1. Q: Merger and acquisition (M&A) and reorganization is one of the main ways for the capital market to optimize resource allocation and to support the high-quality development of the real economy. Under the circumstances that China's economic development is in the face of a complicated external environment and the downward pressure, how to give full play to the functions of the system of M&A and reorganization has been an important task for the capital market to serve China’s overall strategy. Can you brief us on the general situation of M&A and reorganization on the Shanghai Stock Exchange (SSE) market in 2018?
A: In 2018, China's economy has maintained a good momentum characterized by overall stability with steady progress, mixed with new and worrisome developments, and the external environment is complex and grave, with the economic operation facing downward pressure. Experiencing difficulties at the current stage, some listed companies are in the face of the tasks for structural adjustment, transformation and upgrading that are more urgent than before, making it necessary to give better play to the role of the capital market in serving the real economy. As an important way to optimize resource allocation in the capital market, M&A and reorganization is important in supporting the listed companies’ efforts to accelerate transformation and upgrading, resist risks and challenges and achieve high-quality development.
With the joint efforts of all market participants, the M&A and reorganization market on the SSE has remained generally stable, recording a total of 1,226 cases of M&A transactions and a total transaction amount of RMB1.2 trillion in the whole year, up by 42% and 31% respectively year-on-year. In terms of major asset restructuring, a total of 131 companies initiated the reorganization, with the number almost the same as the previous year; a total of 117 plans were disclosed, an increase of 18% year-on-year, with the activity level improved; the transaction amount involved reached nearly RMB400 billion, close to the previous year's level. The situation was highlighted by some good trends, with encouraging driving forces accumulating.
First of all, the mergers and acquisitions in the industrial sectors and the real economy have been increasingly the mainstream in the field. In 2018, the industry mergers and acquisitions targeting the integration “in the same industry and between the upstream and the downstream” accounted for more than 70% of all transactions. The industry logic has become the mainstream and consensus of the market, and the role of M&A in supporting and serving the real economy has been brought into further play. Specifically, both the number and the transaction amount of the plans with the underlying assets in the strategic emerging industries such as biomedicine, high-end equipment manufacturing and electronic information technology took up more than 70% of the totals. For example, China Marine Information Electronics Company Limited has become the enterprise with the most complete industry chain in the underwater information system and equipment industry in China by injecting the business of underwater information detection, acquisition and confrontation system and equipment to integrate with its original underwater information transmission business; Henan Thinker Automatic Equipment Co., Ltd. has realized technical integration in high-speed train operation monitoring and information management system by acquiring Henan Lanxin Technology Co., Ltd.; through merger and acquisition, Guangdong Champion Asia Electronics Co., Ltd. extended the original batch PCB business to the fields of PCB model and small batch, enriching the structure of products and the industrial layout .
Secondly, overseas mergers and acquisitions were aimed at technological innovation and industrial upgrading. In 2018, the SSE-listed companies carried out a total of 63 cases of overseas mergers and acquisitions, with a total transaction amount of about RMB150 billion. The M&A and reorganization served as a bridge of capital facilitating the Chinese companies’ efforts to go global. In terms of major asset restructuring, 9 companies including Wanhua Chemical Group Co., Ltd., QuMei Home Furnishings Group Co., Ltd. and Ningbo Jifeng Auto Parts Co., Ltd. implemented major overseas mergers and acquisitions in the year, with a total transaction amount of about RMB100 billion. With the “Belt and Road” initiative increasingly expanded, the overseas mergers and acquisitions implemented by Chinese enterprises have gradually realized the transition from extensive expansion to intensive development, with emerging industries and high-end technologies more favored. For example, after acquiring the Hungarian company Borsod Chem, Wanhua Chemical Group Co., Ltd. surpassed BASF to become the world's largest MDI producer, with its position in the industry and market competitiveness enhanced significantly; by acquiring the German company Grammer, Ningbo Jifeng Auto Parts Co., Ltd. achieved the transformation from an auto internal component supplier to an auto internal system supplier; Bohai Piston acquired TAH, a German auto parts company, to obtain the advanced manufacturing processes for lightweight aluminum alloy parts, thus enhancing its core competitiveness.
Thirdly, there have been positive changes in market-based tender offers. In 2018, a total of 9 market-based initiative tender offers were launched on the SSE, with the frequency much higher than the level of one offer every year on average in the past, showing that such programs were much more active and market-dominated. This was not only linked to the characteristics of the tender offer, but also highly connected with the fact that currently the market is increasingly rational and the game is more adequate. Compared with the shareholding increase in the secondary market, the tender offer is characterized by the determined capital cost and the controllable time cost, and can effectively shorten the decision chain and improve the efficiency in implementation. Compared with the contractual transfer, the tender offer can ensure that the small and medium-sized shareholders enjoy the equal right for exit, and effectively balance the interests of the acquirer and small and medium-sized investors. On the basis of adequate information disclosure and market game, the offer information is also reflected in the stock price trend in a more rational manner, making more investors willing to accept the offer. It can be said that the tender offer cases in the year demonstrated the trend of market-oriented development and the increasingly rational and mature takeover market, which was conducive to value discovery and improvement of company quality.
