It's hard to reconcile.

"Investor Network" Wu Wei

After the postponement, recently, Xinlian Integration (688469. SH) finally replied to the Shanghai Stock Exchange's inquiry letter regarding the company's acquisition of Xinlian Yuezhou.

The acquisition, which took nearly a year, sparked heated discussions due to the target company's continuous losses, high premium valuations and lack of performance commitments. Regarding the issues concerned by the exchange and the market, such as the loss of the target company, the high premium and the necessity of the acquisition, in the reply, SINOLINK gave a detailed explanation, and said that "according to the prudent judgment of the management, the target company will turn losses into profits in 2026." ”

Compared with the loss of the acquisition target, the operating conditions of Xinlian Integration have also attracted the attention of the market. As an enterprise mainly engaged in semiconductor integrated circuit chip manufacturing, packaging and testing, etc., the establishment and listing of Innosilicon have attracted much attention from the market. However, after the cumulative loss of more than 7 billion yuan, Xinlian Integration has not yet been able to achieve profitability; Under the influence of the reduction of initial shareholders and the frequent occurrence of large transactions, the stock price of the already broken Insilink continued to be sluggish, and the state-owned shareholders who supported the development of Innosilicon also failed to maintain and appreciate the value of their investments.

There is no back-up premium acquisition

In September 2024, only 16 months after the completion of the initial offering, Xinlian Integrated disclosed the acquisition draft, intending to acquire 72.33% of the equity of Xinlian Yuezhou by issuing shares and paying cash for a transaction consideration of 5.897 billion yuan; After the completion of the transaction, Innolink Yuezhou became a wholly-owned subsidiary of Innolink. The counterparties of this transaction include 15 shareholders including Binhai Xinxing and Yuanzhi No. 1, covering state-owned, private equity and technology companies, some of which are the original investors of Xinlian Yuezhou when it was established.

The target company, Xinlian Yuezhou, was established in 2021 and is mainly engaged in silicon carbide (SiC) and automotive-grade chip foundry. As of the benchmark date of April 2024, its 100% equity valuation is 8.152 billion yuan, an increase of 132.77% over the current company's owner's equity. It should be pointed out that at the time of establishment, the total investment of each shareholder in Xinlian Yuezhou was 6 billion yuan, and "from the establishment of the target company to the date of signing this report, the target company has not had any increase or decrease in capital or equity transfer." This means that when the transaction is completed, the institutions participating in the establishment of the company will receive a floating profit of about 36%.

In response to the issue of high valuation, Innosilicon said in its reply that "the core product technology of the target company's competitiveness has reached the domestic or international advanced level." "The target company is constantly improving in the above aspects, and continues to consolidate the leading position in the domestic industry, so the evaluation value of the target company is reasonable and cautious. ”

It is worth noting that Xinlian Yuezhou is a subsidiary led by Xinlian Integration, and as early as before the acquisition, Xinlian Integration had consolidated the financial statements of Xinlian Yuezhou, and the acquisition evaluation did not use the income method. As a result, there are no performance commitments set for this transaction.

The exchange also questioned the necessity of Acquiring the minority interests of the target company even though the company already controlled its subsidiary, Silian Yuezhou. After analyzing the advantages of the target company, Xinlian said that "after the completion of this transaction, the listed company will hold 100% of the equity of the target company, further enhance the control of the target company, and make the best business arrangements for the target company from the perspective of maximizing the company's overall strategic interests and overall synergy, so as to improve the decision-making efficiency of the target company." ”

Image source: SSE e-Interactive

"This transaction is in line with the company's long-term development strategy and is conducive to safeguarding the interests of all shareholders of the company." Some investors did not recognize it, and some investors raised objections to the acquisition and additional issuance of Xinlian Integration on the Shanghai Stock Exchange.

A depressed stock price that is difficult to support

Organized by Shaoxing State-owned Assets, SMIC (688981. SH) co-funded and established by Xinlian Integration, which has attracted much attention from the market since its establishment. In May 2023, when the company completed its initial offering at a price of 5.69 yuan per share, the company received a total of 9.373 billion yuan in fundraising, which was mainly used for the construction and research and development of the 8-inch production line.

Affected by the high cost of asset depreciation and high R&D investment caused by the huge investment in the early stage, Xinlian has not been able to achieve profitability since its establishment. From 2021 to 2023, the company's net loss attributable to the parent company will be 1.236 billion yuan, 1.088 billion yuan, and 1.958 billion yuan respectively, and the performance forecast shows that the company's loss in 2024 will narrow but still be as high as 969 million yuan. This means that since 2021, the cumulative loss of Innoline has been as high as 5.251 billion yuan, and the cumulative loss of Innolink has exceeded 7 billion yuan in 2019 and 2020 of 772 million yuan and 1.366 billion yuan.

The acquisition of the minority shareholder interest of Xinlian Yuezhou, which is also currently losing money, at a premium due to its failure to make a profit, has attracted the attention of the regulator. Among the 10 questions asked by the exchange, three of them are related to the operation and income of the target company, and require Xinlian to analyze the profitability of the target company. According to INLINK, it expects that INLINK will "start to achieve profitability in 2026." ”

Source: Company announcement

The company's long-term losses have weighed on the company's share price. Since the stock price reached a maximum of 6.96 yuan per share on the first day of listing, the share price of Xinlian Integration has started a continuous decline mode. In May 2024, after the lifting of the ban on 3.296 billion original shares, the pressure on shareholders to reduce their holdings increased sharply. Up to now, the share price of Xinlian Integration is around 5 yuan/share, which has fallen by about 12% compared with the issue price of 5.69 yuan/share.

China State-owned Enterprise Mixed Ownership Reform Fund Co., Ltd., the National Council for Social Security Fund and other shareholders who participated in the subscription of the strategic placement shares of Xinlian Integration have seen floating losses on their books; State-owned investment platforms that support the development of Xinlian Integration, such as Shaoxing Yuecheng District Integrated Circuit Industry Fund Partnership (Limited Partnership), Shaoxing Silicon Xinrui Enterprise Management Partnership (Limited Partnership), Shaoxing Rixinrui Enterprise Management Partnership (Limited Partnership), etc., have failed to maintain and appreciate their holdings since the listing of Xinlian Integration.

Under the pressure of the stock price of Xinlian Integration, since the lifting of the ban on the initial shares in May 2024, shareholders such as Gongqingcheng Orange Sea Equity Investment Partnership (Limited Partnership), Gongqingcheng Qiushi Equity Investment Partnership (Limited Partnership), and Qingdao Juyuan Xinyue Phase II Equity Investment Partnership (Limited Partnership) have reduced their holdings of the company's shares in a high proportion. After the lifting of the ban on initial public offerings in May 2024, the frequent discount block transactions have further dampened investor confidence.

Under the framework of the national "14th Five-Year Plan" semiconductor independent and controllable strategy, the silicon carbide production capacity layout and the breakthrough of automotive-grade chips of Xinlian Integration are the core of domestic substitution. Although the market doubts the high valuation, loss and lack of performance commitment, as the first domestic enterprise to promote the mass production of automotive-grade SiC MOSFET, its technical breakthrough, production capacity integration and state-owned assets synergy are the strategic fulcrum of the country to supplement and strengthen the chain. Short-term pain can hardly hide long-term value, in the third-generation semiconductor track, the "contrarian expansion" in this controversy may use time to prove its choice. (Produced by Thinking Finance)■