Zhongzhi flags insolvency issue in letter to investors

Zhongzhi Enterprise Group is insolvent and faces major risks in continuing operations, the private investment conglomerate told investors in an open letter on Wednesday.

According to calculations by intermediary institutions, its assets total about 200 billion yuan ($28 billion), while its total debt is between 420 billion yuan and 460 billion yuan, the company said in the letter.

Since these assets are mostly in the form of debt and equity investments, the recoverable amount is expected to be low because of the long tenure of these assets and difficulties in collection. At the same time, resources available for debt repayment in the short term are far below its overall debt level. Therefore, the company's liquidity is exhausted and its asset impairment is serious, according to the letter.

Zhongzhi has a complex business structure, with various business and project entities. A large number of its corporate assets, related to financing and external guarantees, still await verification and confirmation.

Its final asset and liability situation may be adjusted, and investors will be informed in a timely manner, the company's management team said in the letter.

Zhongzhi's actual controller Xie Zhikun died on Dec 18, 2021. A large number of senior executives and its core staff members have left the company since then. As the group and its subsidiaries were highly dependent on the decisions taken by the former controller, its internal management has lapsed into a state of failure, according to the letter.

However, Zhongzhi will work closely with intermediary institutions for asset clearances and verification, and use the company's assets and equity investments to protect investor rights and interests in a fair manner, the company said in the letter.

Founded in 1995 as a papermaking company, Zhongzhi tapped into the financial sector in 2001 and gradually obtained financial licenses for insurance, financial leases, futures, mutual funds and private equities.

Public data showed that it invested in over 55 listed companies simultaneously during its peak, with its asset value exceeding 1 trillion yuan.

Zhongrong Trust, the trust business unit of Zhongzhi Enterprise Group, was founded in 2002. Public data showed that Zhongrong Trust's investment in the property sector accounted for 6.61 percent of the company's assets in 2017, which increased to 18 percent in 2020.

Major property developers such as Evergrande Group, Shimao Group and Sunac China Holdings have all worked with Zhongrong Trust. Between 2014 and 2016, Zhongrong Trust issued more than 10 trust products for Evergrande.

Evergrande — once China's top-selling property developer — is struggling with more than 2 trillion yuan in liabilities. In August, the developer filed for bankruptcy protection, under Chapter 15 of the United States Bankruptcy Code, in New York.

Since April last year, Shimao has reported bond defaults, both in the onshore and offshore markets.

The four wealth management companies under Zhongzhi Enterprise Group have reported overdue payments related to their wealth management products or suspension of payment since July.