Falsely inflated revenue by 182 million yuan and was labeled "ST"; Hengxin Dongfang urgently needs to strengthen its internal financial controls.

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Source: Daily Economic News

Author: Du Yu

On the evening of April 3, Hengxin Dongfang (rights protection) (SZ300081) announced that due to false records in the 2022 annual report, based on the Beijing Securities Regulatory Bureau’s “Administrative Penalty Notice” and relevant Shenzhen Stock Exchange regulations, the company’s stock trading will be subject to other risk warnings. The company’s stock will be suspended for 1 day starting from the market opening on April 7, and will resume trading on April 8 with other risk warnings, with the stock abbreviation changed to “ST Hengxin”.

After investigation, Hengxin Dongfang’s violations mainly manifested as violations in revenue recognition methods. In 2022, the company engaged in computing power system integration and technical services with Creative Information Technology Co., Ltd. and Nobi Kan Artificial Intelligence Technology (Chengdu) Co., Ltd., selling servers and related software to Creative Information and software to Nobi Kan. However, Hengxin Dongfang did not have control over the goods during these transactions, and despite being aware of the transaction mode, still adopted the gross method to recognize revenue, which does not comply with the relevant provisions of the “Enterprise Accounting Standards,” resulting in an artificial increase of operating income by 182 million yuan in 2022, accounting for 37.12% of the disclosed operating income for that period. This inflated behavior not only violated the relevant provisions of the “Securities Law” but also seriously misled investors, damaging market fairness and transparency.

Regulators plan to impose severe penalties on the company and responsible personnel, with total fines exceeding 700k yuan. Hengxin Dongfang is ordered to correct the violations, given a warning, and fined 5 million yuan; former Chairman and General Manager Meng Nan, former Vice Presidents Chen Wei and Li Xiaobo, and former CFO Wang Linhai are fined 2.5 million yuan, 2.3 million yuan, 2 million yuan, and 700k yuan respectively. This penalty demonstrates the regulatory authorities’ strict crackdown on information disclosure violations, regardless of the company’s stage of development, accounting treatment must adhere strictly to compliance bottom lines.

The author believes that to truly implement rectification and rebuild market trust, the company needs to adopt more systematic and in-depth measures. First, the company should strictly follow the core principles of the “Enterprise Accounting Standards” regarding revenue recognition, establish a business substance review mechanism, pre-judge the applicability of gross and net methods, and ensure that financial treatment aligns with business substance, thereby preventing accounting errors from the source.

Financial data also shows that the company expects a net profit attributable to parent of a loss between 365 million and 475 million yuan in 2025, with the growth of the computing power business dragging down performance during its cultivation period. Hengxin Dongfang should face the transformation difficulties squarely, conduct cautious assessments of the commercial feasibility of the computing power business’s closed-loop. Only by strengthening financial internal controls, returning to business substance, and improving information disclosure quality can Hengxin Dongfang rebuild trust in the capital market and achieve sustainable development, truly implementing the strategic transformation of digital creativity and computing power services.