On January 17, Cathay Biotech (688065) disclosed its latest private placement registration manuscript, and at the same time announced the latest progress of the transfer of equity and subscription of new shares under the Shanghai Yaoxiu agreement.

As one of the benchmark enterprises in the field of synthetic biology, Cathay's series of capital operations have attracted market attention. However, under a sober observation, the strategic considerations and potential risks behind this fixed increase cannot be ignored.

The

controlling shareholder was changed from CIB to Shanghai Yaoxiu, and the Chinese-American attracted China Merchants to become a shareholder

Cathay Biotech plans to issue no more than 6.6 billion yuan this time. As early as June 2023, Cathay Biotech disclosed its private placement plan, which was reviewed by the Shanghai Stock Exchange and approved by the China Securities Regulatory Commission at the end of 2024. According to the plan, the issue price was adjusted from the initial 43.34 yuan / share to 42.97 yuan / share, and the number of shares to be issued did not exceed 154 million shares.

The target of this issuance is Shanghai Yaoxiu, which is controlled by the family of Liu Xiucai, the actual controller of the company.

ACCORDING TO THE DATA, LIU XIUCAI, HIS WIFE XIAOWEN MA AND SON CHARLIE CHI LIU ARE ALL AMERICANS, AND THE THREE HOLD 50.5%, 0.5% AND 49% OF CATHAY INDUSTRIAL BIOTECH LTD. (CIB) RESPECTIVELY.

Liu Xiucai was born in Chuzhou, Anhui Province in 1957, now has American nationality, doctoral degree, and has been a part-time professor and doctoral supervisor of East China University of Science and Technology since 2018. He used to be a senior researcher and postdoctoral supervisor at Sandoz Institute of Materia Medica. The CEO of Peking University Sitong Biotechnology is also a postdoctoral supervisor of Peking University, engaged in the mechanism research of anti-liver cirrhosis drugs, anti-sepsis drugs and anti-cancer drugs. In 2020, he led the company to go public, with a market value of more than 80 billion yuan.

According to the relevant transaction arrangement, CIB will transfer 49% of the equity interest in Shanghai Yaojian to China Merchants Group, and after the completion of the transfer, CIB will hold 51% of the equity interest in Shanghai Yaojian, and China Merchants Group will hold 49% of the equity interest in Shanghai Yaojian. In addition, CIB subscribed for 50.9995% of Shanghai Yaoxiu with 120 million Cathay Biotech shares, and China Merchants Group subscribed for 48.9995% of the shares in cash.

As of the signing date of the prospectus, CIB's capital contribution to Shanghai Yaoxiu in the form of company shares and China Merchants Group's cash contribution to Shanghai Yaoxiu has been completed, and the preparation for the industrial and commercial change registration of Shanghai Yaoxiu is still in progress.

Prior to the issuance, Liu Xiucai's family held 28.32% of the shares through Shanghai Yaoxiu and CIB, plus 2.50% indirectly controlled by the employee shareholding platform, with a total of 30.82% of the voting rights.

According to the plan, after CIB transferred 120 million shares to Shanghai Yaoxiu as a capital contribution, Shanghai Yaoxiu held 20% of the shares to become the controlling shareholder, and CIB's shareholding dropped to 8.32%, and if calculated according to the issuance ceiling, the controlling shares of Liu Xiucai's family and its enterprises will rise to 45.24%, and the control will be further consolidated.

Upon completion of the transaction, China Merchants Group will become a significant shareholder indirectly holding 17.97% of the shares. In fact, this move by China Merchants is the epitome of state-owned capital's layout of the science and technology innovation board and support for enterprises to integrate the industrial chain.

With the deepening of the new round of state-owned enterprise reform, state-owned capital has accelerated the layout of the science and technology innovation board through strategic investment. In 2024, new policies such as "Nine Measures", "Eight Policies on the Science and Technology Innovation Board" and "Six Policies for M&A" will be introduced to support leading enterprises to base themselves on their main businesses, integrate industrial chains, and promote high-quality development. With the advantages of scale and the extensive layout of the industrial chain, the central state-owned enterprises actively respond to the policy and inject new momentum into the development of listed companies.

