Nearly a month after China's Securities Regulatory Commission announced the "new policy" on mergers and acquisitions, the A-share market has seen its first cross-industry merger and acquisition deal.

On October 8th, the Shanghai Main Board-listed company, Bestchem (603360.SH), announced a plan to invest 700 million yuan to acquire a company primarily engaged in semiconductor equipment manufacturing, technical services, and product sales at nearly four times the premium.

According to the announcement, Bestchem intends to increase its investment in Suzhou X-Wisdom Semiconductor Technology Co., Ltd. (hereinafter referred to as "X-Wisdom") through its wholly-owned subsidiary, Shanghai X-Aohua Technology Co., Ltd. (hereinafter referred to as "X-Aohua"). After the capital increase, it will directly hold 46.67% of X-Wisdom's shares and control 54.63% of the voting rights through accepting the entrustment of voting rights.

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If the transaction is completed, X-Wisdom, which once aimed to go public on the STAR Market, will become a controlled subsidiary of X-Aohua and will be included in Bestchem's consolidated financial statements.

Moving from the field of industrial biocides to the higher technical barrier of semiconductor equipment, Bestchem's ongoing attempt is a typical cross-industry merger and acquisition. Against the backdrop of Bestchem's lack of talent and management experience in the semiconductor equipment industry, how the two parties can effectively integrate is a key factor in the success of this merger and acquisition.

On October 11th, a reporter called Bestchem. A person from Bestchem's securities department stated that, according to relevant regulations, this transaction does not involve related party transactions, nor does it constitute a significant asset restructuring. The transaction still needs to be submitted to the company's shareholders' meeting for review.

Traditional business encounters bottleneck and transformation

Bestchem's main business is focused on the industry of isothiazolinone industrial biocides. According to Bestchem's annual report, the company's total production capacity of industrial biocides currently exceeds 40,000 tons. With this production capacity, it is already the largest producer of isothiazolinone industrial biocide raw materials in Asia.

As the company's production capacity gradually increases, Bestchem seems to have reached the industry ceiling. According to Bestchem's 2023 annual report, the company achieved a revenue of 1.066 billion yuan, a decrease of 15.2% year-on-year; the net profit attributable to the shareholders of the listed company was 328 million yuan, a decrease of 18.43% year-on-year. Haitong International analyst Sun Xiaohan said that Bestchem's performance was mainly due to the influence of domestic and international macroeconomic situations, the decline in market demand, and the year-on-year decrease in the prices of some of the company's products, leading to a decline in operating performance.

According to Bestchem's disclosure in the aforementioned annual report, the gross profit margin of Bestchem's industrial biocides in 2023 was 52.58%, a year-on-year decrease of 3.11%.Bai Ao Chemical's downward trend in performance has continued into this year's semi-annual report. Bai Ao Chemical's semi-annual report for 2024 shows that the company achieved a revenue of 583 million yuan, a year-on-year increase of 1.72%; the net profit attributable to the shareholders of the listed company was 165 million yuan, a year-on-year decrease of 13.33%.

In addition to the impact of Bai Ao Chemical's own production scale, Ruan Chao, the founder of Wenyi Fuxin Capital Advisors, told reporters that the domestic original pharmaceutical production field has a high concentration of production capacity, and a stable competitive pattern has been formed with a few leading enterprises occupying the market. Bai Ao Chemical's own willingness to develop a second growth curve is also relatively obvious.

In February 2024, Bai Ao Chemical announced for the first time its plan to expand into the semiconductor field. According to Bai Ao Chemical's announcement, the company signed a "Strategic Cooperation Agreement" with Xin Hui Lian, reaching an industrial cooperation relationship in the semiconductor equipment field. Bai Ao Chemical stated in the announcement, "Under the irresistible high-speed development trend of China's semiconductor equipment industry, the semiconductor equipment industry is planned to be a new direction for the company's strategic development."

In the above agreement, Bai Ao Chemical and Xin Hui Lian agreed to carry out comprehensive strategic cooperation in one or several forms such as establishing a joint venture company, investing in shares, and upstream and downstream trade.

At the same time, Bai Ao Chemical signed a "Semiconductor Equipment Business Cooperation Agreement" with Xin Hui Lian. According to the announcement, Bai Ao Chemical plans to entrust Xin Hui Lian to purchase semiconductor equipment with its own funds, with a total contract price not exceeding 140 million yuan. Xin Hui Lian is responsible for remanufacturing, upgrading, technical services, and external sales of it. For the profits generated by the semiconductor equipment business, both parties will share them in a 50%:50% ratio.

Regarding the 50% share of profits that Xin Hui Lian promised to Bai Ao Chemical, Liu Hongjun, the legal representative of Xin Hui Lian, provided joint and several liability guarantee, and will promote Beijing Xin Ju Technology Development Center (Limited Partnership), which it controls, to provide equity pledge guarantee with the 46.77% equity of Xin Hui Lian it holds.

