In-Depth Review: Hong Yuan Holding Group (OTC: HGYN) 10-K Filing Analysis

Hong Yuan Holding Group ("Hong Yuan" or the "Company") is a Nevada-incorporated, smaller reporting company trading on the Pink Sheets under the symbol HGYN. Established in 2001 and rebranded from Cereplast, Inc. in 2020, Hong Yuan has shifted from development-stage plastics research to supply chain management and fast-moving consumer goods distribution in China.

Warren.AI 💰 2.5 / 10

Executive Summary

• Business Focus: Wholesale and internet sales of FMCG—primarily liquor, wine, tea, cigarettes and mid-to-high-end gifts—supported by contract manufacturing and private label partnerships. • Corporate Structure: Parent in Nevada; China operating entities organized via a Hong Kong subsidiary (Hongyuan HK) and a Chinese VIE (Fengcuiyuan) under common-control agreements. • 2024 Financials: Revenue of $245,572; Gross profit of $92,897; Net loss of $98,844 (inclusive of non-controlling interest). Cash on hand of $46,291 versus working capital deficit of $243,326; accumulated deficit of $97.8 million. • Key Developments: October 2024 acquisition of Hongyuan HK and consolidation of Chinese supply chain subsidiaries ($64,103 purchase price). Two retail liquor stores now operational. • Investment Score: 2.5/10—High execution risk, limited scale and track record, significant going-concern uncertainties.

1. Company & Industry Background

Business Description (Item 1)

Hong Yuan provides end-to-end supply chain management services in China for fast-moving consumer goods (FMCG). Its primary offerings include:

• Distribution of mid-to-low-end to high-end Baijiu (Chinese liquor) from first- and second-tier brands (e.g., Moutai, Wuliangye) and selected tea, beverages (Zhongcha, Nongfu Spring), cigarettes, and specialty foods.
• Store Operations: Offline brand-authorized outlet model, staffed and managed by regional service partners. The Company funds store openings and operations; store partners repay by sharing future profits.
• E-commerce Supply: Providing inventory to cooperative e-commerce platforms and live-stream sellers.
• Contract Manufacturing: OEM partnerships for private label products once its own brand is registered (March 2025).

Industry Context

The Chinese alcoholic beverage market is bifurcated between high-end premium brands (CR6 like Moutai, Wuliangye commanding 86% profit share) and fragmented regional players. Key trends:

• Channel Disruption: E-commerce and live-stream platforms driving price compression; 29% of alcohol sales online with 137% live-stream GMV growth (2025).
• Consumption Upgrade: Premiumization fueling “volume down, price up” with high-end segment growing at 20–30% annually.
• Retail Pressures: Rising labor/rent costs compress brick-and-mortar margins (15–20% gross), forcing digitization and chain-model adoption.

2. Corporate Transactions & Governance

Reverse Merger & Governance

• Originally filed reverse split in 2014 (Biocorp → Cereplast).
• In 2019 emerged from Chapter 7, revived in Nevada, acquired by Custodian Ventures LLC, then sold to Xudong Li in 2020. Current CEO/Director Xudong Li controls 67% of common stock and 91% voting power through Series A-1 preferred shares.
• No audit, compensation or nominating committees; entire 2-member Board conducts those duties (Director Zhang Haosong is independent).
• Code of Ethics not yet formalized (smaller reporting co.).

VIE & Acquisition (October 1, 2024)

Hong Yuan acquired Hongyuan HK (Hong Kong) for HK$500,000 (~US$64,103) or stock. Hongyuan HK then executed entrustment, consulting and pledge agreements with Fengcuiyuan and its subsidiaries (Rongcheng and 55% Xuchang). This arrangement:

• Grants Hongyuan HK exclusive management control (vote, appoint officers, pledge shares).
• Requires consolidation of Fengcuiyuan financials under U.S. GAAP.
• Is accounted as common-control reorganization at historical carrying values.

