"Silent Intuition's Desperate Move: Acquiring Loss-Making Chipmaker at a Premium"

Over two years, the market value has plummeted by more than 68.5 billion yuan, and Siruipu has acquired a loss-making peer against the trend, aiming to open a second growth curve. Despite Chuangxinwei's performance commitment of 220 million yuan, whether the listed company can effectively increase its performance and enhance market competitiveness in the future is still full of uncertainty.

The semiconductor industry still faces the challenge of the downturn cycle, and chip companies are huddling together for warmth.

On January 22, Siruipu, the leader of the domestic analog chip industry, announced a major acquisition plan, acquiring 85.2574% of Chuangxinwei's equity at a high premium of 317.23% for 890 million yuan.

Since the acquisition plan was first disclosed half a year ago, there have been significant adjustments in the acquisition method and equity ratio. Although it is still a controlling stake, the acquisition equity ratio has dropped from 95.7% to 85.3%, a reduction of more than 10%; and the payment method of convertible bonds plus cash has also given the listed company more time and space.

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From the fourth quarter of 2022 to now, including both sides of this transaction, most chip companies have experienced a significant decline in performance revenue, net profit, and even gross profit margin. Siruipu stated that through the complementarity of the two companies' products and channels, the listed company will be more confident in dealing with future market competition.

However, the more direct challenge is whether Chuangxinwei, which is still suffering significant losses, can fulfill its commitment to a net profit of no less than 220 million yuan in the next three years; and whether Siruipu can digest the hundreds of millions of goodwill brought by this acquisition.

Siriupu, seeking growth against the trend, can achieve a substantial improvement in performance through this, and the market is still waiting and seeing.

High premium leveraged acquisition

Compared with the acquisition plan first disclosed in June 2023, the latest plan has undergone many changes.

The announcement shows that Siruipu plans to acquire 85.2574% of the equity of Shenzhen Chuangxinwei Microelectronics Co., Ltd. (referred to as "Chuangxinwei") from 18 transaction counterparts such as Yang Xiaohua, Bai Qinggang, Chuangxin Information, and Chuangxin Technology through the issuance of convertible corporate bonds and cash payment.At the same time, the company also plans to issue shares to no more than 35 specific investors to raise about 383 million yuan in supporting funds to pay for the transaction cash and intermediary fees. After the completion of the transaction, Chuangxin Micro will become a controlling subsidiary of SiRuipu.

In this transaction, the acquisition ratio of Chuangxin Micro and the transaction counterparties have been adjusted.

Chuangxin Micro has a total of 19 shareholders. In the latest transaction draft, the transaction counterparties increased from the initial 17 to 18. On the one hand, Xin Dongli Investment and Ningbo Yihui were added as two new transaction counterparties, while the fifth largest shareholder Ai Yulin was reduced. On the other hand, the equity acquisition ratio also decreased from 95.7% to 85.3%, a reduction of more than 10%.

In early December 2023, SiRuipu disclosed an announcement stating that the company had reached a preliminary consensus with Xin Dongli Investment and Ningbo Yihui on the main terms of the transaction, but there were still "a few transaction counterparties" that had not reached an agreement with the company, and the company was actively negotiating with them. At present, the "few transaction counterparties" may be the reduced shareholder Ai Yulin in this transaction plan.

At present, Ai Yulin holds 14.74% of Chuangxin Micro's equity, while Xin Dongli Investment and Ningbo Yihui hold 3.82% and 0.52% of Chuangxin Micro's equity, respectively. Among them, Xin Dongli Investment was initiated by the National Integrated Circuit Industry Investment Fund, Juzi Technology, etc.

SiRuipu stated that if the two parties reach a consensus in the future, the listed company will fulfill the corresponding review and approval procedures and information disclosure obligations in accordance with the provisions of relevant laws and regulations and the requirements of the listed company's standardized operation.

In terms of the acquisition method, the transaction consideration has also changed from the original shares and cash to convertible bonds and cash payment, which relatively reduces the financial pressure on the listed company.

