Financial Services Association, May 27 (Reporter Li Yongjun) Today's high opening of Huakai Yibai (300592.SZ) may be seen as a correction to the market's perception that the company took over established cross-border e-commerce connectivity technology from Huading Shares (601113.SH) last week at a cash consideration of 700 million yuan. This case of two listed companies optimizing each other's asset allocation and strengthening their respective core business capabilities through mergers and acquisitions is worth reviewing.

#### Isn't the “best of both worlds” deal worth a seat?

On the evening of May 21, Huakai eBay and Huading Co., Ltd. both announced that the dust had settled on the transaction Tongtuo Technology. The buyer Huakai Ebay paid 700 million dollars in cash to marry Tongtuo Technology, one of the cross-border e-commerce “Sakata Four Tigers”. The latter calculated revenue volume of 3.4 billion yuan last year. After the merger and acquisition, there is little doubt that Huakai Ebay's revenue this year was over 10 billion dollars.

Although the seller Huading Co., Ltd. was bought for 2.9 billion yuan that year and is now sold for 700 million yuan, accounting for a huge loss of 2.2 billion yuan, it seems wise to take back 700 million yuan in cash and “decide” to put down non-core businesses and focus on the main nylon business they are better at.

However, there is no shortage of questions from the outside world about this merger and acquisition. On the three trading days after the announcement of the trading news on the evening of May 21, the stock prices of both buyers and sellers weakened. Huakai eBai's stock price fell from 13.98 yuan at the close of May 21 before disclosure to 13.72 yuan on the 24th. Huading shares also dropped from 3.96 yuan to 3.68 yuan during the same period.

As far as Huading Co., Ltd. is concerned, the main question is “buying high and selling low” as described above. As far as Huakai Ebai is concerned, the Financial Services Association reporter summed up that there are roughly three questions. First, Tongtuo Technology's Huading shares have been losing money year after year. What is the actual value of the assets collected by Huakai Ebai, and can they be converted into gold after the merger? Second, it is questionable whether this transaction is fair and cost-effective if it is evaluated using the Asset Foundation Law rather than the Profit Method, and there is no performance gamble. The third is whether the 700 million cash payment will affect the safety of Huakai eBai's cash flow.

Obviously, compared to Huading Co., Ltd., which is about to leave the market, the pressure to answer the questions is now on Huakai Yibai, which is receiving the ball.

How do you view the value of Tongtuo Technology?

Of course, looking at a merger and acquisition transaction, we may focus on two aspects. One is the quality of the underlying assets, and the other is whether collaboration can be formed.

Let's look at asset quality first. According to the transaction plan disclosed by Huakai eBay, in 2022 and 2023, Tongtuo Technology achieved operating income of 3.447 billion yuan, 3.413 billion yuan, net profit of -310 million yuan and -100 million yuan, after deducting non-net profit of -341 million yuan and -107 million yuan respectively.

From a revenue perspective, Tongtuo Technology, which experienced the Amazon “lockdown” crisis in 2021, is still “a skinny camel bigger than a horse”; from a revenue perspective, and regardless of the goodwill difference between buying and selling, business profitability has also become a real drag on the former buyer Huading Co., Ltd.

However, according to senior cross-border e-commerce people who are watching this transaction, today's Tongtuo Technology is a good target. As an iconic enterprise developed in the reckless era of the cross-border e-commerce industry, Tongtuo Technology experienced the biggest setback in 2021.

Affected by Amazon's “blockade wave” and the blocking of funds by the third-party payment tool Paypal, the total amount of Tongtuo Technology's receivables and inventory impairment losses in 2022 and 2023 was 171 million yuan and 101 million yuan, respectively. Furthermore, in 2022, Amazon's blocked store inventory discount promotion caused the current gross margin to drop to 25.65%; in 2023, the impact of the incident decreased, and gross margin increased to 29.23%.

However, from another perspective, since the above accounts receivable and inventory have all been fully depreciated, the impact on future financial data after Huakai Ebay took over has basically been eliminated.

On the other hand, Tongtuo Technology's deducted non-net profit for 2022 and 2023 was -341 million yuan and -107 million yuan, respectively. Losses are shrinking. Furthermore, in 2023, credit impairment and asset impairment totaled -101 million yuan. Excluding impairment factors, Tongtuo Technology's profit and loss basically reached balance.

