Legal person faces trading restrictions and consecutive losses, Yihua Lu is at risk of delisting

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China Economic Journalists Gu Mengxuan and Li Zhenghao report from Guangzhou and Beijing

Recently, Yihua Lu (300212.SZ) issued an announcement titled “Regarding Restrictions on High Consumption for the Company and Its Legal Representative” (hereinafter referred to as the “High Consumption Restriction Notice”). The company and its legal representative, Xiao Yi, were issued a “Restriction of Consumption Order” by the Beijing Shijingshan District People’s Court. Due to the company’s failure to pay 2.14 million yuan in contract payments and litigation fees as per the enforcement notice, the court decided to impose restrictions on the company and Xiao Yi, prohibiting high-cost and non-essential consumption behaviors.

The China Business Journal notes that Yihua Lu has reported losses for three consecutive years. Additionally, the company’s cash flow has been tight, with negative values in the past two years.

In January this year, Yihua Lu released an announcement titled “Regarding the Termination of Some Fundraising Projects and the Permanent Replenishment of Remaining Funds into Working Capital,” reflecting the company’s strained capital chain.

Regarding the restrictions on Xiao Yi and the company’s losses, the China Business Journal contacted Yihua Lu and sent interview emails. As of press time, the company has not responded. The two official phone numbers published online are currently out of service and disconnected.

Regarding the restriction on Xiao Yi, Tian Lihui, director of the Nankai University Institute of Financial Development, told reporters that according to the “Provisions of the Supreme People’s Court on Restricting the Consumption of Persons Subject to Enforcement and Related Matters,” when the obligor fails to fulfill the payment obligations determined by effective legal documents, the court can impose restrictions on their and their legal representatives’ consumption. The threshold for applying the restriction is not high. As long as there is a “failure to perform” status, regardless of the amount or whether there is subjective malice, the court can enforce restrictions upon application or ex officio.

Internal Control Deficiencies

The High Consumption Restriction Notice shows that Beijing Shidai Lingyu Technology Co., Ltd. (hereinafter referred to as “Shidai Lingyu”) had a contractual dispute with Yihua Lu. After trial by the Beijing Shijingshan District People’s Court, Yihua Lu was ordered to pay Shidai Lingyu 2.14 million yuan in contract payments and litigation fees. Because the company failed to pay within the specified period as per the enforcement notice, Shidai Lingyu applied for enforcement, and the court imposed restrictions on the company and its legal representative.

Wang Huaitao, chief lawyer at Xin Gu Law Firm, pointed out to reporters that based on the information in the restriction notice, the direct reason Xiao Yi was restricted is that Yihua Lu, as the obligor, failed to fulfill the payment obligations within the deadline specified in the court’s enforcement notice.

Wang said that according to the “Provisions of the Supreme People’s Court on Restricting the Consumption of Persons Subject to Enforcement,” when the obligor fails to perform the payment obligations as required, the court can impose restrictions on the obligor, their legal representatives, and key responsible persons.

He emphasized that this measure does not depend on whether the obligor has subjective malice; as long as the obligation is not fulfilled on time and no effective settlement or guarantee is provided, the court can enforce restrictions upon application or ex officio. “The purpose of the restriction is to urge performance and prevent the transfer or concealment of assets through high consumption,” Wang explained.

Internal Control Flaws

The restriction notice indicates that Beijing Shidai Lingyu Technology Co., Ltd. (Shidai Lingyu) was involved in a contractual dispute with Yihua Lu, which was judged by the Beijing Shijingshan District People’s Court. The court ordered Yihua Lu to pay 2.14 million yuan in contract payments and litigation fees. Due to the company’s failure to pay within the designated period, enforcement was applied for, leading to restrictions on the company and its legal representative.

Lawyer Wang Huaitao told reporters that the direct cause of Xiao Yi’s restriction is that Yihua Lu, as the obligated party, did not fulfill the payment obligations within the deadline specified in the enforcement notice.

He stated that, according to the “Provisions of the Supreme People’s Court,” when the obligor fails to perform the payment obligations, the court can impose restrictions on the obligor and their legal representatives or main responsible persons.

He pointed out that this measure is not based on whether the obligor has malicious intent; as long as the obligation is not fulfilled on time and no settlement or guarantee is provided, restrictions can be imposed. “The purpose of the restriction is to supervise performance and prevent asset transfer through high consumption,” Wang said.

The restriction notice also shows that, as of the disclosure date, excluding already disclosed cases, the company and its subsidiaries have been involved in a total of 22 lawsuits and arbitrations over the past 12 months, with a total amount of 57.1165 million yuan, accounting for 7.84% of the latest audited net assets.

In the same period, the company and its subsidiaries have been plaintiffs in 3 lawsuits/arbitrations totaling 18.5451 million yuan, accounting for 2.54% of the latest audited net assets.

According to the Enterprise Warning System, as of now, Yihua Lu has 32 administrative regulatory measures, 4 self-regulatory measures, and 3 administrative penalties.

Financial expert and PhD Shi Lei from Nanning University pointed out that the recent concentrated lawsuits, regulatory measures, and administrative penalties reveal multiple internal control deficiencies: the inability to pay contract payments on time indicates serious loss of contract performance and financial management; some equity investments in data lake projects are insolvent, reflecting failures in subsidiary and investment management.

