Debt concerns may be behind Lenovo’s sudden withdrawal of STAR listing application: report

Chinese multinational technology company Lenovo’s sudden withdrawal of its application for a listing on China’s Science and Technology Innovation Board (STAR), often regarded as the domestic NASDAQ, could be linked to its high debt ratio, low research and development (R&D) input and high salary packages for its top executives, Chinese media outlets reported over the weekend.

Lenovo surprised the market by filing its 10-billion-yuan ($1.55 billion) listing application on the STAR market right before the weeklong National Day holidays, only to withdraw the application on Friday, the first trading day after the holiday.

Domestic media outlets including the Beijing Youth Daily reported over the weekend that Lenovo’s withdrawal could be due to its failure to meet STAR market requirements.

Lenovo said on Sunday that the withdrawal is due to the possibility of invalid financial information.

Lenovo’s debt to asset ratio, at 90.5 percent, is high compared with other companies listed on the STAR market, the report said. Internet companies listed on the market had an average ratio of 39.5 percent in 2018, while those in computers and telecommunications had an average ratio of 55.7 percent.

Nearly 45 percent of the IPO proceeds were to have been spent on reinvestment or to boost working capital, which is not aligned with the STAR’s requirement of putting money into innovation.

The report also pointed out that Lenovo’s proportion of R&D expenses is less than 3 percent of revenue while the STAR sets a benchmark of at least 5 percent. Many other STAR companies invest 12 percent of revenue into R&D.

Also, nearly 60 percent of Lenovo’s R&D expenses are spent as salaries for its research teams.

In addition to the company’s low profit margin of 1-3 percent in recent years, the top executives get handsome compensation packages. A total of 27 executives got total pretax income of 933 million yuan in fiscal year 2021, accounting for 7.77 percent of the company’s pretax profit. Expenditure in this area also grew rapidly in the past three years.

In a stock filing on Sunday, Lenovo said that the withdrawal was due to the possibility that financial information in its application might become invalid during the approval process, due to the scale of its business and complexity.

The company said its operations are running smoothly and the withdrawal poses no negative impact on its financial situation.

Lenovo, already listed in New York and Hong Kong, performed well from accelerated digitalization during the pandemic.

The company posted revenue of 109.4 billion yuan in the quarter ended on June 30, up 27 percent year-on-year, while net profits soared 119 percent to 3.01 billion yuan.

The Shanghai Stock Exchange said that it had accepted the withdrawal application submitted by the company and its sponsor, investment bank China International Capital Corp, and decided to terminate its listing application.

On China’s Sina Weibo, comments receiving the most “likes” suggested that Lenovo’s level of innovation disqualified it for a STAR market listing.

Source: Global Times

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