Recently, the news of a pharmaceutical company's cross-border acquisition of a chip company has caused a sensation in the market.

Originally, cross-border acquisitions are not new, but the subject of this acquisition is a loss-making pharmaceutical company, with a pre-suspension market cap of only 2.16 billion; while the target of the acquisition is a profitable chip company with a valuation of over 0.3 billion, reaching 10 billion in the last round of equity transfer in 2021, which is a typical case of "the small swallowing the large".

Moreover, both of these companies are under the control of the same actual controller, crossing two completely unrelated high-tech industries, making people can't help but marvel at the terrifyingly broad boundaries of this founder's ability.

It was learned from east money information that on the evening of September 10, listed company Hainan Shuangcheng Pharmaceuticals (002693.SZ) released the "Hainan Shuangcheng Pharmaceuticals Co., Ltd. issuance of shares and cash payment for the acquisition of assets and the fundraising for the matching funds and related party transaction prospectus" (hereinafter referred to as the "acquisition plan"), planning to acquire 100% of the shares of Ningbo Ola Semiconductor Co., Ltd. (hereinafter referred to as "Ola Semiconductor") by issuing shares and paying cash.

As the counterparty to the transaction is an enterprise controlled by the actual controller of the listed company Hainan Shuangcheng Pharmaceuticals, it is an affiliated party of the listed company, and the actual controller of the listed company will not change before and after the completion of the M&A transaction. According to the "Administrative Measures for Major Asset Restructuring of Listed Companies," this transaction constitutes a related party transaction and a major asset restructuring but does not constitute a restructuring for listing.

Before the transaction, Hainan Shuangcheng Pharmaceuticals mainly engaged in the research, development, production, and sales of chemically synthesized polypeptide pharmaceuticals. After the acquisition and restructuring, it will achieve a strategic transformation, focusing on developing simulation chip and mixed analog-digital chip design businesses, and will selectively divest pharmaceutical-related assets in the future.

Trading overview, source: Hainan Shuangcheng Pharmaceuticals acquisition plan.

01

Hainan Shuangcheng Pharmaceuticals has accumulated losses of 0.13 billion over the past 5 years.

Hainan Shuangcheng Pharmaceuticals is currently mainly engaged in the research, development, production, and sales of chemically synthesized peptide drugs, including injection thymalfasin, injection somatostatin, active pharmaceutical ingredients, etc.

It is worth noting that Hainan Shuangcheng Pharmaceuticals went public in August 2012, and since 2020, there have been more years of loss than profit. Among them, the net income attributable to shareholders of Hainan Shuangcheng Pharmaceuticals in 2021, 2022, the first half of 2023, and the first half of 2024 were -20.3251 million yuan, 9.0124 million yuan, -50.7416 million yuan, and -16.9462 million yuan, respectively. In addition to the loss of over 50 million in 2020, the accumulated losses over the past 5 years are about 0.13 billion yuan.

As of the end of June 2024, Hainan Shuangcheng Pharmaceuticals' total assets amounted to 0.82 billion yuan, and total liabilities amounted to 0.326 billion yuan.

Financial overview of Hainan Shuangcheng Pharmaceuticals, source: acquisition plan.

Before the completion of this merger, the actual controllers of Hainan Shuangcheng Pharmaceuticals were Wang Chengdong and WANG YINGPU, father and son, who together controlled 49.01% of the company's shares, and jointly served as the actual controllers of the company.

Wang Chengdong, born in the 1950s, has been the chairman of Hainan Shuangcheng Pharmaceuticals since May 2000. In addition, Wang Chengdong also owns several companies, including Ningbo Aola Semiconductor Co., Ltd., Hainan Shuangcheng Investment Co., Ltd., Hainan Zhidecheng Technology Development Co., Ltd., Shenzhen Zhongke Tianying Technology Co., Ltd., and Shaoxing Bocheng Cultural Tourism Co., Ltd. His industrial footprint can be said to be quite large.

As of the date of signing the merger plan, the equity structure of Hainan Shuangcheng Pharmaceuticals is as follows, source: acquisition plan.

In the acquisition plan, Hainan Shuangcheng Pharmaceuticals stated that with the continuous improvement of China's drug quality system and the continuous improvement of the quality requirements for people's medication, the reform of the pharmaceutical system continues to deepen.