Cross-border acquisition at a fourfold premium

After many "pavements", Bai Ao Chemical and Xin Hui Lian have formed a more "intimate" relationship.

According to Bai Ao Chemical's announcement on October 8, the acquisition of Xin Hui Lian by Bai Ao Chemical has been approved by the company's board of directors and supervisory board.

It is worth mentioning that Xin Hui Lian, which was acquired by Bai Ao Chemical this time, has already undergone "spin-off division".According to the agreement reached between Xin'ao Hua and Xin Hui Lian and related parties in May of this year, the original Xin Hui Lian has completed its division. As of the announcement of this notice, the spin-off process of Xin Hui Lian has been completed, Xin Hui Lian continues to exist, and has spun off Xin Hui Lian New (Suzhou) Technology Co., Ltd. (hereinafter referred to as "Xin Hui Lian New"). Among them, the business and assets related to core equipment products applied in the semiconductor manufacturing stage are retained in the surviving company.

Han Peng, a senior partner of Beijing Da Dao Zheng Tong Law Firm, told reporters that the so-called spin-off division refers to the legal act of a company establishing another company with part of its assets. In the case of a spin-off division, although the original company continues to exist, it has reduced its registered capital and should go through the legal process of changing its registration, while the spun-off company should go through the establishment registration. "In simple terms, spin-off division is to separate some assets from the original company."

According to the announcement in February 2024 when Bai Ao Chemistry and Xin Hui Lian reached a strategic cooperation and entrusted the latter to purchase equipment worth 140 million yuan, in 2023, Xin Hui Lian's total assets were 481 million yuan, revenue was 183 million yuan, and net loss was 47.5026 million yuan. As of January 2024, Xin Hui Lian's total assets were 514 million yuan, revenue was 14.2555 million yuan, and net loss was 9.214 million yuan. At that time, Xin Hui Lian had not yet undergone spin-off division.

According to this investment announcement, the announcement shows that Xin Hui Lian achieved a business income of 267 million yuan in the first half of 2024, with a net profit of 85.9851 million yuan. However, it is temporarily unknown how much of Xin Hui Lian's income in the first half of 2024 is related to Bai Ao Chemistry. A person from the securities department of Bai Ao Chemistry said that the above data will be disclosed by the company later.

The announcement shows that Bai Ao Chemistry uses the income method to evaluate Xin Hui Lian, with an evaluation result of 829 million yuan, an evaluation increase of 660 million yuan, and an appreciation rate of 391.25%.

Regarding this valuation, Ruan Chao said that from the perspective of the new merger and acquisition policy, the current regulatory authorities will argue the acquisition from multiple dimensions and will no longer view it from a single PE or appreciation rate.

The relevant parties also made a commitment to Xin Hui Lian's performance, promising that Xin Hui Lian's net profit for each year from 2024 to 2026 will not be less than 100 million yuan, 150 million yuan, and 250 million yuan, respectively, and the total net profit for the three years will not be less than 500 million yuan.

It is worth mentioning that Xin Hui Lian did not originally plan to achieve profitability in a short period of time.

According to the listed company Bai Ao Chemistry, before the spin-off division, Xin Hui Lian's original business strategy did not aim to achieve profitability in the short term, but focused on developing cutting-edge semiconductor equipment technology as its business purpose, aiming to land on the Science and Technology Innovation Board according to the "fifth set of standards" as a short-term goal, and investing the main funds and personnel into research and development.

However, since the second half of 2023, due to the cold capital market, Xin Hui Lian adjusted its own business strategy, promoted the division of the wafer bonding equipment business, which was difficult to achieve profitability in the short term, from other original businesses, and increased the development of other semiconductor equipment businesses, and expanded into the remanufacturing of photolithography machines and related technical service businesses.Ruan Chao told the reporter that the plan design of this transaction has some special features. First, Xinhui Lian initiated a spin-off in June 2024, splitting off the business of wafer bonding equipment and other businesses that are difficult to profit in the short term, and independently derived Xinhui Lian New, which was not included in this transaction; secondly, Bai Ao Chemical did not choose to directly acquire Xinhui Lian shares through cash or issuance of shares, but adopted the "capital increase + entrusted voting rights" method to achieve control and consolidation, which also provides a new transaction idea for subsequent cross-border merger and acquisition transactions.

The reason why Bai Ao Chemical acquired Xinhui Lian through the method of capital increase and entrusted voting rights this time, Ruan Chao analyzed, "Generally speaking, capital increase is to provide funds for the future development of the target." The person in charge of the securities department of Bai Ao Chemical said that the main reason for adopting the capital increase form is to consider the other party's capital needs.

The transaction also adopted the method of entrusted voting rights. Ruan Chao said: "The amount of Bai Ao's capital increase is not enough to let the company obtain control, so the method of entrusted voting rights was also adopted."