On the evening of October 7th, Bestchem Co., Ltd. (603360.SH) announced that its wholly-owned subsidiary, Shanghai Xin'ao Hua Technology Co., Ltd. (hereinafter referred to as "Xin'ao Hua"), plans to increase its capital in Suzhou Xinhui Lian Semiconductor Technology Co., Ltd. (hereinafter referred to as "Xinhui Lian") for a price of 700 million yuan. After this capital increase, Xin'ao Hua will directly hold 46.6667% of the equity in Xinhui Lian and, through accepting the entrustment of voting rights, will control a total of 54.6342% of the voting rights of its equity.
Yang Xingjie, a researcher at China Research and Puhua, said in an interview with a reporter that in recent years, Bestchem's original chemical main business has shown a downward trend, and it is necessary to seek new sources of profit growth. The semiconductor industry, as the core of the information industry, has a fast growth rate and has a broad development prospect. With the continuous progress of technology and the sustained growth of market demand, the semiconductor industry has become a key force in leading a new round of technological revolution and industrial transformation.
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Bestchem stated that this transaction is in line with the company's semiconductor business strategic planning and development needs, which will help to increase new profit growth points, improve the layout of the semiconductor industry, and further enhance comprehensive competitiveness and profitability.
However, crossing over often comes with operational and management risks. Yang Xingjie pointed out that by entering the semiconductor industry, Bestchem will face management challenges in two completely different fields. The semiconductor industry is technology-intensive and capital-intensive, and it requires high professional ability and industry experience from the management team.
Regarding this capital increase transaction, the reporter called and sent a letter to Bestchem, but had not received a reply by the time of publication.
Not aiming for short-term profits
Public information shows that Xinhui Lian was established in 2019 with a registered capital of 70 million yuan, mainly engaged in the business of photoresist coating and development machines, lithography machines and other yellow light process equipment, as well as wet cleaning equipment, semiconductor production line automation equipment and other businesses.
In recent years, due to the suppression from the United States, domestic downstream customers' demand for the localization of key semiconductor equipment has been increasing.
Bestchem stated that in order to effectively shorten the supply cycle and reduce dependence on key suppliers, while cooperating with international suppliers, domestic chip manufacturers and downstream customers pay more attention to promoting the localization of the supply chain and cultivating local suppliers, which has brought additional business opportunities for domestic semiconductor equipment manufacturers.
Looking at the listed companies in the same industry, North Hua Chuang (002371.SZ) and Shengmei Shanghai (688082.SH) achieved a year-on-year increase in operating income of 46.38% and 49.33% respectively in the first half of 2024. Xinhui Lian also benefited from this industry trend, and its operating income has risen significantly.According to the announcement by Bestchem and the pro forma financial statements issued by the intermediary institutions, Xinghui Lian's operating income for the years 2022 and 2023 were 131 million yuan and 172 million yuan, respectively, with net profits of -9.99 million yuan and -33.72 million yuan. However, by the first half of 2024, Xinghui Lian's operating income had soared to 267 million yuan, and the net profit had turned from loss to profit, amounting to 85.9851 million yuan. As of June 2024, the net assets reached 185 million yuan.
Bestchem emphasized that Xinghui Lian's business strategy does not aim for short-term profitability as its primary goal. Instead, it focuses on developing cutting-edge semiconductor equipment technology as its core mission, with the short-term objective of listing on the STAR Market according to the "Fifth Set of Standards." The company invests its main funds and personnel into research and development.
Yang Xingjie stated that the actual controller of Xinghui Lian has long been engaged in the industry, and the core R&D and management teams come from leading international companies, possessing rich industry experience and professional capabilities. Xinghui Lian has certain technical strength and market share in the semiconductor equipment field and has already achieved profitability in the first half of this year. Future performance growth is expected, meeting Bestchem's requirements for investment targets.
Seeking New Growth Points
In fact, Bestchem and Xinghui Lian have had many interactions before. On February 7th this year, the two parties signed the "Semiconductor Equipment Business Cooperation Agreement" (hereinafter referred to as the "Agreement"), carrying out a series of investment and cooperation matters. This provided a certain cooperative foundation and experience for Bestchem to cross into the semiconductor field.
According to the Agreement, Bestchem entrusted Xinghui Lian to purchase semiconductor equipment with its own funds. Xinghui Lian was responsible for remanufacturing, upgrading, and providing technical services for the purchased equipment and selling it externally. The profits generated from the cooperation were shared according to the agreed method in the Agreement.