In other words, Tongtuo Technology's losses were mainly due to systemic events in the industry in history. Currently, the number of Tongtuo Technology store sites is over 10,000, monetary assets exceed 400 million yuan, no interest-bearing liabilities, and the revenue scale is still above the middle of the industry. Overall, the asset quality is not bad.

Furthermore, the source warned that the price of this transaction was based on the net asset value of Tongtuo Technology, and after Huading shares were delivered and left the market, Huakai Ebai, as a leading seller in the cross-border e-commerce industry, will inevitably enable management support for Tongtuo Technology in all aspects after entering the market. The future development of Tongtuo Technology will certainly depend on its own hematopoiesis, but it will also be deeply branded as eBay, “getting into the wall and following orders”, so it makes sense that this transaction will not set performance as a gamble.

Can we collaborate after mergers and acquisitions?

In mergers and acquisitions, integration and collaboration after the transaction is the key to success or failure. So, what kind of sparks can be created between Huakai Ebay and Tongtuo Technology?

A person from Huakai and Ebay told the Financial Federation reporter that after the acquisition, the two are highly complementary and are confident that they will form a collaboration. “1+1” is greater than 2. As an example, the source said that in terms of customer unit price and SKU, Huakai Ebay has more than 1 million SKUs, and the customer unit price is around 100 yuan; Tongtuo Technology's main company sells about a few thousand SKUs, and the customer unit price is more than 200 yuan.

In terms of channels, compared with 80% of eBai's revenue coming from Amazon, Tongtuo Technology accounts for less than 50% of Amazon's revenue, and the channels are more diverse. After the merger, it will help listed companies' channels develop more evenly.

In terms of categories, Tongtuo Technology sells close to 80% of its products, which is very different from eBay and is complementary.

The source said that eBai also has advantages such as large R&D investment and strong informatization capabilities, and both are in Shenzhen, where cross-border e-commerce is most developed. In the future, they can empower Tongtuo Technology in terms of information technology, supply chain, and business management, and improve its management efficiency and profit level. The gross margin of Tongtuo Technology in the past two years was 26%-29%, and Ebay was around 37%. I believe that after empowering, Tongtuo Technology's gross margin can match eBay's and strive for a major increase.

As for concerns from the outside world, Huakai Ebai's 24Q1 financial report shows that at the end of the first quarter, the book capital was 600 million yuan, and the acquisition of Tongtuo Technology would cost 700 million yuan, whether it would affect the company's cash flow safety. The source responded that the consideration for this transaction is to be paid through its own funds and self-raised funds. Currently, the company is working with various banks to compare financing costs, and will finalize the loan amount and select the bank based on capital costs.

He said that cross-border e-commerce enterprises have abundant cash flow, and the company's book capital can meet the needs of operation and payment of consideration for this transaction. Currently, the balance ratio of the company and Tongtuo Technology is around 30%. Appropriate bank loans are conducive to optimizing the company's balance and liability structure and maximizing the efficiency of capital utilization. There is no situation where this transaction will empty the company's book capital.

The data shows that in 2023, China's cross-border e-commerce imports and exports amounted to 2.38 trillion yuan, an increase of 15.6% over the previous year. Of this, exports amounted to 1.83 trillion yuan, an increase of 19.6% over the previous year. In the first quarter of this year, cross-border e-commerce imports and exports reached 577.6 billion yuan, an increase of 9.6%, and continued to grow rapidly.

In an exchange with the relevant officials of the Shenzhen Cross-border E-commerce Association this year, the Association determined that with the combined efforts of multiple factors such as increased online consumption habits of overseas consumers, increased recognition of Chinese products, and the drive of Chinese platforms such as SHEIN, TEMU, and TikTok Shop to go overseas, China's cross-border e-commerce will still have a long dividend period.

On May 24, the Executive Meeting of the State Council reviewed and approved “Opinions on Expanding Cross-border E-commerce Exports and Promoting Overseas Warehouse Construction”. The conference pointed out that it is necessary to actively cultivate cross-border e-commerce operators, guide orderly competition, and better empower the upstream and downstream development of the industrial chain.

As cross-border e-commerce moves from a reckless period to the 2.0 stage of gradual standardized development, integration between industries is inevitable. The future development of Tongtuo Technology, a case between two listed companies, Huakai Ebay and Huading Co., Ltd., may still inspire the industry.