Chengdu Road and Bridge Suddenly Faces "Contract Termination" from Former Related Party: Nearly 3 Billion Yuan Engineering Contract Terminated, Over 200 Million Yuan in Project Payments Pending Recovery

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Daily Economic News Reporter | Xu Shuai    Daily Economic News Editor | Wei Wenyu

On the evening of March 18, Chengdu Road & Bridge (SZ002628, stock price 5.24 yuan, market value 3.967 billion yuan) announced that it recently received two letters from Panzhihua Chuantou Hongge Industrial Co., Ltd. (hereinafter “Chuantou Hongge”), namely a “Contract Termination and Performance Suspension Letter” and a “Contract Termination and Construction Suspension Letter,” involving two project contracts led by the company as a joint venture, with contract amounts of 162 million yuan and 2.8 billion yuan respectively. Among these, in the project with a contract amount of 2.8 billion yuan, Chengdu Road & Bridge still has over 200 million yuan in unpaid construction fees.

In response, Chengdu Road & Bridge stated it will actively communicate, urge settlement, and protect its rights through appropriate channels. The Daily Economic News reporter (hereinafter “DER”) noted that at the time of signing these two projects, Chuantou Hongge was related to Chengdu Road & Bridge, and Liu Zhihong was still the actual controller of Chengdu Road & Bridge. Since March 2023, the actual controller has changed to Liu Jiangdong. Additionally, according to the announcement, the construction periods specified in both project contracts have ended.

Image source: Chengdu Road & Bridge Announcement

The announcement shows that Chengdu Road & Bridge received letters from Chuantou Hongge, unilaterally terminating part or all of the contracts for two major projects.

One is the “Design-Build Contract for the Loho Tourism Agriculture Demonstration Park and the Central Area Road Construction Project (Bundled Projects 1 and 2).” The announcement states that this project was signed in March 2022, with a contract period of 730 calendar days and a contract price of 162 million yuan. Regarding the reason for termination, the announcement says that according to the letter, Chuantou Hongge decided to terminate the contract due to its own business reasons, and the project will no longer proceed.

The other is the larger “Rock Sheep River Channel Management, Sports Park Construction, Phase II of the Western Ring Road, New Roads in the Southern Area, Sun Lake Park, and five other bundled projects involving survey, design, and construction—hereinafter “Seven Bundled Projects Contract.”” The announcement indicates that this project was signed in December 2019, with a contract period of 36 months and a tentative contract price of 2.8 billion yuan. Of these, the construction of the new roads in the southern area, Sun Lake Park, the Redge Town Environmental Management Project, and the Rock Sheep River Channel Management have been completed and will be settled according to the contract. The other three sub-projects—Sports Park Construction, Redge Three Towers, and Phase II of the Western Ring Road—failed to proceed as scheduled due to Chuantou Hongge’s own business reasons and have been terminated.

Tianyancha shows that Chuantou Hongge was established on April 26, 2019, with a registered capital of 100 million yuan. According to the announcement, at the time of project signing, Chuantou Hongge was related to Chengdu Road & Bridge. The specific relationship is that Hongyi Industrial Group Co., Ltd., controlled by Liu Zhihong, the original actual controller of Chengdu Road & Bridge, holds 43.90% of the controlling shareholder of Chuantou Hongge, Sichuan Chuantou Huixin Industrial Co., Ltd. (“Chuantou Huixin”), and former director Xiang Rong served as a director of Chuantou Huixin. Xiang Rong, a former director and senior manager, resigned from the board in July 2021 and, as of the disclosure date, holds no position in the company. The actual controller of the company changed from Liu Zhihong to Liu Jiangdong in March 2023, and as of this announcement, Liu Zhihong holds no position.

Regarding the impact of this contract termination on the company’s financial condition, Chengdu Road & Bridge stated that for the four sub-projects of the seven bundled projects that have been accepted and audited, the company has settled the related engineering accounts as per the contract. As of this announcement, the total recognized revenue from these projects is about 435 million yuan, with approximately 268 million yuan received, and about 206 million yuan in unpaid fees.

Chengdu Road & Bridge said that the termination of these projects was initiated by Chuantou Hongge due to its own objective reasons, not due to any breach by the company. This contract termination will not have a significant impact on the company’s operating performance and financial status in 2025; the final impact will be subject to annual audit results.

Regarding the sudden termination of these two major projects, Chengdu Road & Bridge used the term “unilaterally” in the announcement: “As of the date of this announcement, Chuantou Hongge has unilaterally sent a letter to terminate the contracts, and the company has not yet signed a formal termination agreement with Chuantou Hongge.”

Chengdu Road & Bridge stated it will actively communicate and negotiate with Chuantou Hongge, urge progress in project settlement and payment, and effectively safeguard the company’s legal rights through appropriate channels. The contracts for the Loho Tourism project and the three unimplemented sub-projects of the seven bundled projects have been terminated, and no losses have been incurred from unstarted projects. After this termination, the company’s unfinished order amount will decrease accordingly.

DER found that in 2018, Dazhou businessman Liu Zhihong, together with Sichuan Hongyi Jiahua Industrial Co., Ltd. (“Hongyi Jiahua”), took control of Chengdu Road & Bridge, making Liu Zhihong the actual controller. At the end of 2022, Hongyi Jiahua’s holdings in Chengdu Road & Bridge were auctioned by judicial authorities and acquired by Sichuan Dongjun Taida Industrial Co., Ltd. (“Dongjun Taida”). Subsequently, in March 2023, Hongyi Jiahua and Dongjun Taida signed a “Voting Rights Entrustment Agreement,” whereby Hongyi Jiahua entrusted all voting rights and related rights of its Chengdu Road & Bridge shares to Dongjun Taida. As a result, Dongjun Taida gained control of Chengdu Road & Bridge, and Liu Jiangdong became the actual controller.

DER also noted that, according to the announcement, the construction periods specified in both project contracts have ended. Why did Chuantou Hongge still send termination notices? Are the project contract terminations due to commercial reasons, or because Liu Zhihong is no longer the actual controller of Chengdu Road & Bridge and no longer wishes to cooperate?

On the evening of March 18, DER called the contact number for Chuantou Hongge’s 2023 annual report. A staff member from Chuantou Hongge stated they are only an office staff member and are not aware of specific business details, suggesting DER contact their company leadership directly.

DER also contacted relevant personnel from Chengdu Road & Bridge for verification. The response was that there had been preliminary verbal communication, and the contract terminations “are solely due to the projects themselves.” Regarding the fact that the construction periods in the contracts have ended, the person explained that construction contracts generally do not have fixed deadlines, and the periods are usually tentative.

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Cover image source: Zhu Yu