A-share Mkt Turb.; Guy Spier's Value Invest.

A-share market sees another stock-for-stock absorption merger!

On the evening of September 2nd, two A-share listed companies under China Shipbuilding Group—China Shipbuilding and China Shipbuilding Heavy Industry—both issued announcements stating that they are planning a stock-for-stock absorption merger of China Shipbuilding Heavy Industry by China Shipbuilding through the issuance of A-shares to all shareholders of China Shipbuilding Heavy Industry. Starting from September 3rd, the stocks of both companies were suspended, with an expected suspension period not exceeding 10 trading days.

This is the largest asset integration by China Shipbuilding Group since the merger of the "North-South Ship" two major groups five years ago, marking a key step for China Shipbuilding Group to address the same-industry competition in the shipbuilding and marine main business.

As of the close on September 2nd, the market value of China Shipbuilding and China Shipbuilding Heavy Industry were 156.088 billion yuan and 113.554 billion yuan, respectively. The joint integration of two listed companies with a market value of over 100 billion is the largest scale M&A transaction in the A-share capital market in the past decade.

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Addressing the same-industry competition in the shipbuilding assembly business

China Shipbuilding and China Shipbuilding Heavy Industry stated in their announcements that the move aims to further focus on the country's major strategies and the main responsibilities of strengthening the military with equipment, to accelerate the high-quality development of the shipbuilding assembly business, to standardize the same-industry competition, and to enhance the operational quality of the listed companies.

Shipbuilding assembly, as the core business of China Shipbuilding Group's military and civilian ship business, is mainly undertaken by China Shipbuilding and China Shipbuilding Heavy Industry. China Shipbuilding is a global leader in shipbuilding, with a global market share of about 11% (calculated by completed deadweight tons), and is also the core military and civilian ship listed company with the largest production capacity, the most complete industrial chain, and the strongest technical strength under China Shipbuilding Group. It has internationally renowned shipbuilding enterprises such as Jiangnan Shipbuilding, Waigaoqiao Shipbuilding, and Guangzhou Ship International, with comprehensive design and construction capabilities covering the "three pearls" on the crown of the world's shipbuilding industry.

China Shipbuilding Heavy Industry, on the other hand, is a leading domestic enterprise in the research, design, and manufacturing of warships, with top domestic shipbuilding enterprises such as Dalian Shipbuilding, Wuchang Shipbuilding, and Beihai Shipbuilding, as well as warship supporting enterprises such as Dalian Marine Propulsion and Wuhan Heavy Industry. Its main business covers five major sectors: marine defense and marine development equipment, marine transportation equipment, deep-sea equipment and ship repair and refit, ship support and mechanical and electrical equipment, and strategic emerging industries.

It is evident that China Shipbuilding and China Shipbuilding Heavy Industry have a high degree of business overlap in the field of shipbuilding assembly, constituting same-industry competition. This reorganization will address the same-industry competition issues between China Shipbuilding and China Shipbuilding Heavy Industry in the assembly business.

In the view of industry insiders, this reorganization will integrate the advantageous scientific research, production, and supply chain resources of China Shipbuilding and China Shipbuilding Heavy Industry, accelerate the internal business integration of China Shipbuilding Group, further strengthen the top-level coordination of the main business, effectively reduce same-industry competition, better coordinate military ship business, and it is expected that civilian ship business will form a joint force to explore overseas markets together. This will achieve the integrated development and mutual promotion of industrial operation and capital operation, leverage synergistic effects, and achieve complementary advantages.The integration is expected to achieve a "1+1>2" synergistic effect.

Upon completion of this restructuring, the surviving listed company, China State Shipbuilding Corporation (CSSC), will lead the world in terms of asset size, business revenue scale, and the number of ship orders on hand, becoming the world's largest flagship shipbuilding listed company.

According to the semi-annual report, CSSC delivered 48 civilian ships/4.0345 million deadweight tons in the first half of this year, an increase of 10 ships compared to the same period last year, with a tonnage completion rate of 59.87% of the annual plan, a year-on-year increase of 3.20%; completed ship repairs for 149 ships/1.112 billion yuan, with an amount completed at 54.24% of the annual plan; delivered industrial application equipment with a value of 787 million yuan; and delivered 16,000 tons of self-elevating and self-propelled wind power installation platforms for offshore engineering.

