asset-liability ratio was 71.3%, already above the 70% regulatory focus line, suggesting weak solvency. In addition, among the controlling subsidiaries, for Qinno (Hong Kong), its other shareholders did not provide guarantees in proportion to their shareholdings and instead provided counter-guarantees only through equity pledges. This means that if Qinno (Hong Kong) were to default, Shenzhen Huqiang would bear all guarantee responsibilities, while other shareholders would bear only limited losses through pledged equity.

High-dividend “bloodletting” of listed companies

While the listed company’s capital chain is under pressure, another operation has continued—large-scale dividend payouts.

In 2025, Shenzhen Huqiang already implemented two rounds of dividends. For interim dividends, cash dividends of 2.00 yuan were paid for every 10 shares; the third-quarter dividend was also 2.00 yuan per 10 shares. Total dividends paid were 418 million yuan. The latest annual report shows that the company also plans to pay an additional cash dividend of 1.00 yuan per 10 shares at year-end. In 2025, cumulative cash dividends totaled 523 million yuan, and the dividend payout ratio reached 112%.

This is not an isolated case. In 2024, the company paid a total of 450 million yuan in cash dividends, and the dividend payout ratio reached 211%.

Image source: Wind

“This means the company has used almost all of its profits—even exceeding the profits’ funding—to pay dividends. Given its own tight cash position and short-term debt piling up, such a high-dividend policy looks especially abnormal,” a securities analyst who has tracked Shenzhen Huqiang for a long time told Interface News reporters. “Under normal circumstances, when a company’s cash flow is tight and debt-servicing pressure is high, it would appropriately reduce the dividend payout ratio and retain funds to supplement working capital or repay debt. But Shenzhen Huqiang’s actions are exactly the opposite.”

The controlling shareholder, Huqiang Group, is the biggest beneficiary of this dividend policy. By the end of 2025, Huqiang Group directly held 728 million shares of Shenzhen Huqiang (including shares that have been pledged), representing a shareholding ratio of 69.59%. Based on this, of the 520 million yuan dividend paid in 2025, the controlling shareholder received approximately 359 million yuan in cash. In 2024, Huqiang Group received dividends of 313 million yuan.

The next question is the timing of the dividend payouts. In the first half of 2025, the company’s operating cash flow fell by 32.57% year over year, with short-term debt piling up and financing-activity cash flows registering net outflows for many consecutive years. Under such tight internal funding conditions, why would the company distribute most of its profits in the form of dividends?

Exchangeable bonds—an covert channel for disguised reductions

In 2025, Shenzhen Huqiang’s controlling shareholder Huqiang Group issued three tranches of exchangeable corporate bonds in quick succession. In that year, in August, “25 Huqiang E1” was issued with a size of 700 million yuan; in September, “25 Huqiang E2” was issued with a size of 1.7 billion yuan; and in December, “25 Huqiang E3” was issued with a size of 1.3 billion yuan. The three tranches totaled 3.7 billion yuan of financing, and the coupon rates for all three were 0.01%.

Image source: Wind

Exchangeable bonds are fundamentally different from convertible bonds: convertible bonds are issued by the listed company, and the funds enter the listed company to support development; exchangeable bonds are issued by shareholders, and the funds enter the shareholders’ pockets. The essence of exchangeable bonds is a financing tool in which shareholders pledge the shares of the listed company they hold. According to a related interpretation by China Securities Journal, the core logic is: during the bond’s term, the holder may convert the creditor’s rights into the underlying shares at the agreed price. If the stock price rises later and triggers the exchange, the holder sells the shares to realize gains, while the issuer (controlling shareholder) indirectly completes a reduction in holdings without increasing the listed company’s total share capital.

The subtlety of this financing tool is that it may become a channel for a major shareholder’s disguised reduction in holdings. A bond investment manager explained to Interface News: “If a major shareholder wants to reduce holdings but does not want the outside world to know, or does not want to lose control of the company immediately, they will issue exchangeable bonds. After issuance, the major shareholder receives financing, and the bondholders can choose to exchange at maturity. There’s a time lag here: after the issue is completed, the major shareholder already has the money and whether and when shares are transferred is a matter for the future. It feels like the shares haven’t changed, but in reality it’s already a disguised reduction.”

For the three tranches of exchangeable bonds issued by Huqiang Group, the initial exchange price was 29.97 yuan per share. All three bonds were issued in 2025, with a three-year term, leaving more than two years until maturity. The bond terms include a redemption mechanism. For “25 Huqiang E1” and “25 Huqiang E2,” after maturity, Huqiang Group will redeem all of the bonds of that tranche that have not been exchanged to bondholders at a redemption price equal to 106% of the bonds’ par value. For “25 Huqiang E3,” the redemption price is 103% of the bonds’ par value.

“A change in the redemption conditions means the market has become more optimistic about Shenzhen Huqiang’s share price, so investors are willing to accept a lower guaranteed return,” the bond investment manager said. “But for the listed company, this is not good news. The controlling shareholder has already obtained 3.7 billion yuan in financing in advance through exchangeable bonds, making the urgency of its capital needs very clear. If over the next two years Shenzhen Huqiang’s share price stays at 29.97 yuan per share or above, bondholders will choose to exchange, which will dilute the controlling shareholder’s ownership ratio and may affect the stability of the company’s control. More importantly, this disguised reduction does not need to trigger a reduction-in-holdings announcement. Small and medium shareholders often learn last, and their interests are hard to receive effective protection.”

Finance company—an “hub” for pooling funds

In August 2025, Shenzhen Huqiang and Huqiang Group Finance Co., Ltd. renewed the “Financial Services Agreement.” Under the agreement, the finance company provides the listed company with a comprehensive credit line of 2.5 billion yuan, while the listed company and its subsidiaries’ daily maximum deposit balance with the finance company must not exceed 2.5 billion yuan.

This agreement itself is not unusual—many corporate groups establish finance companies to manage internal funds. But when the agreement’s terms are compared with actual execution, some details are worth attention.

As of June 30, 2025, Shenzhen Huqiang’s deposit balance with the finance company was 1.187 billion yuan, accounting for 42.90% of the company’s total deposits of 2.767 billion yuan. Meanwhile, the company’s loan balance with the finance company was zero.

By contrast, the company’s loan balance obtained from banks in the same period was 6.124 billion yuan. The listed company bears interest expenses on bank borrowings (109 million yuan) but deposits a large amount of funds into the finance company. The finance company uses these deposits for interbank lending or investments to earn interest income. With funds moving in and out, the listed company bears the interest spread loss, while the finance company controlled by the controlling shareholder gains interest income.

It is also worth noting that the finance company itself has compliance issues. In June 2025, Huqiang Group Finance Co., Ltd. was fined 400,000 yuan by the Shenzhen Financial Regulatory Bureau for “insufficient rectification of issues found during on-site inspections,” and the then-chairman Zhao Jun was warned. The phrase “rectification not sufficient” in the administrative penalty announcement implies that the problems were not discovered for the first time, but were repeated and not thoroughly rectified.

Image source: Shenzhen Financial Regulatory Bureau website

The related-party transactions between the listed company and the finance company are not isolated business arrangements. They echo the listed company’s high dividends and the controlling shareholder’s exchangeable bonds—dividends move cash from the listed company to the controlling shareholder; the finance company pools deposits into a platform controlled by the controlling shareholder; and exchangeable bonds allow the controlling shareholder to obtain financing in advance. With three channels running in parallel, they jointly point to the controlling shareholder’s capital needs.