As of September 30, 2023, the assessment date, the assessment value of 100% of Chuangxin Micro's equity was 1.066 billion yuan. According to the negotiation between the transaction parties, the transaction price of all Chuangxin Micro's equity was assessed at 1.06 billion yuan, which is an increase of 810 million yuan compared to its net assets attributable to the parent company, with an appreciation rate of 317.23%.

In this transaction, the transaction price corresponding to 85.26% of the equity is 904 million yuan. Among them, 13.2683 million yuan was deducted in advance from the transaction consideration of Chuangxin Micro's management team shareholders to solve the difference between the differentiated pricing and the assessment value in the subsequent possible minority equity acquisition matters, and the final transaction price was confirmed at 890 million yuan. SiRuipu will pay a cash consideration of 507 million yuan and issue convertible bonds worth 383 million yuan.

Previously, the company's share issuance price was set at 182.76 yuan per share, but now, SiRuipu's initial conversion price for convertible bonds is 158 yuan per share. In the past half year, SiRuipu's stock price has fallen from 226.97 yuan per share to 108.92 yuan per share, which has also affected the transaction pricing.Profit Suspense Under Performance Commitment

Behind the high premium acquisition lies the current status of Chuangxin Micro's unprofitable operations and the continuous decline in gross margin.

Founded in 2017, Chuangxin Micro specializes in the design of high-precision, low-power battery management and high-efficiency, high-density power management chips. Its products are widely used in fields such as smartphones, wearable devices, and electric tools.

The company secured two rounds of financing in 2022, which is the reason for the aforementioned "minority shareholders." In January and August of that year, the company completed its angel round and Series A financing, raising over 200 million yuan, with investors including Shenzhen Venture Capital, Xin Dong Li Investment, and Ju Cheng Capital, among others.

Despite being highly valued in the acquisition, Chuangxin Micro's performance is hardly outstanding. From 2021 to the first three quarters of 2023, Chuangxin Micro's operating income was 199 million yuan, 181 million yuan, and 185 million yuan, respectively, with net losses of 100 million yuan, 6.4472 million yuan, and 4.1229 million yuan, and gross margins of 46.53%, 35.34%, and 26.33%, respectively. Although the business situation in the first three quarters of 2023 has improved, with revenue and net profit attributable to the parent company exceeding the full year of 2022, the company is still in a loss-making state.

It is worth noting that more than half of Chuangxin Micro's sales revenue comes from major customers, with the revenue from the top five customers accounting for 81.22%, 70.5%, and 52.24% of the total sales in each period, respectively.

In the face of fierce industry competition, the company's consecutive years of losses, stagnant revenue, and the annual decline in gross margin, Chuangxin Micro's profit commitment for the next three years is quite challenging.

In this transaction, the performance commitment parties, Yang Xiaohua, Bai Qinggang, Chuangxin Information, Chuangxin Technology, and Chuangxin Technology, have committed that Chuangxin Micro's net profit for the years 2024-2026 will not be less than 220 million yuan. At the same time, the two parties have also negotiated performance compensation and impairment testing compensation. As of the end of September 2023, the goodwill of Srip was 0, but after the completion of this transaction, the company's goodwill was 616 million yuan, accounting for 12.31% and 16% of total assets and net assets, respectively.

In response to the above situation, Srip has expressed optimism about future expectations. The announcement shows that after this transaction, the two parties will form a positive complementary relationship in terms of product categories, customer resources, and sales channels for battery management and power management chips. By leveraging each other's accumulated R&D strength and advantageous positions, they will achieve effective business integration, which is conducive to further enhancing the continuous operating ability of the listed company.