As of the end of June 2024, CSSC had a cumulative order book of 322 civilian ships/23.6218 million deadweight tons/199.639 billion yuan; ship repair orders for 98 ships/1.161 billion yuan, offshore engineering equipment contract order amount of 1.636 billion yuan, and industrial application contract order amount of 1.307 billion yuan.

China Shipbuilding Industry Corporation (CSIC) completed a total of 26 civilian ships, 2.773 million deadweight tons (a year-on-year decrease of 7.1%), and 843,000 corrected gross tons (a year-on-year increase of 10.5%) in the first half of this year; in the first half of the year, it received orders for 68 civilian ships, 11.671 million deadweight tons, and 43.6 billion yuan, respectively, with year-on-year increases of 83.8%, 230.6%, and 130.2%.

This time, CSSC is promoting the deep reform of CSSC and CSIC through market-oriented means, clarifying the integration goals and tasks, firmly working in the same direction and forming a joint force, enhancing the overseas competitiveness of CSSC and the international influence of Chinese shipbuilding, and is expected to achieve a "1+1>2" integration effect.

In the first half of this year, CSSC achieved a business revenue of 36.017 billion yuan, a year-on-year increase of 17.99%, and a net profit of 1.412 billion yuan, a year-on-year increase of 155.31%; CSIC achieved a business revenue of 22.102 billion yuan, a year-on-year increase of 31.05%; and a net profit attributable to the parent company of 532 million yuan, a year-on-year increase of 177.13%.

Subsequently, the surviving listed company will leverage its strong scientific research and innovation capabilities, advanced management level, exquisite manufacturing processes, rich product structure and production lines, seize industry opportunities, enhance global industry influence, continue to lead the development of the global shipbuilding industry, and help CSSC build a world-class shipbuilding group.

Central and state-owned listed companies continue to be active in mergers and acquisitions and restructuring.

This is another significant asset restructuring case in the A-share market recently. This year, policies encouraging listed companies to merge and restructure have been frequently introduced, with the new "Nine National Articles" explicitly encouraging listed companies to comprehensively use mergers and reorganizations and other methods to improve development quality. The China Securities Regulatory Commission's "Opinions on Strengthening the Supervision of Listed Companies (Trial)" proposes multiple measures to invigorate the merger and reorganization market.On June 19th, at the opening ceremony of the 2024 Lujiazui Forum, the Chairman of the China Securities Regulatory Commission (CSRC), Wu Qing, stated: "We support listed companies in using various capital market tools to enhance their core competitiveness, especially to leverage the main channel of capital market mergers and acquisitions to help listed companies strengthen horizontal and vertical integration and collaboration within the industry."

In this context, there has been a continuous emergence of merger and acquisition (M&A) and reorganization cases in the A-share market. Statistical data shows that since May 2024, listed companies on the Shanghai and Shenzhen stock exchanges have disclosed nearly 40 significant asset reorganization projects. Taking the STAR Market as an example, companies on the STAR Market have actively utilized the "STAR Market Eight Measures," relying on industrial M&A to grow and strengthen, launching 14 M&A and reorganization cases with a total value exceeding 3 billion yuan, which is twice that of the same period last year.

A reporter from the Securities Times observed that among the A-share M&A and reorganization cases, central and state-owned enterprise (SOE) listed companies have continued to be active. On August 6th, the transaction of AVIC Electronic Measurement and Control Technology Corporation issuing shares to purchase 100% equity of Chengdu Aircraft Industry (Group) Co., Ltd., a subsidiary of Aviation Industry Corporation of China, was registered by the CSRC, with a transaction value of 17.439 billion yuan. On the evening of July 18th, Huadian International also announced that the company plans to issue shares and pay cash to purchase the equity of eight companies, including Huadian Jiangsu Energy Co., Ltd., and to raise supporting funds.

The M&A and reorganization of Haohua Technology, which issued shares to purchase 100% equity of Blue Sky Chemical, has been completed. Both companies' core business areas are in high-end fluorochemical materials. Haohua Technology has grown and strengthened through M&A and reorganization, joining hands with Blue Sky Chemical to become a leading enterprise in the global fluorochemical industry. This reorganization is the first significant asset reorganization business within the China National Chemical Corporation (ChemChina) and has a certain market benchmark significance, as well as the potential to create a demonstration effect among central SOEs.