Super Telecom Faces Major Legal Battles Amid Computing Power Transition to N...

Asianfin--Since June this year, Shanghai-listed communication services provider Super Telecom has encountered two major lawsuits with striking similarities: a significant project did not go through, leading to the inability to recover a 2 billion yuan advance payment made to a Gansu-based state-owned enterprise.

In the second lawsuit, after a 2.25 billion yuan prepayment was remitted to an upstream supplier, the goods were not delivered, resulting in a breach of a nearly 5 billion yuan Nvidia GPU purchase agreement. In August, 2.83 billion yuan of the company's bank accounts were frozen.

The second lawsuit is a classic supply chain dispute, with the frozen funds amounting to three times the company's cash balance reported in its semi-annual report. During the same period, the company's prepayments reached a historic high of 927 million yuan, highlighting the supply chain dilemma behind its efforts to shift its business focus to computing power and putting the credibility of its "computing power equipment sales business" under question.

Despite this unresolved supply chain predicament, Super Telecom has seen a dramatic turnaround in its stock price, surging nearly sixfold in two years amid the soaring popularity of generative AI.

The lawsuits have prompted its major shareholder Liang Jianhua to quickly "circumvent and reduce holdings," with his family profiting over 800 million yuan, casting doubt on the company's attempted business transition from telecommunication services to computing power.

In its second year of the transition, Super Telecom is facing the two lawsuits. The first involves a 2 billion yuan advance payment to Lanzhou state-owned assets, while the second concerns a 2.83 billion yuan fund freeze due to a lawsuit with Inspur Software.

In August, Super Telecom announced that it had received a "Civil Complaint" from the Guangzhou Intermediate Court. The case stemmed from a dispute between Inspur Software and Jining Ninghua over the transaction of Nvidia H800 GPU modules, leading to a "creditor's right of subrogation" lawsuit. Super Telecom was sued to freeze 2.83 billion yuan.

The issue can be traced back to December 2023, when Super Telecom' subsidiary, Super Equipment, signed a 4.95 billion yuan contract to sell Nvidia GPU modules to Jining Ninghua Big Data Co., Ltd. It was agreed that Inspur Software Group would procure 220 Nvidia H800 GPU modules for Jining Ninghua, with delivery by February 2, 2024.

However, Super Equipment's upstream supplier failed to deliver after receiving a 2.25 billion yuan advance payment, resulting in a breach of contract by Jining Ninghua. Consequently, Inspur Software Group demanded that Super Equipment repay the advance payment and penalties, totaling 2.83 billion yuan.

In response, two senior executives of Super Telecom reached out to Inspur Software Group, but the company representative refused further negotiation.

The second lawsuit dates back to 2022, when Super Telecom paid 2 billion yuan as a "cooperation intention deposit" to Lanzhou New Area Science, Culture, and Tourism Group Co., Ltd. (Lanzhou SCT), in hopes of accelerating its data center business and participating as a general contractor in the Lanzhou Big Data Industrial Park project. Lanzhou SCT was supposed to return the funds within 12 months, along with an annualized fee of 5.3%.

However, Lanzhou SCT failed to return the funds and pay the fee, leading to a courtroom battle a year later. Super Telecom obtained a mortgage guarantee over a 79,000-square-meter property under a subsidiary of Lanzhou SCT, but the recovery of the cooperation funds remains uncertain.

The company's pursuit of computing power center general contracting, the overdue 2 billion yuan deposit, and the Nvidia GPU supply breach directly hurt Super Telecom' "computing power transformation," particularly the credibility and supply chain stability of its new "computing power construction and leasing, and equipment sales" business.

Before transitioning, Super Telecom's main business involved communication network construction projects. In 2021, the company was recognized as an "Outstanding Partner" in indoor distribution construction and equipment installation by China Mobile Guangdong.

The company's strategic pivot in 2022 aims to deploy its business strategically in Gansu Province. Super Telecom intended to partner with Lanzhou New Area Big Data Industrial Park, focusing on project development, construction, and operation.

In 2023, "deploying the computing power field" became a primary focus of the company's annual report. Following the cooperation with Lanzhou SCT, the company signed a "Strategic Cooperation Agreement" with six parties, including China Power Engineering Consulting Group Co., Ltd., for a comprehensive computing power center project in Gansu Qingyang. The company is also advancing two self-operated computing power projects in Ninghua and Qingyang.

Super Telecom's transition has exposed its insufficient control over its supply chain, putting enormous economic pressure on its liquidity. The company's cash balance has shrunk from 289 million yuan in 2022 to just 92 million yuan in mid-2024. Meanwhile, prepayments have soared to 927 million yuan in the first half of this year, a year-on-year increase of 84.01%.

The company’s operating model of “delivery first, payment later” has resulted in significant cash flow strain, partly due to the substantial prepayments made to upstream suppliers.

Additionally, the Guangzhou-based company’s ability to fulfill contractual obligations has been impacted by policy changes, market conditions, supply capabilities, and funding arrangements. Initial agreements did not explicitly define the penalties for non-compliance by all parties involved.

Despite holding a coveted position within the AI computing power domain, Super Telecom’s actual controller, Liang Jianhua, has been reducing holdings worth 827 million yuan, employing tactics like short-term sell-offs and circumvention through private equity, and even receiving regulatory penalties for deliberately "hitching onto hot topics."

Given that Super Telecom has not paid dividends for three consecutive years and has reported losses over the same period, Liang Jianhua does not qualify for direct reduction. Therefore, he has primarily relied on the secondary market for insurance. Recently, within just a few days of announcing an agreement transfer, he published another announcement changing the transaction counterpart and lowering the transfer price, surprising the market.

On July 12, Liang signed a share transfer agreement with Yue Ting, transferring 6.35% of the company’s shares at 25.84 yuan per share for a total of 258 million yuan.

Just nine days later, on July 21, Super Telecom announced that Liang Jianhua had canceled the previous agreement transfer plan and found a new buyer—Shanghai Jiuyi, a private equity fund—taking over about 6.35% of the shares for 243 million yuan, reducing the low-price sale by another 15 million yuan.

This pattern of transactions, involving a small-scale private equity fund as a potential intermediary for a larger stakeholder, suggests a strategic circumvention of regulatory norms.

In May 2024, the Shanghai Stock Exchange issued a regulatory warning to the company's board secretary, Lu Peimin, for repeatedly releasing information involving hot topics through unofficial channels without clarifying the company’s actual involvement in the related business and the uncertainty of its impact on performance.

Given these factors, the road ahead for Super Telecom in its computing power transformation appears riddled with challenges, ranging from supply chain stability and contractual compliance to market competition and regulatory scrutiny. The company’s recent financial maneuvers and legal battles have raised questions about the true substance and viability of its ambitious pivot into the computing power domain.