Under this situation, the pharmaceutical industry has continuously raised the requirements for research and development and quality. The bidding system and pricing system are becoming increasingly perfect. The industry concentration continues to rise, and competition among enterprises in the industry is becoming increasingly fierce. Influenced by changes in pharmaceutical industry policies and increasingly fierce market competition, the polypeptide market where Hainan Shuangcheng Pharmaceuticals is located has been impacted, and its revenue and net income have continued to decline, with weak performance growth.

Hainan Shuangcheng Pharmaceuticals urgently needs to adjust its business structure, promote business transformation, seek new profit growth points, and improve its sustainable operation capability.

This transaction will inject the assets of Ningbo Aola Semiconductor Co., Ltd., controlled by Wang Chengdong, into Hainan Shuangcheng Pharmaceuticals, which will help leverage the resource advantages of Hainan Shuangcheng Pharmaceuticals' shareholders and improve the asset quality and sustainable operation capability of Hainan Shuangcheng Pharmaceuticals.

02

Aura Semiconductors has earned over 0.3 billion in profit in the first 7 months of this year and has previously sought to be listed on the STAR Market.

Aura Semiconductors was established in May 2018 and is mainly engaged in the research, design, and sales of analog chips and mixed-signal chips. Its current product line includes clock chips, power management chips, sensor chips, and RF chips. In addition, the company also provides semiconductor IP licensing services.

As of the date of the merger plan signing, Wang Chengdong and WANG YINGPU, father and son, together control a total of 57.51% of Aura Semiconductors' shares through direct and indirect holdings.

Aura Semiconductors' equity structure, source: acquisition plan.

It is worth noting that Aura Semiconductors had previously applied for listing on the STAR Market, with the IPO application being accepted in November 2022 and undergoing inquiries. In May 2024, the company voluntarily withdrew the application and the STAR Market IPO process was terminated.

According to the prospectus submitted by Aura Semiconductor in November 2022, the company plans to publicly issue no more than 83.34 million shares, not less than 25% of the total share capital after the issuance, and is expected to raise 3 billion yuan, resulting in an estimated market value of about 12 billion yuan. In the equity transfer in October 2021, Aura Semiconductor's valuation had already reached 10 billion yuan.

It can be seen that the valuation of Aura Semiconductor greatly exceeds the market value of Hainan Shuangcheng Pharmaceuticals (2.16 billion) before the trading halt. This acquisition is a typical "swallowing an elephant," and the pricing and share payment difficulties of the acquisition will be significant.

In terms of financial data, in 2022, 2023 (unaudited), and January to July 2024 (unaudited), Aura Semiconductor's revenue was 0.478 billion yuan, 0.472 billion yuan, and 538 million yuan, respectively. The net income during the same period was -0.856 billion yuan, -0.962 billion yuan, and 307 million yuan.

According to the acquisition plan, Aura Semiconductor's loss is mainly due to the significant share payment expenses confirmed by the stock-based incentives. The company's share payment expenses were fully amortized in 2023, and it achieved a turnaround from loss to profit in January to July 2024. Excluding the impact of share payment, Aura Semiconductor's net income for the corresponding periods was 68.3304 million yuan, 34.7187 million yuan, and 307 million yuan.

Key financial data of Aura Semiconductor, source: acquisition plan

In the previous prospectus submitted, Aura Semiconductor also disclosed its performance from 2019 to June 2022. The non-GAAP net income attributable to the parent company (excluding share payment amounts) was 10.0842 million yuan, 0.149 billion yuan, 97.6253 million yuan, and 14.2391 million yuan, respectively.

In other words, from 2019 to July 2024, Aura Semiconductor achieved a total net income of over 0.6 billion yuan after excluding share payment amounts.

It is worth noting that in 2020, Aura Semiconductor distributed a large dividend of 0.135 billion yuan despite having negative retained earnings.

In 2022, Aura Semiconductor's revenue declined, drawing the attention of regulatory authorities. The company stated in an inquiry letter that this was mainly due to unfavorable macroeconomic conditions and adjustments in the business strategies of major clients.

