Picture / visual China
The punishment of the State Administration of market supervision is only for false propaganda, not including the punishment of financial fraud. More tickets are still to come
Source: eleven people from finance and Economics
Ma Lin, Yu Le, Wu Qiong
After six months of self disclosure, lucky coffee received its first penalty.
On the morning of September 22, the State Administration of Market Supervision announced that it had decided to impose administrative penalties on Ruixing coffee (China) Co., Ltd., Ruixing coffee (Beijing) Co., Ltd., and 43 third-party companies that played a role in helping false publicity in Ruixing incident, with a total penalty of 61 million yuan.
“Finance and economics” reporter learned that due to the scope of power of the regulatory authorities, the punishment of the General Administration of market supervision is only for false propaganda. For Ruixing’s financial fraud, the Ministry of finance will make another punishment according to the accounting law. According to the official website of the Ministry of finance, the Ministry of finance has completed the quality inspection of accounting information of the domestic operation entities of Ruixing company, and found problems such as fictitious transaction volume, income, cost and profit of Ruixing, and will give administrative punishment according to law.
As of press release, the State Administration of market supervision has not announced the specific amount of fine for each company involved in the case. However, according to the Anti Unfair Competition Law of the people’s Republic of China, the company that constitutes false publicity and helps false publicity shall be fined more than 20 million yuan and less than 20 million yuan. Therefore, the upper limit of fine for each of the 45 companies involved is 20 million yuan.
In the penalty notice, the General Administration of market supervision said: “during the period from April to December 2019, in order to obtain competitive advantages and trading opportunities, Ruixing company, with the help of a number of third-party companies, falsely promoted the key marketing indicators such as sales revenue, cost and profit margin of Ruixing coffee in 2019. From August 2019 to April 2020, it widely publicized and used the false business through various channels Selling data, deceiving and misleading the relevant public, violates the provisions of Article 8 (1) of the Anti Unfair Competition Law of the people’s Republic of China that “operators shall not make false or misleading commercial publicity on the performance, function, quality, sales status, user evaluation, and previous Honors of their commodities, so as to deceive and mislead consumers”, which constitutes a false propaganda act
In addition to Ruixing, 43 third-party companies were punished, including Beijing Chexingtianxia Consulting Service Co., Ltd., Beijing Shenzhou Youtong Technology Development Co., Ltd., and Zhengzhe international trade (Xiamen) Co., Ltd. The State Administration of market supervision and administration of the people’s Republic of China held that these companies “provided substantial assistance for Ruixing company to carry out false publicity, and violated the provision of paragraph 2 of Article 8 of the Anti Unfair Competition Law of the people’s Republic of China that” operators shall not help other operators to conduct false or misleading commercial propaganda by organizing false transactions “, which constitutes the act of assisting false publicity
After receiving the punishment notice, Ruixing coffee told Caijing: “Ruixing coffee respects and resolutely implements the punishment decision made by relevant state departments on this investigation, and has carried out comprehensive rectification on relevant issues. We will further standardize business activities and ensure stable operation in accordance with relevant laws and regulations. ”
For Ruixing, who was in the “post Lu Zhengyao era”, the result of the punishment was not bad news. A senior management of Ruixing told Caijing that the company’s top management had already expected the severe punishment of Ruixing coffee by various departments of the Chinese government. The “boots” of domestic punishment have been implemented one after another, which can make the management return to the operation level as soon as possible.
The punishment from domestic regulatory authorities such as the General Administration of market supervision and the Ministry of finance is Ruixing’s first big test. In the future, lucky will also face several big tests, including fines imposed by the US Securities Regulatory Commission and the Department of justice, joint criminal liability penalties, lawsuits initiated by us shareholders, and settlement with convertible bond creditors. All of these issues will continue to make Ruixing pay a huge price.
The source told Caijing that the company is unlikely to obtain new financing channels in the short term, and has not been informed of any possible acquisition plans for the time being. Therefore, the core of Ruixing’s management strategy at this stage is to achieve hematopoiesis at the management level.
At present, lucky has taken many measures to reduce costs and improve income level. Many of the planned new projects have pressed the pause button, and the store expansion and the joining speed of Xiaolu tea have also slowed down significantly. The company will focus on the business that can generate positive cash flow and change its target from “rapid expansion” to “survive” through refined operation.
“Cutting” Lu Zhengyao
Since Ruixing exposed financial fraud, the board members of Ruixing have changed frequently, and the contradiction between Chairman Lu Zhengyao and the capital side has been made public. At present, Lu Zhengyao has left Ruixing’s board of directors and management and lost all shares.