Shi also noted that the 32 regulatory measures and penalties highlight weak compliance awareness in areas such as information disclosure and financial accounting, with compliance systems essentially non-existent; frequent regulatory actions also point to risks related to related-party transactions and capital occupation, exposing chaotic management of funds during the company’s strategic transformation.

Expected Negative Net Assets at Year-End

The reporter notes that Yihua Lu has reported losses for three consecutive years and has had negative net cash flow from operating activities for two years.

Additionally, according to the company’s recent earnings forecast, in 2025, Yihua Lu expects a net profit attributable to the parent company of between -2.176 billion and -2.791 billion yuan; net profit after deducting non-recurring gains and losses is expected to be between -2.242 billion and -2.805 billion yuan.

Regarding the reasons for the losses, Yihua Lu stated in its earnings forecast that in 2025, the company will focus on expanding smart transportation, data elements, and data operation services. While new contracts have increased year-over-year, the company has not yet achieved operational profitability due to high financial expenses.

“The main reason for the large losses is that the company has tested for impairment of assets related to data lake assets and some equity investments, and has recognized significant impairment provisions,” the forecast said.

Yihua Lu also indicated that it expects its net assets attributable to the parent company to be negative in 2025. If the audited net assets are negative, according to the “Shenzhen Stock Exchange Growth Enterprise Market Listing Rules,” the exchange will issue a delisting warning.

Tian Lihui pointed out that the reasons for Yihua Lu’s forecasted losses can be summarized as three “losses”: first, revenue slowdown due to macroeconomic impacts, project delays, and postponed acceptance, reducing revenue to around 400 million yuan; second, cost overruns with high fixed expenses like financial costs, while R&D and market expansion have not yielded effective results; third, asset losses due to large impairment provisions on data lake assets and investments. These combined factors have caused losses to exceed revenue, which is a warning sign.

Wang Li said that the core reasons for Yihua Lu’s forecasted losses in 2025 are twofold: first, operational improvements are insufficient to cover fixed and financial costs; second, continued impairment of assets related to past businesses and investments continues to erode profits.

“This also means the company faces the risk of negative net assets at year-end,” Wang added. Once the annual audit confirms negative net assets, the company will be subject to a delisting warning, indicating that the issues are no longer just about profit fluctuations but threaten ongoing operations and listing status.

Regarding the ongoing losses and negative cash flow, Shi Lei explained that the root cause lies in the company’s painful transition from a “heavy asset” to a “light asset” strategy: the shift has been hampered by a lack of revenue from old and new businesses, with traditional data lake projects halted, causing revenue to plummet. Emerging businesses like smart transportation and data elements are either too small-scale or have long delivery cycles, unable to offset the revenue decline.

Shi also pointed out that the heavy investments in data lake projects have become a burden, with some projects experiencing settlement reductions that lowered gross profit, and poorly managed investments in subsidiaries leading to losses and asset recovery risks. Large asset impairments have directly caused significant accounting losses, accounting for about 78% of the total loss in 2024. Meanwhile, with revenue shrinking sharply, high fixed costs like financial expenses continue to erode profit margins, leading to long-term negative operating cash flow.

“Borrowing Peter to pay Paul”

The reporter notes that in January, Yihua Lu announced the termination of some fundraising projects and the permanent transfer of remaining funds into working capital, with the board approving the termination of the “Super Storage R&D Project” and the “AI Training Resource Library and Full-Field Video Perception Service Platform Project,” using the remaining funds to support daily operations and business development.

Tian Lihui pointed out that the termination of some projects reflects a harsher reality: the company no longer has the capacity for long-term R&D and must “rob Peter to pay Paul” to maintain daily operations. Using raised funds for perpetual liquidity support essentially means using shareholders’ money to “keep the lights on,” indicating that the core business can no longer sustain itself, and the capital chain is so tight that it must dip into fundraising reserves.

Wang Li said that while project termination does reflect liquidity pressure, it cannot be simply summarized as “no money on hand.” More accurately, under the background of ongoing losses, asset impairments, litigation enforcement, and pressure on net assets, the company has shifted its focus from long-term expansion to short-term cash flow management. “In other words, the company now prioritizes ‘keeping operations, maintaining liquidity, and ensuring ongoing viability,’” Wang explained.

Regarding Yihua Lu’s current situation, Tian Lihui believes that the company has reached a point where “biting the bullet” is necessary.

First, strategic reduction: the 2025 strategic consensus emphasizes focusing on “data” core products and building benchmark scenarios, which means decisively divesting marginal businesses that consume resources but are unprofitable.

Second, financial stabilization: reaching debt restructuring agreements with creditors, resolving litigation crises, and restoring banking credit and financing functions.

Third, governance overhaul: investigating internal control failures, rebuilding compliance bottom line. “The controlling shareholder, China Film Group, has proposed a ‘Five Checks and Five Looks’ approach—checking finances, operations, management, markets, and teams—and the key is to implement these requirements, not just keep them at the meeting level,” Tian said.

Shi Lei believes that Yihua Lu should urgently improve in three areas: first, liquidity relief through accelerated disposal of bad assets, seeking shareholder support, and strengthening receivables collection to resolve the liquidity crisis and “restriction of consumption” risk; second, focusing and slimming down operations, shifting from expansion to survival, concentrating on smart transportation and developing data element businesses to rebuild core capabilities; third, strengthening internal control and compliance, strictly controlling capital and contract risks, standardizing information disclosure and related-party transaction approval, and repairing management loopholes to cope with frequent lawsuits and regulatory penalties.