Key financial data for Aura Semiconductor, source: prospectus.

Whether in previous inquiry letters or in this acquisition proposal, Aura Semiconductor has mentioned the issue of high customer concentration. From 2019 to 2022, the sales revenue from the top five customers accounted for over 90% of the company's total. From 2022 to July 2024, over 50% of Aura Semiconductor's revenue comes from the largest customer.

In addition, Aura Semiconductor's product revenue structure is also concentrated. The company's mass-produced and sold products include clock chips, power management chips, and sensor chips, among which clock chips are the main source of revenue. From 2019 to the first half of 2022, the sales revenue of clock chips accounted for over 86%.

At the same time, regulatory authorities have also pointed out growth issues in their inquiries. Aura Semiconductor's clock chips, which are the main source of income, have a market share of 61.27% in the domestic market and 10.19% in the global market. The company needs to ensure future growth.

Aura Semiconductor states that consumer electronics, information communication, and automotive are the three largest application areas for clock chip products. Among them, consumer electronics and information communication markets are relatively similar in size, while the clock chip market in the automotive sector is about half the size of consumer electronics and information communication. In the information communication industry, Aura Semiconductor's clock chip products have already gained a certain market share. At the same time, the company's clock driver products have started to be applied in personal computers and new energy vehicles. As the company's clock chip product line deepens and the scale of new customers in the consumer electronics and automotive sectors continues to expand, the terminal application scenarios for clock chips will continue to grow, providing momentum for the company's revenue growth.

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Epilogue

According to the acquisition plan, after this transaction is completed, Hainan Shuangcheng Pharmaceuticals' strategic development focus will shift to the business of analog chips and mixed-signal chips. Hainan Shuangcheng Pharmaceuticals will accelerate the layout in the fields of power management chips, sensor chips, and RF chips based on the main product line of clock chips, which is conducive to speeding up the strategic transformation of listed companies and is in the interests of all shareholders of Hainan Shuangcheng Pharmaceuticals.

The issuance price paid by Hainan Shuangcheng Pharmaceuticals for this stock-based incentive is RMB 3.86 per share, not lower than 80% of the average trading price of the company's stock in the 60 trading days prior to the pricing benchmark date. The pricing of Ora Semiconductor has not yet been determined, and it will be based on the evaluation report issued by the asset evaluation institution in the future.

It is worth noting that Hainan Shuangcheng Pharmaceuticals announced a suspension notice regarding the planning of a major asset restructuring and related transactions on August 28. The stock price surged by 9.21% the day before the suspension; after resumption of trading on September 11, it recorded two consecutive daily limit increases.

Trend of Hainan Shuangcheng Pharmaceuticals' stock price, source: East Money Information

In recent years, the State Council, the China Securities Regulatory Commission, and the exchanges have successively introduced a series of policies that encourage and support restructuring and integration, creating favorable conditions for the capital market. The most recent of these policies is the "Opinions on Strengthening Supervision, Preventing Risks, and Promoting the High-Quality Development of the Capital Market" issued by the State Council on April 12, 2024, which proposes to comprehensively use mergers and acquisitions, stock-based incentives, and other methods to improve the quality of development of listed companies, increase the reform efforts of mergers and acquisitions and restructuring, and take multiple measures to invigorate the mergers and acquisitions and restructuring market.

Under multiple policy supports, China's capital market mergers and acquisitions are entering an "active period".

Data shows that since May 2024, A-share listed companies have disclosed a total of 46 major asset restructuring projects, and 7 equity-based restructuring projects have been submitted to the China Securities Regulatory Commission for registration. The relevant person in charge of the China Securities Regulatory Commission stated that overall, the market-oriented reform of mergers and acquisitions has achieved positive results, with significant mergers and acquisitions cases emerging one after another, showing the characteristics of active mergers and acquisitions of "hard technology" enterprises, and promoting technological innovation and resource integration.

Looking back at the growth history of overseas giants, without exception, they have all relied on both internal growth and parallel mergers and acquisitions. The encouragement of domestic policies for mergers and acquisitions may also become a breeding ground for the birth of multinational corporations.

Just hoping for more reasonable pricing and fewer insider trading in the process of M&A transactions, bringing tangible benefits to investors.