Shares of Zhejiang Century Huatong Group Co.,Ltd. (002602) are under renewed pressure as the company faces a regulatory warning from the Zhejiang Securities Regulatory Bureau. The action targets several shareholders, including Yaoyuqu, Yiqisheng, Jiyufan, and former controlling shareholder Huatong Holdings, for failing to meet performance compensation and guarantee obligations tied to a 2019 major asset restructuring. The directive, which mandates corrective measures, stems from a 29.8 billion yuan acquisition of Shengqu Technology, then the largest gaming deal on the A-share market.
The core issue traces back to a 2020 financial fraud at Shengqu, which inflated profits by 367 million yuan. This triggered a significant share compensation clause, requiring the three partner firms to collectively return over 126 million shares. While Jiyufan has complied, Yaoyuqu and Yiqisheng have been passive, and Huatong Holdings' guarantee has remained unenforced. Despite an arbitration victory, the company has struggled to complete the share cancellation, leaving minority shareholders exposed to losses.
This unresolved dispute is creating a stark contrast in the secondary market. After peaking in late September 2025, the stock has fallen nearly 40% by the end of July 2026. Even a strong Q1 2026 earnings report, with revenue up 35.19% and net profit surging 50.18%, was met with a near 9% drop on the day of release. The current price-to-earnings ratio is at a decade-low 4% percentile, reflecting deep valuation concerns despite robust financial results.
On July 14, the company reported a stellar half-year forecast, with revenue of approximately 22 billion yuan (up 28%) and net profit between 4.3 billion and 4.77 billion yuan (up over 60%). Its game, "Whiteout Survival," topped global mobile game revenue charts in June, and Century Games ranks second among Chinese mobile game publishers globally. Yet, a major shareholder selling plan on May 8, where Chairman Wang Ji and his associates plan to sell up to 220 million shares (3% of total shares) for an estimated 3.5 billion yuan, citing "debt repayment," has intensified market anxiety.
The compensation chain is now completely broken, exposing fundamental flaws in the original capital operation. The 2019 restructuring agreement included mutual liability clauses and guarantees from Huatong Holdings, designed as multi-layered safeguards. However, the entire system has collapsed. Jiyufan refused to fulfill its joint liability, while Yaoyuqu and Yiqisheng ignored arbitration notices and court orders. Enforcement is difficult due to the dispersed equity of the partner firms, meaning the massive compensation shares remain unrealized, effectively leaving minority investors to bear the entire loss from the Shengqu fraud.
This scenario is rare in Chinese M&A, highlighting severe due diligence and risk control failures. The default by Huatong Holdings, the original guarantor, signals deep internal governance issues, continually suppressing institutional investor confidence. Additional pressure comes from early M&A-related shareholders, like Shanghai Daoying, entering bankruptcy liquidation, releasing over 110 million restricted shares at discounted prices, creating a sustained sell-off and trapping the stock in a negative feedback loop between historical equity issues and contract defaults.
The company's current fundamentals appear strong on the surface. 2025 full-year revenue hit 37.898 billion yuan, with net profit surging 362.02 billion yuan. Q1 2026 revenue exceeded 11 billion yuan, a record for an A-share game company. "Whiteout Survival" remains a top global earner, and new ventures in AI computing power and data centers are being developed. However, this has failed to reverse the stock's decline, with the Q1 report triggering a nearly 9% drop and a 40% cumulative fall from its 2025 high.
The market's pessimistic pricing stems from multiple unquantifiable risks. The sustainability of growth is in question, and historical governance issues amplify valuation discounts. A structural shift of capital into AI and semiconductor sectors has drained liquidity from gaming stocks, despite strong overseas growth. The company's reliance on a single blockbuster game, "Whiteout Survival," is a major vulnerability, with user acquisition costs rising faster than revenue. Brokerage reports warn that a decline in the top game's revenue could lead to rapid deceleration in earnings.
The legacy M&A compliance concerns are the biggest drag. The Shengqu fraud and the chain of defaults have eroded institutional trust, with the number of heavy fund holdings nearly halving within six months. The large shareholder's selling plan compounds the pressure, suggesting a focus on cashing out rather than long-term development. Market commentary notes that pricing reflects more than current earnings, combining historical bad debts, broken promises, selling pressure, and sector outflows into a persistent valuation discount. The low P/E ratio is a risk premium, not a buying opportunity.
The costly outcome of aggressive M&A expansion is now clear. The 29.8 billion yuan acquisition of Shengqu, with its broken compensation promises and the disconnect between high earnings and falling stock prices, serves as a stark warning. The regulatory action is a broader signal against unchecked M&A and weak enforcement of compensation clauses. A company's value cannot be built solely on short-term acquisitions; shareholder credit, internal governance, and long-term risk management are the true foundations of valuation.
Looking back, Century Huatong rushed to enter the gaming sector, prioritizing M&A gains while treating performance compensation and guarantees as formalities. When the fraud was uncovered, the compensation chain failed, leaving minority investors as the ultimate risk bearers. This business model has now resulted in a severe stock price decline and institutional exit. Even with strong current earnings from overseas products and AI, the negative expectations from historical defaults, unrealized compensation shares, and selling pressure are unlikely to be resolved quickly.
For the company, restoring market confidence will require more than just operational performance. Two key actions are needed: first, pursuing all compensation shares through arbitration and court enforcement, forcing the defaulting parties to fulfill their obligations and fully covering the losses from the Shengqu fraud. Second, improving M&A risk controls to ensure that future transactions have strong compensation enforcement, preventing similar governance gaps. Transparency in shareholder selling and equity disposal is also crucial.
This event is a lesson for the entire A-share M&A market, where many companies have grown through large acquisitions but neglected the binding force of performance commitments. When targets fail, compensation defaults are common. Century Huatong's case shows that paper guarantees cannot replace real performance. Shareholder credit is deeply tied to stock price, and any breach of trust ultimately affects all investors. The capital market will not reward short-term earnings growth alone. Only by clearing historical bad debts, rebuilding shareholder accountability, and balancing short-term gains with long-term risk control can the valuation discount be eliminated, breaking the cycle of rising earnings and falling stock prices. The era of rough expansion is over; only compliance and sustainable growth can support a company through market cycles.
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