With deepening regulation and stricter law enforcement, the chaotic M&A and restructuring market has been brought under control, with improved market order and optimized resource allocation, and this highlights the critical role of capital market in serving our national strategies and the real economy. The SZSE market of M&As and restructurings focuses on serving the real economy, with great emphasis on nurturing new engines of growth, promoting transformation and upgrading, boosting state-owned enterprise (“SOE”) reform and serving the “Belt and Road” initiative. Overall, a sound momentum has taken shape.
In the first half of 2018, M&A and restructuring market in Shenzhen maintains a sound development trend with obviously better quality and higher efficiency and more rational distribution. As of June 30, the number of SZSE-listed companies that suspended stock trading to plan major asset restructurings stand at 206, much lower compared with the same period in 2015 and 2016. Some companies went through restructuring while upholding the principle of phased disclosure; therefore, they did not apply for trading suspension. A total of 82 major asset restructuring plans were disclosed, involving a total transaction amount of CNY248.3 billion, equivalent to that of the previous year. Average transaction amount reaches about CNY3 billion, a 22% year-on-year increase. Although the number of restructurings does not increase significantly, their quality and structure have improved significantly. Meanwhile, many breakthroughs have been made, which are typical representatives in their respective industries and reflects mainstream values and reforms. They fully exemplify transformations in the quality, efficiency and momentum of our national economy.
Embracing the new economy and injecting new growth momentum
Recently, the new scientific and industrial revolution represented by information technology is booming. Innovative enterprises featured by new technologies, industries and business models keep popping up. New economy enterprises are embraced and welcomed by SZSE-listed companies. In the first half of 2018, nearly one-third of the M&A targets are related to Internet, big data, cloud computing, artificial intelligence, software and integrated circuits, high-end equipment manufacturing, biomedicine etc., with a total transaction volume of about CNY41.5 billion, a significant increase compared with the same period of last year. For example, HGZN acquired auto welding equipment manufacturer to expand its technology and talent pool in the field of high-end smart equipment manufacturing and improve its flexible production capacity of the shared production lines for multiple types of vehicles.
Focusing on industrial integration to guide asset valuation
In recent years, the side effects of restructurings of high evaluation, high goodwill and high performance commitments and “copycat” restructurings are manifesting themselves, and the acquired assets are out of control from time to time. In the first half of 2018, quality of the M&A market continued to improve. 48 out of the 84 disclosed restructurings were related to industrial chain integrations and M&As based on industrial integration gradually became the mainstream. Meanwhile, valuation appreciation rate of M&A targets on the Main Board, SME Board and ChiNext Board dropped by about 30% compared with the same period last year. Valuation in the M&A market went back to normal. For example, ADDSINO acquired three information security and big data technology service providers to strengthen its information security capacity and improve its equipment information system building capacity. LPHT acquired a hybrid corn seed R&D company to expand its presence in corn seed industry in China and achieve strategic synergy. Under a new wave of scientific and technological revolution and industrial transformation, listed companies strengthen their upstream and downstream restructuring and M&As along the industrial chain to extend to high value-added sectors and facilitate transformation and upgrading and gain a competitive edge in the entire industry chain.
Driving the reform of SOEs and serving the national strategies
Year 2018 is witnessing SOE reform’s accelerated entry into the implementation stage from the designing and planning phase. In the first half of the year, there were 22 M&As conducted by SZSE-listed SOEs with the transaction amount of CNY95.6 billion, which account for 38% of the total value of M&As in the SZSE market. Compared with private enterprises, SOEs conduct less M&As with a larger transaction amount involved. Asset injections into large state-owned and small-platform listed companies kept emerging. For example, China Merchants Group injected quality port assets into Chiwan Wharf to integrate the corporate port assets, establish a framework where a domestic listed platform controls an overseas listed platform, and solve structural contradictions between domestic and overseas capital platforms, realizing the supply-side structural reform of Shenzhen port. COFCO injected an enterprise engaged in deep processing and R&D of fuel ethanol, starch, and corn into COFCO Biochemical, building it into the sole firm under COFCO specializing in R&D, production, and deep processing of corn, and improving the operational efficiency.
Apart from assets injections from the group, some SOEs issued shares to private companies for asset acquisition, which not only improved their profitability, but also vitalized themselves with the introduction of private capital. For example, Fengle Seed acquired from 34 natural persons the equities in a corn seed company to expand its market share in Southwest China, achieving seed resource sharing and complementing each other’s advantages. While the SOE reform is deepening, M&As will be the hub of SOE reform and development. Cases like combination of strong enterprises, mixed ownership, internal reorganization will continue to emerge.
Addressing over capacity and supporting the supply-side reform
In the first half of 2018, the restructuring plans of 15 SZSE-listed companies involved asset sale, mainly in chemical engineering, minerals, manufacturing, real estate, and retail industries. These companies have taken substantial steps to shut down and spin off their loss-making assets, optimize and allocate production factors, and clear their production capacity. For example, International Medicine sold its commodity retail business to focus on medical services and concentrate quality resources to improve its competitiveness in medical services. Besides, when selling their assets, some enterprises also purchased assets to weed out the obsolete assets and introduce the advanced ones, achieving great development. For example, ZYSCO sold loss-making industrial specialized equipment and quality special steel billet business, and bought 100% stake in COFCO Capital. At present, the company’s business covers several financial businesses such as trust, futures, insurance, and banking, switching to an investing holding platform featuring agricultural finance.
Serving the “Belt and Road” initiative and promoting two-way opening up
There are about 450 SZSE-listed companies conducting business in countries covered by the “Belt and Road” initiative, with investment in the “Belt and Road” area amounting to CNY70.6 billion, and M&As amounting to CNY48.4 billion over the past five years. The “Belt and Road” initiative begins to demonstrate its leading and radiation effect. In the last two years, the number of M&As involving traditional industries like real estate has gradually decreased, and that involving technology and service enterprises has increased significantly. For example, in the first half of 2018, Hangxin Tech. purchased MMRO, an Estonian aircraft technical support solution provider with cash, completing its layout in the field of aviation maintenance and expanding its service scope, market areas, and customer base. Career International bought Investigo, a British human resource enterprise. Through the acquisition, the company intended to vigorously develop British and European markets and build a global human resource service system for its domestic human resources.
An officer from SZSE expressed that SZSE would continue to follow the unified leadership the CSRC, fulfill its front-line regulatory duties, take responsibilities, and actively push forward the M&As and restructurings of listed companies from the following five aspects: First, to optimize the restructuring and trading suspension mechanisms, curb random and long-term suspensions, and enhance supervision of abnormal stock price fluctuations. Second, to strengthen regulation of performance commitments, and enhance the hard constraints on M&As. Third, to give full play to the market mechanism, and push forward the marketization process of M&As. Fourth, to urge intermediary organizations to fulfill their duties and duly conduct relevant investigations and maintain the standards as gatekeepers. Fifth, to enhance disclosure of information on restructurings and safeguard investors’ right to know.