Whether Lu Zhengyao was involved in financial fraud was not mentioned in the investigation results of the special investigation committee released by Ruixing on July 1. But obviously, as Lu Zhengyao is the founder and former chairman of Ruixing, and also the core figure of Ruixing’s business model, if Ruixing can cut off Lu Zhengyao, it means that Ruixing is at least trying to cut off from the history of counterfeiting.
Before that, the shares pledged by Lu Zhengyao and former CEO Qian Zhiya burst, and the shares held by them and their families were liquidated in the courts of the two islands and the British Virgin Islands. They no longer hold any shares or hold any positions in Ruixing. Therefore, in theory, Lu Zhengyao has lost his right to speak on Ruixing’s board of directors and the company’s affairs, and the power has been transferred to Dazheng capital, the shareholder with the largest voting rights.
Ruixing implements the “ab share mode”, and the voting right of B shares is 10 times of that of a shares. According to Caixin, Dazheng capital owns 43.50% of the voting rights of Ruixing and 7.15% of the shares, while pleasant capital has 3.22% of the voting rights and 5.30% of the shares.
At least from the public level, Lu Zhengyao did not appear in front of the stage. A lucky employee who did not want to be named told Caijing that before the company’s accident, Lu Zhengyao often appeared in Ruixing’s office area and often participated in Ruixing’s senior management meetings. “After the accident, he hasn’t been in the company for a long time.” The staff said.
However, there is a view that Lu Zhengyao can still influence Ruixing’s decision through his influence. At present, Ruixing’s board of directors is composed of four independent directors, namely, Cha Yang, Zhuang Weiyuan, Liu Feng and Shao Xiaoheng, and three executive directors, namely Guo Jinyi, Cao Wenbao and Wu Gang. There has been a view that the last three are Lu Zhengyao’s “own people”. One of the reasons cited is that at the general meeting of shareholders on July 5, Guo Jinyi, Cao Wenbao and Wu Gang voted in favor of Lu Zhengyao’s proposal to remove himself, Li Hui and Liu Erhai from their directorships and to nominate two new independent directors, Zeng Ying and Yang Jie.
Caixin previously quoted an unnamed person close to Lucky’s board of directors as saying that many matters of Ruixing were still reported to Lu Zhengyao.
The above-mentioned Ruixing high-level personage refuted this saying: “now Mr. Lu is no longer involved in Ruixing coffee, nor is he remotely controlling Ruixing.” He said that Lu Zhengyao no longer held the post of chairman, director or any other post since the shareholders’ meeting on July 5 and left Ruixing completely. “He himself is no longer in charge of shareholders and management.”
He also said that Ruixing’s four independent directors are from outside, and the remaining three management directors are not controlled by Lu Zhengyao. “The media has previously disclosed that Lu Zhengyao’s shares have been taken over and cleared by KPMG. A person with such a strong personality will not do such things behind the scenes, which is not in line with his personality.”
“Why only two executives (Qian Zhiya and Liu Jian) and a few employees know about such a large amount of fraud? (they) don’t quite believe this conclusion. In fact, this is the true side of the matter, because the fraud of listed companies can never let too many people know and participate. The whole system is still healthy, the management team is only a few people involved, the store is not involved.
“We’ve gone through so much scrutiny from regulators, and the board of directors has launched a thorough investigation. All executives’ computers, mobile phones, email boxes, servers, company databases and financial data were taken away. Now lucky should be the cleanest. ” The person said.
The person said that after the incident, lucky coffee has the opportunity to become a standardized company with modern corporate governance structure. At present, the management of lucky basically reports to the board of directors about every two weeks, including the analysis and processing of the company’s complex legal relationship at home and abroad, operating budget, operating results, future cash flow evaluation, and business segment adjustment. The management will implement the work after the approval of the board of directors.
Internal unrest subsided temporarily
Since the exposure of fraud for more than five months, the internal organizational structure of lucky has been reorganized, the management scope of senior management has been re divided, and some departments have also been dismantled and reorganized.
A remarkable change is that Rui Xing of the “post Lu Zhengyao era” is making a complete distinction with the “Shenzhou system”.
Ruixing coffee was born out of the founding team of Shenzhou Youche. The founders of Ruixing and Shenzhou Youche are Lu Zhengyao, and senior executives such as Qian Zhiya and Liu Jian are also members of “Shenzhou Department”. Since its establishment, Ruixing coffee has shared the office space of Beijing headquarters with Shenzhou Youche. Some departments and employees often take charge of the affairs of the two companies at the same time.
Recently, Caijing visited Ruixing coffee’s Beijing headquarters located on Zhongguancun East Road. The reporter learned that the employees of Shenzhou Youche (838006. OC) are moving out one after another. All of them will move out in October, leaving all the employees of lucky coffee.