In addition, after the rectification of the disorders such as the “fake” and “follow-suit” reorganizations and the reorganizations with “high prices, P/E ratios or risks”, the market environment has been gradually regulated, the valuation system has returned to rationality, the investors have had a more reasonable understanding of restructuring, and the stock prices have responded in a stable way on the whole.
2. Q: In recent years, the number of private enterprises listed on the SSE has grown steadily, and both state-owned and private listed companies have achieved rapid development. Can you brief us on the characteristics of the M&A and reorganization implemented by the SSE-listed state-owned and private companies in 2018?
A: Looking back at the history of China's capital market, we can see that the history of the development of the capital market was also the process of the state-owned enterprises continuously deepening the reform and the private enterprises constantly achieving development and growth. Both the state-owned and private enterprises have played an important role in stabilizing growth, advancing innovation, increasing jobs, and improving people's livelihood, and have jointly pushed forward the economic and social development. At present, the SSE-listed private companies take up nearly 60% of the total in number with the aggregate market value accounting for nearly 50% of the total, and have been important participants that cannot be ignored and are indispensable in the M&A and reorganization market.
On the one hand, the M&A and restructuring supporting the supply-side reform and the reform of state-owned enterprises has taken on a new look. In 2018, the SSE-listed state-owned enterprises made a total of 536 mergers and acquisitions, with a total transaction amount of RMB675.7 billion, an increase of 25% year-on-year; in terms of major asset restructuring, a total of 37 plans were disclosed, accounting for about 32% of the total, involving a transaction amount of RMB202.9 billion, or about 53% of the total. Through the M&A and reorganization, the SSE-listed state-owned enterprises have solved the excess capacity, integrated the superior production capacity, made efforts in both mechanism innovation and technological upgrading, and maximized the multiplier effect for the reform. The 6 companies including Aluminum Corporation of China Limited, CSSC Offshore and Marine Engineering (Group) Co., Ltd., China CSSC Holdings Limited, China Railway Group Limited, Zhongjin Gold Corporation, Limited and China Shipbuilding Industry Group Power Co., Ltd. have launched the market-based debt-to-equity swap plans, showing that the model of achieving “unburdening” through deleveraging in the capital market has gradually matured; Sinotrans Limited absorbed and merged with Sinotrans Air Transportation Development Co., Ltd. through shares exchange, thus integrating the sea, land and air transportation resources and enhance its capacity for comprehensive logistics service; SST Beijing Qianfeng Electronic Co., Ltd. resolved the historical issue of equity division by absorbing the advanced capacity of BAIC New Energy, realizing business transformation and upgrading; a number of corporations such as Shenhua Group, Baowu Steel Group, China Minmetals Corporation and China Merchants Group have been recognized as pilot enterprises for state-owned capital investment, with the capital management put in place.
On the other hand, mergers and acquisitions have helped private enterprises gain new opportunities for development. In 2018, the SSE-listed private enterprises conducted a total of 690 mergers and acquisitions, with a total transaction amount of RMB532.8 billion, an increase of 40% year-on-year; in terms of major asset restructuring, a total of 80 plans were disclosed, accounting for about 68% of the total, involving a transaction amount of RMB180.4 billion, accounting for about 47% of the total. While boosting their own development with M&A and reorganization, the private enterprises are profoundly changing the ecology and structure of the M&A and restructuring market. For example, with the injection of the R&D and sales businesses of CMOS image sensors, Will Semiconductor Co., Ltd. Shanghai has rapidly improved the overall technical level of its semiconductor design; Yifeng Pharmacy Chain Co., Ltd. has expanded its business footprint by integrating other regional chain pharmacies, achieving the scale effect; QuMei Home Furnishings Group Co., Ltd. acquired the Norway-listed company Ekornes through tender offer, so as to carry out collaboration in market expansion, product research and development, supply chain management and other fields, tap into the overseas markets and accelerate its deployment abroad. Some private enterprises have encountered difficulties with the combined risks such as slowing economic growth, China-US trade frictions, downturns in the industry cycle, and pledges of the stocks held by major shareholders. As an effective measure to optimize the capital structure, M&A and reorganization has played an important role in preventing and defusing risks.
While the two ownership systems have grown stronger through M&A and reorganization, the highly integrated mixed ownership reforms are also moving forward. A number of companies, such as China Eastern Airlines Corporation Limited and Huatai Securities Co., Ltd., have launched their targeted additional issuance programs to introduce high-quality private capital. Through the “catfish effect” between the two ownership systems, the corporate governance structure characterized by effective check and balance and the market-oriented operating mechanism that is flexible and efficient will be established, so as to change the "physical reaction" to the "chemical reaction", enhance the competitiveness of the state-owned economy and realize the mutual complementation, reciprocal promotion and common development of the two ownership systems.
3. Q: In 2018, the China Securities Regulatory Commission (CSRC) continued to deepen the market-oriented reform of M&A and reorganization, and introduced a series of new policies for the listed companies. What efforts has the SSE made in implementing the measures, and what is the effect?
