by Court-ordered restructuring being negotiated
URUMQI, Xinjiang, China — Markor International Home Furnishings reported a net loss of approximately $61 million for the third quarter as revenue fell more than 30% from a year earlier, according to its filing with the Shanghai Stock Exchange made on Oct. 30. Revenue dropped to about $76 million as the company waits to learn whether a court will require it to restructure, the functional equivalent in China to a Chapter 11 bankruptcy proceeding.
More than half of the quarter’s loss came from one-off items, with nonrecurring charges totaling about $35 million, according to the filing. Stripping the one-off charges out, the company lost approximately $26 million from its ongoing business.
To explain the losses, Markor cited declines in sales from both its directly operated stores and franchise network in China. Also factoring in were sales of assets and the shutdown of unprofitable businesses in an effort to cut long-term operating costs, the filing states. And, just as Kuka Home and MotoMotion China did in their own 3Q reports, Markor points to increases in supply and purchasing costs because its supply chain “has not yet recovered.” (Oddly, the filing does not identify from just what the supply chain has yet to recover. Tariffs? Relocating production? Covid?)
Markor also recorded asset and credit impairments (write-downs) after a subsidiary in Tianjin entered bankruptcy liquidation, and because the company has not formally entered court restructuring, piling up in the meantime have been penalty interest, compound interest and default charges on overdue debt.
Finally, for the third quarter, cash generated by operations dropped 131% to yield an outflow of a half-million dollars, the filing’s many tables show. (For the first nine months, operating cash was essentially flat.)
Mounting debt
To resolve the debt problem while still operating as a going concern, Markor faces a Chinese state-directed corporate restructuring, which is an administrative and government intervention, according to an article in the Brooklyn Journal of International Law.
According to the same law journal article, where U.S. Chapter 11 proceedings prioritize recovery for creditors, a government-required restructuring in China typically seeks instead the preservation of jobs, social stability and supply chains, while preventing spillover effects in the relevant sector, in this case, home furnishings. Rather than debtors-in-possession at the helm, as is the case in the U.S., steering a typical restructuring in China is a group of state- or court-appointed administrators, a “liquidation group” often dominated by local officials.
In short, when a Chinese public company undergoes a state-directed restructuring, it shares the basic objective of U.S. Chapter 11, which is reorganizing liabilities to avoid liquidation, but it also lacks the procedural predictability, debtor independence and creditor-driven market mechanisms of the U.S. legal system.
These descriptions are of what is typical, which is not to say they necessarily fit Markor’s situation with exactitude.
The company’s 3Q was translated into English by Claude.
Earlier filings show that from 2022 to the present, losses at Markor have been growing, and it is these struggles that led to a court-ordered reorganization of its parent company that began earlier this year. In early October, a court ordered a consolidated reorganization of Markor Investment Group, the controlling shareholder of Markor, and two of its affiliates. Markor is in what is called pre-reorganization, which is a sort of waiting room while the debtor negotiates with creditors and investors before a court accepts the petition for a restructuring. Markor has hired an auditor to carry out a full audit of its accounts as of the end of September to support that process, the 3Q report states.
Busy court docket
There are at least 20 court cases involving Markor that have lenders demanding debts that are past due, to the tune of 1.47 billion yuan ($204 million-$207 million at 7.1–7.2 yuan to the dollar), according to a raft of filings posted at the Shanghai Stock Exchange website. And total creditor claims are much larger than the lawsuits, totaling approximately $720 million. State-owned and state-associated banks own about 85% of the claims represented in the filings, but it is difficult to parse which loans went to Markor or its owner, Markor Investment Group.
Looking at the first three quarters, Markor’s net loss more than quadrupled to about $136 million, or 0.63 yuan a share, from $33 million or so, or 0.15 yuan a share, a year earlier. Revenue fell 37% to $2 11 million from $333 million, according to the filing.
Yuan amounts were converted into U.S. dollars by Gemini using current dollars, so they are only approximations.
Excluding nonrecurring items, the nine-month loss was about $92 million.
Unlike Kuka Home and MotoMotion, however, margins for Markor sharply narrowed. The cost of sales ate up about 76% of revenue, leaving a gross margin of roughly 24%, which is down from about 33% a year earlier. Meanwhile, nonoperating expenses rose more than fivefold to $51 million, and credit impairment losses climbed to $14 million from just under $3 million.
On the cost side, the results are all over the map. While selling expenses fell 39% to approximately $63 million and R&D spending halved to about $5 million, administrative expenses rose 5% to $45 million. Interest expense added another $15 million. And while a year ago, $44 million of investment income cushioned the blow, this year the investment income line showed a loss.
What’s next?
In summary, the results show a company running out of room. This pressure began building in April when a creditor, Wuxi Kuaile Commercial Management, asked the Urumqi Intermedeate People’s Court to put Markor Investment Group into restructuring and start pre-restructuring, arguing it could not pay debts as they fell due, according to a filing by Meike, a name under which Markor also trades.
If Markor’s restructuring plan is accepted by the court, the stock will receive an additional delisting-risk warning. For its part, the company has said a failed restructuring could end in bankruptcy and delisting.
Rescue money is arriving in the form of debt forgiveness. Restructuring investors waived about $129 million of Markor’s debts between late August and the end of September, according to company announcements reported by the China News Service.
Markor Investment Group owns 34% of Markor, and all of its shares are pledged. The second-largest holder is a Ganzhou Development Meijia with 12%. Markor had 19,588 ordinary shareholders at the end of September.
Markor trades and/or operates under the names Meike, ST Markor and Markor International Business Trading, and its furniture businesses are (or have been) Jonathan Charles, M.U.S.T. Holdings, Vietnam Furniture Resources and Vivet. Markor’s controlling owner is Markor Investment Group.
Richard Feng founded Markor in Urumqi in 1990, and it began making furniture in 1992. Lots of furniture. Markor’s influence on the North American industry came from building for American brands and then buying those brands. Its two first U.S. purchases were companies it had already been making furniture for, Schnadig and A.R.T Furniture. Markor also began carrying Ethan Allen furniture in its stores in China in 2002. Acquisitions of Rowe Furniture and JCD followed, such that the Markor galaxy comprised four U.S. companies and 10 factories in China.