China Merchants Group participated in the cooperation at the level of Shanghai Yaoxiu, and part of the funds subscribed for shares, and the rest was used for investment in the field of biology. After the shareholding, there is no special arrangement with Liu Xiucai's family. Shanghai Yaoxiu promised not to reduce its shareholding within 60 months, and the indirect shareholding of China Merchants Group is also subject to the relevant shareholding reduction regulations, and it promises not to transfer shares to the outside within 60 months (except for internal structure adjustment).

In July 2023, the company signed a "Business Cooperation Agreement" with China Merchants Group, under which China Merchants will make every effort to promote the procurement of Cathay's bio-based polyamide materials, with the purchase volume of not less than 10,000 tons, 80,000 tons and 200,000 tons respectively in the first three years, and coordinate with affiliated financial enterprises to provide preferential financing. In September 2024, the two parties further signed a strategic cooperation agreement to refine the cooperation methods.

Cash is abundant and the funds raised will be used to replenish the flow and repay debts

The "Financial News Agency" noted that the net proceeds of the fundraising are intended to be used to replenish liquidity and repay loans.

From the perspective of financial situation, at the end of the third quarter of 2024, Cathay's asset-liability ratio was only 18.23%, and the cash on the books reached 4.637 billion yuan.

In terms of performance, Cathay Biotech has shown certain ups and downs in recent years. In 2023, the company will achieve revenue of 2.114 billion yuan, a year-on-year decrease of 13.39%; The net profit attributable to the parent company was 367 million yuan, a year-on-year decrease of 33.75%, and the decline rate was further expanded compared with 8.99% in 2022. Although the company's total operating income in the first three quarters of 2024 increased by 41.49% year-on-year to 2.215 billion yuan, and the net profit attributable to the parent company was 345 million yuan, a year-on-year increase of 9.97%, there is still a certain gap compared with the company's historical peak.

Cathay Biotech is mainly engaged in the research and development, production and sales of new bio-based materials, including a series of bio-based polyamides and their core monomers, bio-based long-chain diacids and bio-based pentanediamine. In recent years, the bio-based polyamide market has grown rapidly, with the global market size of about 2.5 billion yuan in 2022 and is expected to reach 21.6 billion yuan by 2025.

However, in terms of profitability, the company's gross profit margin showed a rapid downward trend. From 2020 to 2023, the gross profit margin will be 50.01%, 39.03%, 35.24% and 28.79% respectively; Its bio-based polyamide is in the early stage of industrialization and promotion, and has not yet been stably operated.

Affected by the price reduction of products, the amount of the company's inventory price decline provision and the proportion of provision increased, because it was in the downstream application development stage, the production line capacity utilization rate was low, the unit cost was high, the selling price was low, and the gross profit margin was negative, which brought pressure to the operation. It is estimated that when there is no change in the operation of a specific project outside of production and the utilization rate of new capacity is less than 15%, the overall gross profit will be lower than the 2023 level.

At the same time, the company's fixed assets and projects under construction are huge. From 2021 to 2023 and the first half of 2024, the depreciation of the company's fixed assets accounted for 6.89%-12.75% of operating income, which had a certain impact on performance. At present, the company's construction projects mainly include bio-based pentanediamine and other projects, after the completion of fixed assets will increase significantly, depreciation will also rise accordingly. If the project is not profitable after it is put into production, the new depreciation will lead to a decline in performance.

In addition, Cathay also faces capacity-related risks. Although the company's large-scale production lines of bio-based polyamide and bio-based pentanediamine have been put into operation and generated revenue, the improvement of capacity utilization rate faces problems such as equipment commissioning and process optimization, and there is a risk that production is not as expected. At the same time, 500,000 tons of bio-based pentanediamine and 900,000 tons of bio-based polyamide projects are under construction, and 40,000 tons of biosebacic acid, 30,000 tons of long-chain diacids and 20,000 tons of long-chain polyamide projects are in the capacity ramp-up stage. If affected by factors such as personnel, suppliers, civil engineering, infrastructure, macro environment and policies, the progress of project construction or capacity ramp-up is not ideal, which will adversely affect the company's operating performance.