A: In recent years, the CSRC has continued to deepen the market-oriented reform of M&A and reorganization. With the administrative licenses substantially cancelled and simplified, more than 90% of transactions of M&A and reorganization are not subject to the approval of the CSRC at present. In 2018, in order to adapt to the characteristics of the new stage of economic development, the CSRC continuously deepened the reform to streamline administration, delegate powers, and improve regulation and services, and intensively introduced a series of policies and measures for “increasing efficiency and reducing costs” in the field of M&A and reorganization, thus further stimulating the market vitality. Taking advantage of the close connection with the market, the SSE gave equal priority to regulation and service on the basis of the actual conditions of the companies, and in the cases such as Suzhou Secote Precision Electronic Co., Ltd., provided a package of services in policy consultation, program adjustment, training and guidance, technical support and other fields, so as to facilitate the implantation of the important policies.
First of all, the system of raising supporting funds was improved. The ceiling of raised funds was increased to fully meet the funding needs of the listed companies in fostering the new drivers. The SSE-listed companies raised a total of RMB57.7 billion in reorganization in the whole year, effectively supplementing the working capital. The purposes for the raised supporting funds were expanded by allowing the funds to be used in replenishment of working capital and repayment of debts. A number of companies such as Inner Mongolia Eerduosi Resources Co., Ltd. and Shanghai Original Advanced Compounds Co., Ltd. used the raised supporting funds to supplement working capital and repay bank loans, so as to meet the practical demands for easing financial pressure and optimizing capital structure.
Secondly, the payment instruments for M&A and reorganization were enriched. The targeted convertible bonds were launched as an innovative measure, thus providing a more flexible interest game tool for both sides of the transactions. Suzhou Secote Precision Electronic Co., Ltd. announced the market’s first reorganization plan with the convertible bonds as a payment instrument, so that the transaction game was more adequate and the pressure of cash payment and the risk of dilution of major shareholders' shares were eased; China Shipbuilding Industry Group Power Co., Ltd. introduced the targeted convertible bonds in the two stages of asset acquisition and supporting fundraising, thus achieving the reduction of leverage as well as lifting the capital constraints for "military-to-civil transformation ".
Thirdly, the requirements for disclosure of the plans were simplified. By revising the No. 26 Guidelines, the requirements for information disclosure of reorganization plans were simplified, so as to facilitate the implementation of the trading suspension and resumption system. It took only 10 trading days from the trading suspension for Zhongjin Gold Corporation, Limited to disclose its plan, showing that the problem of long-term trading suspension troubling the reorganization previously was completely solved.
4. Q: Resolving the risk of the equity pledge liquidation for the listed companies can be said to be one of the key tasks for the capital market in 2018. Can you brief us on the bail-out in M&A and reorganization?
A: The year of 2018 saw some companies exposed to the risk that the controlling shareholders who had high-proportion pledge of equity were unable to pay their debts when the stock prices fluctuated, and were in the face of liquidation, which caused great concern in the market. In order to prevent individual hazards from expanding and triggering systemic risks, the CSRC, local governments and industry associations launched a series of relief measures to help the listed companies with development prospects as well as temporary operating difficulties out of the plight of equity pledge. Based on information disclosure and risk release, the SSE dealt with the problem in a prudent manner. Particularly, M&A and reorganization played a positive role as one of the important options for dealing with the risks.
First of all, part of the equity was transferred and strategic investors were introduced. For example, a company's controlling shareholder had a tight capital chain and then introduced an asset management company by transferring part of the company's equity. The transfer set a performance commitment, and if the promise was not fulfilled, the controlling shareholder should make compensations for the performance, thus forming a benefit bond. At the same time, as a strategic investor, the asset management company sent a director to the company to deepen its participation in operation and decision-making, thus providing an opportunity for the company to promote the integration of industry and finance.
Secondly, the control right was transferred to resolve the funding crisis. For example, a company suffering from the sluggish main business for a long time had almost lost its continued profitability after repeatedly failing in transformation. Facing the tight capital chain and the risk of pledge, the controlling shareholder transferred the controlling right to a company in the same industry with the experience in operating the same kind of assets, thus basically maintaining the stability of the company's production and operation.
Thirdly, the cooperation agreements were signed to implement resource integration. For example, due to the rapid expansion of capital in the previous period, a company had a high asset-liability ratio, with cross-default in a number of debts, and was trapped in a tight capital chain. Signing a cooperation intention agreement on strategic reorganization with a group in the same industry, the controlling shareholder of the company planned to integrate the businesses of both sides through asset restructuring, asset injection and other means, so as to resolve the liquidity risks faced by the company and lay a foundation for the follow-up transformation and development.
In addition, some companies and their shareholders took the initiative to “lose weight” and withdraw funds by disposing of assets and other means, so as to repay their debts in advance and avoid accumulation of risks. At present, about 20 companies have defused the risk of equity pledge through the above-mentioned means, and the defusing of the risks for equity pledge on the SSE has achieved certain results.