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Reform And Innovation Go Hand In Hand With Standardized Development, With M&A Restructuring Adhering To Serving The Real Economy — Review Of The M&A Restructuring And Supervision Of Shenzhen Stock Exchange-Listed Companies In 2018

Date 22/01/2019

M&A restructuring is an important way to optimize the allocation of resource pile in the capital market and key means to accelerate industrial upgrading. In 2018, SZSE upheld the general principle of seeking progress while maintaining stability, and focused on the two main lines of M&A restructuring, i.e. "market-oriented reform" and "full-chain supervision". In so doing, we stimulated the market's internal vitality, guided the market to develop in a standardized way, actively responded to changes in market conditions, and promoted M&A restructuring to play a more active role in serving high-quality economic development. According to statistics, the total number of M&A restructuring of the SZSE market was 2,522 last year and the total transaction amount reached CNY1.38 trillion, accounting for 60% and 54% of the A-share market respectively and showing a good development trend.

Facilitate market-oriented reforms to stimulate vitality.

In 2018, SZSE earnestly played its advantage of being close to the market frontline, cooperated with CSRC to facilitate market-oriented reforms in M&A restructuring, and promoted the landing of a series of important systems.

First, SZSE cooperated to work on the reform of the growth system. We deeply studied the basic system of the market, learned from the regulation experience of mature capital markets and combined it with our practice to provide suggestions for the launch of the "small-amount and quick" review mechanism and the optimization of the purpose of matching financing for restructuring. After the introduction of the such review mechanism, the 3 CSRC-approved cases by the end of 2018 (i.e. Oriental Jicheng, TRS, Henan Provincial Communications Planning & Design Institute) were all from the SME board or the ChiNext board. It took less than four months from disclosure to implementation, showing that the mechanism significantly improves market efficiency and has achieved positive results.

Second, SZSE deepened the system reform of trading suspension and resumption. In accordance with the CSRC guidance, we revised and improved the guidelines for trading suspension and resumption, deepened the concept of disclosure by stage, and further shortened the period of suspension for restructuring. The goal was to maximize the protection of investors' trading opportunities and maintain normal market order. We also adjusted in time the settings for trading suspension and resumption due to restructuring, so as to provide institutional support and process connection.

Third, SZSE improved the rules of self-discipline supervision. In combination with CSRC's new regulations and supervision guidance for M&A restructuring, we comprehensively launched the revision and improvement of information disclosure memo, business processes and key points of announcements for M&A restructuring at the SZSE level to ensure the landing of the new reform policy.

Fourth, SZSE optimized the post-review mechanism. Combined with market-oriented reforms, we focus on the risks and uncertainties of trading during the review of restructuring plans and urge companies to carry out proper information disclosure and risk warning. Meanwhile, the review efficiency has been further improved, with 60% of restructuring plans being discussed and given feedback within three days after disclosure. As a result, a "fast lane" has opened for the restructuring of listed companies.

Full-chain supervision promotes high quality development.

In 2018, SZSE reviewed the restructuring disclosure documents for a total of 174 companies (times) and issued 199 restructuring inquiry letters. SZSE stresses on both supervision and service by encouraging the M&A restructuring of listed companies and strictly holding fast to the bottom line of supervision. The supervision chain is activated before, during and after M&A restructuring, so as to promote development through supervision.

First, SZSE strictly supervised trading suspension before M&A restructuring to effectively maintain market order. In 2018, trading suspension and resumption were under our close supervision to resolutely curb the suspension for avoiding stock price drops, eradicate the "stubborn nails" of long-term suspension, and activate forced trading resumption for companies trying to delay resumption. In this way, we maintained transaction continuity and market liquidity, and protected the legitimate rights and interests of investors. In 2018, the number of new companies which went through suspension due to M&A restructuring decreased by 33% year-on-year and the average suspension time was reduced by 30% year-on-year. By the beginning of 2019, in the SZSE market, there were only six companies of long-term suspension, which tells that the negative situation of "long-term suspension" and "arbitrary suspension" has been completely reversed.

Second, SZSE carried out strict reviews during M&A restructuring and carefully guarded the first line of defense. On the one hand, we prudently followed the standards of listing by restructuring, curbed regulatory arbitrage, and conducted key supervision and inquiries on such plans for 13 companies (times) which were suspected of avoiding listing by restructuring. On the other hand, from the source, we strengthened the supervision of "high-valuation, high-premium and high-leverage" transactions, "bamboozling" restructuring, bogus transactions and interest tunneling etc. We conducted multiple inquiries to pinpoint problems and mainly played the warning and corrective function of restructuring inquiries. In 2018, the appraisal value-added rate of M&A restructuring of listed companies in the SZSE market continued to drop, with that of nearly 70% of the trading plans being within 5 times. Meanwhile, SZSE took a combination of measures including supervision inquiries and on-site inspections. For plans that still involved major doubts after inquiries, on-site inspections were initiated by the Compliance and Inspection Department working with CSRC to carefully study the problems and identify transaction risks.