3. Financial Analysis (Items 7, 8 & 7A)

Revenue & Profitability (2024 vs. 2023)

• 2024 Revenue: $245,572 (nil in 2023). • Cost of Goods Sold: $152,675 → Gross profit $92,897. • Operating expenses: $189,198 (+22.5% vs. $154,476 in 2023) driven by rent, personnel & office expense. • Net Loss Attributable to Parent: $98,844 vs. $154,464 in 2023 (improvement of $55,620). • Net Loss per share: $(0.00) (both periods), on 74.6 million shares.

Cash Flow & Liquidity

• Cash Balance: $46,291 at 2024 year-end (vs. $5,983 in 2023). • Operating cash used: $89,582 (vs. $111,866 in 2023). • Financing: $130,634 contributed by VIE owners. • No investing cash flows. • Working capital deficit: $(243,326).

Balance Sheet Strength

• Total Assets: $222,664 (Current: $129,016; ROU $93,091; Net PP&E $557). • Total Liabilities: $391,466 (Operating leases $93,091; payables $42,260; related party $251,887; taxes $4,228). • Stockholders’ Deficit: $(168,802) including $62,652 non-controlling interest; accumulated deficit $97.8 M.

Going Concern & Audit

Auditors (Aloba, Awomolo & Partners, PCAOB ID 7275) expressed substantial doubt about the Company1s ability to continue as a going concern, citing recurring losses and negative equity.

4. Key Risk Factors (Item 1A & Qualitative Disclosures)

Hong Yuan is defined as a "smaller reporting company"—no formal risk factor section, but material risks include:

1. Going Concern: Recurring net losses, negative working capital, dependence on related-party loans and future financing.
2. VIE Structure: Regulatory uncertainty around Chinese VIE arrangements, potential for contract invalidation, shareholder rights limitations.
3. Concentration of Control: Majority shareholder controls >90% voting via preferred shares, minimal board independence.
4. Market Competition: Severe channel price wars, digital disruption, margin compression, consumer brand shifts.
5. Operations & Scale: Low current revenue base, reliance on just two physical stores and a handful of employees (10 full-time).
6. Compliance & Disclosure: Pink Sheets listing implies low liquidity, limited disclosure obligations, higher execution risk.

5. Investment Thesis & Valuation

Pros

• Growing Market: FMCG distribution in China—especially liquor and tea—is large and expanding, with structural premiumization trends.
• Digital Potential: Ability to leverage e-commerce partnerships and live-stream channels.
• Niche Model: Store partner funding model reduces capex burden, with future profit-backed loan repayment.

Cons

• Financial Fragility: Small top line ($0.25 M), persistent losses, negative equity and working capital.
• Governance & Liquidity Risks: Light compliance, opaque related-party financing, low trading volume on Pink Sheets.
• VIE Counterparty Risk: Chinese contracts may be unenforceable; consolidation depends on trust and political climate.
• Scale & Execution: Only two stores producing modest revenue; requires rapid store roll-out and brand traction.
• High Leverage: Operating leases and related-party payables.

Valuation & Score

With a micro-cap balance sheet, minimal revenue, lack of free cash flow and high governance risk, Hong Yuan trades more as a venture than an investable equity. Unless the Company secures substantial additional capital, rapidly scales stores and mitigates its VIE/legal uncertainties, further dilution or distress financing is likely.

Investment Score: 2.5 / 10

6. Conclusion & Next Steps

Hong Yuan1s pivot into Chinese FMCG supply chain and liquor retailing notes a potentially high-growth market, but its current scale, recurring losses and structural risks limit near-term upside. Investors should monitor:

• Funding Rounds: Can the Company secure larger, independent capital?
• Store Roll-Out: Progress in opening and stabilizing more outlets.
• Revenue Trajectory: Doubling/quadrupling revenues to approach break-even.
• VIE Stability: Any regulatory or legal challenges to the VIE structure.
• Governance Improvements: Board independence, audit committee formation, better transparency.

At its current market cap and liquidity, Hong Yuan remains a speculative, high-risk play. Only with demonstrable scale-up, meaningful profit improvement and de-risked corporate governance could a more favorable investment case emerge.

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