An unnamed lucky employee said he heard that the rent of the building had been paid by lucky for a long time. According to the above-mentioned management, since the disclosure of Ruixing’s financial fraud, the situation that Ruixing and Shenzhou share the team no longer exists.
In the executive office area on the second floor of Ruixing office area, Qian Zhiya, the former CEO and Liu Jian, the COO, who participated in financial fraud, and the former CFO reinout schakel, who voluntarily resigned, all worked here. Now, these stations have been vacated or replaced by others.
(in Ruixing’s Beijing headquarters, the positions of former CEO Qian Zhiya and former coo Liu Jian are now vacant. Photography / Yule)
When the regulatory authorities investigated Ruixing, Lu Zhengyao’s related Shenzhou premium car was also affected. In August, China Securities Regulatory Commission (CSRC) issued a warning and imposed a fine of 500000 yuan on Shenzhou Youche based on its investigation of information disclosure laws and regulations. Lu Zhengyao, the actual controller and chairman of Shenzhou Youche, was also fined 200000 yuan.
In June and July earlier, Shenzhou car rental (0699. HK) announced that BAIC group planned to acquire 21% shares of Shenzhou car rental from Shenzhou Youche, the major shareholder of Shenzhou car rental, and 8% equity of Shenzhou car rental from ambergem, another shareholder of Shenzhou car rental. Affected by Ruixing’s financial fraud, the share price of Shenzhou car rental once plummeted by 70%. After Shenzhou Youche sold its shares to BAIC, it will no longer hold any shares in Shenzhou car rental.
The unnamed employee said that after the fraud incident was exposed, lucky’s personnel changed frequently, and many employees left their jobs, but they have calmed down recently. “People who have the idea of leaving their jobs have basically left their jobs a while ago, so the recent staff changes are relatively small.”
The employee also said that a large proportion of the employees who left the company were engaged in research and development. In the period of rapid expansion, Ruixing recruited a lot of programmers with high salary, and now the system construction has been basically completed. “It’s not convenient for people in the business department to cut, but the technical department can.” “But many of them were very happy when they left, because they should get no less compensation.”
The employee believes that there is also a change in senior management style behind this. “We used to expand at full speed. Now we are thinking about how to reduce costs. We should calculate ROI (return on investment) before we do anything.”
Focus on main business for survival
It is generally believed that even if lucky continues to operate, financial fraud will bring “lifelong” shadow to the brand image of lucky. In this regard, the aforementioned Ruixing executives said: “some former executives and employees of Ruixing have done something wrong at the capital level, which leads to the severe punishment that Ruixing should be subject to, whether it is domestic punishment or foreign punishment. This is what our entire management team must accept. We accept punishment and admit our mistakes. We do not ask the public to understand the mistakes of the past. If we do something wrong, we must have the courage to bear the consequences. Children understand this truth. ”
After saying this, the executive added: “but from the product level, the customer level, the operation level, Ruixing is really providing real products and services, and we have not deceived anyone. Our entire team, as well as the nearly 30000 employees and the families behind them, really do not want Ruixing to die or be sentenced to death. ”
At present, Ruixing’s board of directors has employed Jindu, Dacheng and other law firms to be responsible for fines, compensation and litigation. The amount of litigation fees and consulting fees is very high, and the coming fines and compensation will be huge expenses.
Considering that it may not be able to finance in the next two or three years, Ruixing is cutting off its arm to stop bleeding and maintain cash flow. The biggest change in business strategy is to focus on the main business of coffee and continue to operate coffee stores. However, the franchise stores of Xiaolu tea have been greatly compressed and no new shops will be opened. The pace of development and launch of other projects is slowing.
It is estimated that the number of new stores of Ruixing will be maintained at more than 4000 by the end of 2020, and the number of self operated stores with heavy asset mode will decrease by 10% compared with that in 2019. The number of joint stores in franchise mode will increase greatly, with 300 at the end of last year and more than 800 in 2020.
The once controversial “burn money subsidy” strategy is no longer as wayward as before. “Finance and economics” reporter learned that before the financial fraud problem was exposed, Ruixing spent tens of millions of money on the “first free subsidy” in a month. Now Ruixing has canceled the first free coffee discount, and at the same time increased the discount rate. The actual price of coffee with a cost of less than 10 yuan has risen from 12 yuan per cup to 13.5 yuan per cup. In addition, lucky has also cancelled the policy of “no takeout fee for consumption over 35 yuan”.
Previously, China Science and Technology News Network quoted people familiar with the matter as saying that in July 2020, the cash flow of Ruixing’s single store was positive (the main business income of single store minus the cost of main business was positive, and the profit was negative), and the daily cash income was about 13 million yuan, but these data have not been audited by the audit company.