Third, SZSE strictly ensured compliance after M&A restructuring and paid close attention to integration risks. The first was to focus on the integration effect after M&A restructuring implementation, especially whether the listed company could effectively participate in the operation of General Shareholders' Meeting, Board Meeting and Supervisory Committee Meeting, and the corporate governance of underlying assets. Besides, we focused on the "out of control" risk of underlying assets and strengthened information disclosure. The second was to supervise the performance commitments from the restructured objects. We initiated disciplinary measures in a timely manner against the counterparties of restructuring transaction of Philisense Technology, Changzhou NRB and Enjoyor for their non-performance of performance compensation obligations. The third was to closely focus on the risk of goodwill impairment and situations such as no impairment when there should be, inadequate disclosure of impairment tests and one-time impairment reversing, in order to guard against the risk of "black swan events".

M&A restructuring adheres to serving the real economy.

Driven by both market-oriented reforms and whole-chain supervision, the quality ratio of M&A restructuring in the SZSE market in 2018 was more reasonable and the results of quality and efficiency improvement were remarkable. The number of M&A restructuring by SZSE listed companies totaled 2,522, with the transaction amount reaching CNY1.38 trillion. Among them, material asset restructuring was involved in 173 companies (times), with a transaction amount of CNY552.9 billion and a year-on-year increase of 17%. 101 companies completed material asset restructuring, involving a transaction amount of CNY230.7 billion (excluding matching financing).

First, industrial integration has become the main theme of M&A restructuring. In 2018, industrial integration restructuring accounted for nearly 60% of the total. The trading logic was more rational and pragmatic, and there were multiple large-amount transactions between listed companies. Among them, there were mergers between A-share listed companies, such as Midea's absorption of Little Swan through share swap. Besides, there were integrations between A shares and H shares, such as COFCO Property's acquisition of Joy City. Some A-share companies acquired overseas listed companies, such as Tianqi Lithium's acquisition of 23.77% stock equity of SQM, a lithium product supplier listed in San Diego, Chile and the United States.

Second, M&A restructuring has become a new channel for promoting structural reforms on the supply side. Under the background of economic growth shift and industrial structure adjustment, 42 SZSE-listed companies of traditional manufacturing industries featuring heavy assets and strong periodic features have eliminated outdated production capacity and resolved debt risks through M&A restructuring. For example, Jidong Cement integrated BBMG Corporation's cement assets to resolve excess capacity by this megamerger, completely reversing the imbalance between cement supply and demand in the Beijing-Tianjin-Hebei market. Another example is that Hunan Valin Steel launched the first debt-to-equity swap program which was market-oriented and legalized and involved a local SOE and the steel industry. This program significantly improved its financial situation.

Third, technological innovation has become a new driving force for enterprise development. In 2018, through M&A restructuring, the SZSE-listed companies earnestly implemented the national strategy of innovation-driven development, continued to optimize economic structure and transformed development models. 43 completed material asset restructurings involved high-end manufacturing, energy conservation and environmental protection, new energy, biomedicine, medical health and Internet etc., with a cumulative transaction amount of CNY124.1 billion. Capital and technology have been closely integrated to promote the transformation of innovation results and facilitate the industrial upgrading of listed companies.

Fourth, platform-oriented integration has become a new highlight in SOE reform. With the advancement of deepening reform of state-owned capital and SOEs, central enterprises actively used the capital market to explore the operation model for state-owned capital, and construct the structure of "capital management" by headquarters and "asset management" by specialized platform companies. In this way, similar assets were integrated to one platform to realize centralized management. For instance, China Merchants Group (CMG) continuously pushed integrations such as CM Property merged by CM Shekou, Huabei Expressway merged by CM Expressway, CM Port acquired by SZCWH through share offering. CMG's goal was to effectively promote the overall listing of resources such as real estate, highways and ports.

Fifth, M&A restructuring has become a new engine for private enterprises to take off. All along, SZSE has attracted high-quality private enterprises with its distinctive multi-tiered market, standardized and transparent supervision system and professional and efficient service quality. Private SZSE-listed companies rely closely on the capital market platform to achieve leap-forward development through M&A restructuring. In 2018, among the SZSE-listed companies that disclosed material asset restructuring plans, private enterprises accounted for more than 70% of the total, and the forms of M&A restructuring were more diverse. Some of them went globally to achieve global layout, such as China Tianying's acquisition of Urbaser, a company working on environmental protection and solid waste treatment. Some of them acquired state-owned assets to finish mixed ownership reform, such as Eastern Shenghong's acquisition of Guowang High-Technique Fiber. Besides, there were integrations in the same industry and upstream and downstream, such as Blue Sail's acquisition of Biosensors International in order to join the high-end medical device sector.

In 2019, SZSE will continue to promote the market-oriented reform of M&A restructuring, effectively implement first-line supervision of M&A restructuring, and actively guide listed companies to promote supply-side structural reform through M&A restructuring. Besides, we vigorously support enterprises boasting new technologies and new business models and in new industries and new industrial formats to go public through M&A restructuring. In order to do the above, we provide "Five-in-One" services through policy consultation, rule improvement, process optimization, training guidance, and technical support etc. Our goal is to facilitate SOE reforms, support the development of private enterprises and improve the quality of listed companies.