Subsequently, in April, Bestchem invested 500 million yuan to establish a wholly-owned subsidiary, Xing'ao Hua, as the operating platform for semiconductor business. In May, Xing'ao Hua signed a letter of intent with Xinghui Lian and its founder and actual controller, Liu Hongjun, regarding equity investment. At the same time, Xinghui Lian also carried out the division of business and assets.
Finally, on the evening of October 7th, Bestchem announced that Xing'ao Hua intended to increase its capital in Xinghui Lian for a price of 700 million yuan. After the capital increase, Xing'ao Hua will directly hold 46.6667% of Xinghui Lian's shares and control 54.6342% of the voting rights through accepting the power of attorney.
In response, the management shareholders of Xinghui Lian and the original actual controller promised that Xinghui Lian's net profits for the next three fiscal years (2024 to 2026) would not be less than 100 million yuan, 150 million yuan, and 250 million yuan, respectively, with a total net profit not less than 500 million yuan.
Bestchem stated that this transaction aligns with the company's strategic planning and development needs for semiconductor business. It helps to increase new profit growth points, improve the layout of the semiconductor industry, and further enhance overall competitiveness and profitability.Yang Xingjie also pointed out that currently, the industrial biocidal industry where PAO Chemical operates is facing a situation of market growth bottlenecks or intensified competition. By crossing over into the semiconductor industry, PAO Chemical can expand into new business areas, add new profit growth points, thereby enhancing overall profitability and performance.
Cross-industry risks and concerns
PAO Chemical is mainly engaged in the research and development, production, and sales of isothiazolinone industrial biocides. It currently has an annual production capacity of over 40,000 tons of raw materials and has become the largest producer of isothiazolinone industrial biocides in Asia. From 2021 to 2023, PAO Chemical achieved net profits of 250 million yuan, 403 million yuan, and 328 million yuan, respectively.
While consolidating its main business, PAO Chemical is actively seeking cross-industry development to enhance profitability and risk resistance with a dual-main-business strategy. However, the risks of cross-industry operations should not be underestimated.
"Regarding the dual-main-business operation model after PAO Chemical's cross-industry expansion, this brings both opportunities and challenges," said Yang Xingjie. The challenge lies in the fact that dual-main-business operations require the company to manage and coordinate more finely in terms of resource allocation, management operations, and technological research and development to ensure the stable development of both business segments.
PAO Chemical admitted that this equity acquisition is a cross-industry merger and acquisition. Due to the company's lack of talent and management experience in the industry where Xin Hui Lian is located, there is a certain risk of merger and integration, including the integration of corporate culture, the docking of management systems, and the placement and motivation of personnel. As the acquired party, how to effectively integrate Xin Hui Lian with the company's existing management system is one of the key factors for the success of this acquisition.
To prevent and respond to risks, PAO Chemical said it will fully participate in the corporate governance and business management affairs of Xin Hui Lian through various means such as nominating directors, supervisors, and relevant personnel, and actively prevent and respond to risks. However, the company also admitted that if it is difficult to integrate and develop synergistically after the acquisition is completed, the company may suffer losses due to the operational management and merger integration risks of Xin Hui Lian.
Yang Xingjie analyzed that by entering the semiconductor industry, PAO Chemical faces management challenges in two completely different fields. The semiconductor industry is technology-intensive and capital-intensive, with high requirements for the professional ability and industry experience of the management team. The company needs to establish a management system and operation model suitable for the semiconductor business, integrate the resources and teams of the two business segments, and ensure the rational allocation and utilization of resources. This requires a lot of time and effort and there is a certain risk of management integration.
Yang Xingjie suggested that after completing the control of Xin Hui Lian, PAO Chemical needs to deepen the integration with Xin Hui Lian to achieve resource sharing and synergistic development. In-depth cooperation can be carried out in terms of technological research and development, production and manufacturing, market marketing, etc., to optimize business processes and improve operational efficiency. At the same time, it is necessary to strengthen the integration of corporate culture, establish a unified set of values and corporate spirit, and enhance the cohesion and sense of belonging of employees.
In addition, Yang Xingjie also emphasized that PAO Chemical should further improve the corporate governance structure and management system, establish a management model and decision-making mechanism suitable for the operation of dual-main-business, and ensure that the company can operate efficiently and stably.