However, under the multiple influences of global macroeconomics, trade policies, and international situations, the semiconductor industry is still experiencing cyclical fluctuations. Especially for chip design manufacturers targeting the consumer electronics market, their performance has declined significantly since the fourth quarter of 2022. Data shows that the median year-on-year change in net profit of A-share semiconductor industry listed companies in 2022 and the first three quarters of 2023 was 14.54% and -38.65%, respectively.In addition, the price war strategy of Texas Instruments, a major American analog chip manufacturer, has impacted the power management chip and signal chain chip markets, further compressing the profit margins of Chuangxin Micro. Whether Chuangxin Micro can fulfill its performance commitments in the future, and whether the high premium acquisition by SiRuipu can bring the expected returns, remain the focus of market attention.

Challenges for SiRuipu

As the buyer, SiRuipu, established in 2012, is one of the leading domestic analog chip companies.

Data shows that SiRuipu's main products include signal chain analog chips and power analog chips, with downstream application fields mainly in information communication, industrial control, surveillance security, new energy, and automotive, etc.

In 2020, SiRuipu successfully entered the A-share market, but due to weak demand for its core business - signal chain chips, its performance and market value shrank significantly, facing tremendous pressure in recent years.

In 2022, SiRuipu's signal chain revenue accounted for 70.8%, and power revenue accounted for 29.2%. That year, the company submitted its first annual report after listing with a decline in net profit growth rate. The operating income reached 1.783 billion yuan, a year-on-year increase of 34.5%, setting a historical record; however, due to a significant decrease in orders in the fourth quarter, the net profit was only 267 million yuan, a decline of nearly 40% year-on-year.

In the first three quarters of 2023, SiRuipu's performance reached an all-time low, with operating income of 813 million yuan, a year-on-year decrease of 44.63%; the net profit attributable to the parent company was 16.3044 million yuan, a year-on-year decrease of 94.11%.

Among them, the signal chain chips achieved sales revenue of 649 million yuan, a year-on-year decrease of 37.33%, with a revenue share of 79.78%, and power management chips achieved sales revenue of 161 million yuan, a year-on-year decrease of 62.94%, with a revenue share of 19.75%. As the core source of revenue, the signal chain chips had a gross margin of only 56.63% in the first half of 2023, a year-on-year decrease of 5.26%.

The core product profits are under pressure, and it is difficult to find orders. The harsh market environment has also forced the company to actively seek merger and acquisition targets for "self-help."

Since 2019, the company has begun to develop the power management chip market and has gradually obtained orders from several downstream customers, including Hikvision, involving fields such as security and industrial control, but the product categories are not rich. Compared with similar products from Chuangxin Micro, the latter's customers also include consumer companies such as OPPO, OnePlus, and Xiaomi.In a survey conducted last November, when investors inquired about the progress of merger and acquisition (M&A) projects, Sirui Pu stated that, based on the development history of Texas Instruments and Analog Devices, M&A is undoubtedly an effective way for analog integrated circuit (IC) manufacturers to grow and become stronger, achieving leapfrog development. The company will also continue to search the market for targets that align with the company's DNA.

As a "preparatory action" before external acquisitions, in September 2022, Sirui Pu raised over 4 billion yuan through a private placement of shares to specific objects for the construction of the Lingang comprehensive R&D center project, high integration analog front-end and mixed-signal product research and development, and industrialization projects, and received approval from the China Securities Regulatory Commission (CSRC) in March last year to register the application.

However, in the context of poor performance and a weak market, Sirui Pu's acquisition plan did not gain widespread recognition from investors. Although the company's stock price briefly rose after resuming trading, it then fell into a continuous decline, with the stock price once hitting a historical low.

In December 2021, the company's stock price reached its highest value of 620.81 yuan per share, with a market value that once broke through the 80 billion yuan mark. Since then, it has been on a downward trend. On January 24th, Sirui Pu's stock price hit a historical low during trading at 105.66 yuan per share, with the total market value having evaporated by more than 68.5 billion yuan.

In the face of declining performance, intensifying industry competition, and insufficient market confidence, whether Sirui Pu can complete the acquisition of the loss-making Chuangxin Micro through debt issuance, huddle together for warmth to overcome difficulties, or make a "desperate" choice remains to be seen.