Built a Factory?…Stock Rollercoaster for Chinese Company, Suspicious 110 Billion Won Research Expenses

Golden Century Spends 16 Times Its Sales at Once
Operating Loss Affected by 110.3 Billion Won
Joo Seung-hwa's Co-CEO Plan Revealed

Golden Century, whose stock price has recently been on a rollercoaster ride, reportedly spent 110 billion KRW on research expenses in a single quarter. This amount, equivalent to about 16 times its sales, was spent all at once, causing the company to record a massive loss.

According to the Financial Supervisory Service's electronic disclosure system on the 30th, Golden Century announced that it recorded sales of 7.3 billion KRW and an operating loss of 110.3 billion KRW in the third quarter of last year. Compared to the same period the previous year, sales decreased by 58%, and operating profit turned into a large-scale deficit from 400 million KRW.

The cause of the large deficit is research and development (R&D) expenses. Golden Century spent 586.37 million yuan (approximately 109 billion KRW) on R&D costs in the third quarter of last year alone. This amount corresponds to 1,486% of quarterly sales. Considering that the annual R&D expenses used in recent years were about 0.5 to 1% of sales, this is an unusual case.

Golden Century is a Chinese company that manufactures parts such as agricultural tractor wheels and complete tractors. As of the end of the third quarter of last year, tractor wheels accounted for 45.3% of total sales, and tractors accounted for 24.9%.

The company explained that the 110 billion KRW scale R&D expenses were used for equipment investment in the "large tractor complete vehicle assembly business." Earlier, in April 2021, Golden Century announced that it would invest 223.8 billion KRW to build a large tractor complete vehicle production plant and ancillary facilities in cooperation with the Chinese government.

However, there is no trace of the factory construction in the financial statements. Normally, if a factory is being built or constructed, the cash spent should be recorded in the accounting books as tangible assets or assets under construction. If it is a joint venture, the equity investment should remain as an asset.

Nevertheless, as of the end of the third quarter of last year, Golden Century's tangible assets did not increase. On the other hand, cash equivalents decreased by an amount corresponding to the R&D expenses. Because the R&D expenses were reflected as losses, total equity decreased, and total assets shrank by about 33%.

The assets of Golden Century's Chinese subsidiary, Jiangsu Golden Century Intelligent Technology Co., Ltd. (Jiangsu Golden Century), which is presumed to have actually incurred the R&D expenses, also did not increase. The total assets of Jiangsu Golden Century decreased from 250 billion KRW in the first half of last year to 137.3 billion KRW in the third quarter of last year. This is because 111.6 billion KRW, presumed to be R&D expenses, was reflected as a loss.

According to an insider, the recent R&D expense spending was pushed forward by Golden Century's co-CEO Joo Seung-hwa. CEO Joo is the largest shareholder, holding 11.84% of Golden Century's shares. A company official claimed, "In a fiercely competitive tractor complete vehicle market in China, CEO Joo forced a large-scale R&D expense spending without sufficient market research."

Meanwhile, Golden Century's stock price has been on a downward trend throughout last year. The sharp decline in performance is considered the main cause. Additionally, news at the end of last year that Golden Century's management was involved in stock price manipulation also weighed down the stock price.

According to financial authorities, Golden Century conducted a paid-in capital increase from the end of 2017 to early 2018. At that time, major executives are suspected of manipulating the market to raise the issuance price of the capital increase. CEO Joo was the largest shareholder and CEO of Golden Century at that time.