"Star Market Daily" October 30th News (Reporter: Chen Mei) A-shares are currently experiencing a new wave of mergers and acquisitions, with many listed companies engaging in cross-border mergers. However, at the same time, exchange supervision is also on the rise.

Recently, Dalian Bio-chem (603360) cross-border capital increase in Suzhou Xinhui Lian Semiconductor Technology Co., Ltd. (referred to as Xinhui Lian) has attracted attention from the Shanghai Stock Exchange.

Dalian Bio-chem stated that it received the Shanghai Stock Exchange's "Regulatory Letter on Overseas Investment and Capital Increase of Dalian Bio-chem Co., Ltd." (referred to as the "Regulatory Letter"). In the "Regulatory Letter", the Shanghai Stock Exchange raised questions about the significant increase in new business revenue of the target company Xinhui Lian, the achievability of performance commitments, and the arrangements during the spin-off process.

It is worth noting that in the past half month, including Dalian Bio-chem, three companies involved in cross-border mergers and acquisitions have been queried by the Shanghai Stock Exchange. The other two are Dongguan Huali Industries and Jiangxi Lianchuang Opto-electronic Science&Technology, all three companies are related to high premium valuations, performance betting, among other issues.

Fourfold premium, Dalian Bio-chem "buys" non-core assets

Caifinance Venture Capital Data shows that the Xinhui Lian that received capital increase was established in 2019. Before the capital increase, the company had gone through multiple rounds of financing. From May to July 2021, Dongzheng Capital and Changshu Dake Industrial Venture Capital participated in its tens of millions A round financing focusing on the development of wafer bonding machines. The post-financing valuation of the company at that time was 0.41 billion yuan.

In 2022, PuKe Investment and others invested in Xinhui Lian's equity financing, with a post-investment valuation of 1.2 billion yuan, a 156.1% increase from the previous valuation. The reason for such significant growth, as stated by Dalian Bio-chem, is that at that time, Xinhui Lian had achieved a mature level of technology in multiple product areas, expected commercialization, and a significant increase in scale.

"Science and Technology Innovation Board Daily" reporters noticed that in this round of investment in Dalian Bio-Chem, only part of Xinhui Lian's assets are involved, excluding the business of 'wafer bonding machine research and development'.

In the announcement, Dalian Bio-Chem stated that after the investment, it will directly hold 46.6667% equity of Xinhui Lian, the corresponding value of which is 0.829 billion yuan, with an appreciation rate of 391.25%, meaning a 4-fold premium.

At the same time, the original Xinhui Lian is being subdivided, with 46.6667% equity being increased by Dalian Bio-Chem, and the other part of the business 'wafer bonding equipment-related business and assets' being transferred to the new company Xinhui Lian Xin (Suzhou) Technology Co., Ltd. (referred to as 'Xinhui Lian Xin').

Information released by Changshu National High-tech Zone shows that in the A-round financing, Xinhui Lian, including the research and development of 'wafer bonding machines', has assembled a professional team of experienced professionals in the semiconductor field, mainly researching and producing Electrostatic Chucks (referred to as E-CHUCK, ESC). ESC is a key specialized fixture for manufacturing equipment such as dry etching, PVD, CVD, etc. It not only plays a decisive role in the qualification rate of products but also can increase the effective area of silicon wafers by 5%, achieving higher output ratios, which is the core technology that 'can hold the key'.

In other words, the investment in Xinhui Lian by Dalian Bio-Chem is not the core asset of Xinhui Lian. As a result, Dalian Bio-Chem has been questioned by the Shanghai Stock Exchange, including inquiries about the existing orders and prospective orders of the investment target, valuation, and business synergy.

It is worth noting that the 46.6667% equity of Xinhui Lian in this round corresponds to a pre-investment valuation of 0.8 billion yuan, while Dalian Bio-Chem has acquired it at a price of 0.7 billion yuan.

The third quarter report of 2024 shows that Dalian Bio-Chem's revenue is close to 0.9 billion yuan, with a net income attributable to the mother of 0.4135 billion yuan. This means that Dalian Bio-Chem needs to use the net income and other funding sources from the first three quarters of this year to complete this investment transaction.

Valuation, performance betting, leading to regulatory focus.

This is not the first time that the Shanghai Stock Exchange has issued regulatory inquiries regarding foreign investments, capital increases, mergers, acquisitions, and other matters.

The 'STAR Market Daily' noted that recently Dongguan Huali Industries (603038) and Jiangxi Lianchuang Opto-electronic Science&Technology (600363) have also been queried by the Shanghai Stock Exchange due to equity acquisition events, and the inquiries are all related to high premium acquisitions and performance guarantees.

Jiangxi Lianchuang Opto-electronic Science&Technology plans to acquire 8% equity held by the controlling shareholder Jiangxi Electronic Group Co., Ltd. in 'Lianchuang Superconductor', which has been queried by the Shanghai Stock Exchange due to the acquisition premium exceeding 22 times and being a related asset. Caixuetong Venture Investment Information Platform shows that Lianchuang Superconductor is a company in the field of high-temperature superconductor technology.

Dongguan Huali Industries also faced inquiries due to the acquisition price of assets, with the acquired target seeing an increase in net assets attributable to owners reaching 188.83%. Meanwhile, in the regulatory inquiry response, Dongguan Huali Industries stated that the acquired assets have formed goodwill of 0.203 billion yuan, accounting for 14.85% of the net assets. The 'STAR Market Daily' noted that the acquisition of 'Shangyuan AI' by Dongguan Huali Industries involves the development of artificial intelligence, while Dongguan Huali Industries' main businesses are home materials and industrial internet.

In addition, Dalian Bio-chem (603360), Dongguan Huali Industries (603038), and Jiangxi Lianchuang Opto-electronic Science&Technology (600363) have all established performance guarantees when making acquisitions and capital increases.

For example, in the acquisition of Lianchuang Superconductor by Jiangxi Lianchuang Opto-electronic Science&Technology, a 'Profit Compensation Agreement' was signed with the target company. Lianchuang Superconductor undertook to achieve a cumulative net income attributable to owners not less than 0.6 billion yuan from 2024 to 2026.

Dongguan Huali Industries also committed to the acquisition of assets, with non-net profit attributable to owners not less than 38 million yuan, 53 million yuan, and 6.5 million yuan from 2024 to 2026.

The aforementioned Xinhui Lian committed to a total net income not less than 0.5 billion yuan from 2024 to 2026.

In response, Bu Rixin, the founder of Venture Capital Hard Technology, said in an interview with "Star Daily" reporters that mergers and acquisitions in the technology field do not have a high reference value for valuation premiums, because the valuation premium is relative to net assets.

In Bu Rixin's view, most technology projects operate with light assets, and their net assets do not represent the true value of the company. Specifically, semiconductor equipment companies that are acquired, strictly speaking, cannot be considered as heavy asset projects. At the same time, performance commitments, although currently a default practice in listed company mergers and acquisitions, should not become the norm.

"However, the synergy effect is not a short-term immediate effect, and performance commitments are short-term events. Essentially, it goes against the original intention of mergers and acquisitions, and it is possible that due to performance commitments, the target of the acquisition may prioritize short-term benefits over long-term strategies.

Regarding mergers and acquisitions of listed companies, Bu Rixin stated that as the number of merger cases increases, regulators should strengthen guidance. "Only by returning mergers and acquisitions to the true logic and developing towards a more rational and market-oriented direction can we achieve a win-win situation for both parties and the market."