Behind the fracture of Jingdong: the time for large companies to split up and go public

Jingdong, Baidu, NetEase …… including many A-share listed companies are implementing spin-off listing plans. The significance of the spin-off is more out of consideration for corporate governance and long-term strategy, thus allowing the parent company to focus more on its main business, and is also an important step for companies to improve operational efficiency and governance.

Behind the fracture of Jingdong: the time for large companies to split up and go public

On May 28, Jingdong Logistics (02618.HK) was successfully listed on the Hong Kong Stock Exchange, opening at HK$46.05 per share, up 14.10% from the issue price, with a total market value of nearly HK$280 billion.

This is the second company under Jingdong Group to be spun off and listed. As early as December 8 last year, Jingdong spun off its online medical business subsidiary “Jingdong Health” (06618.HK) and successfully listed it in Hong Kong, with a market value of over HK$350 billion today.

Not only Jingdong, but also Baidu Group spun off its smart life innovation business “Xiaodu” and its smart chip business “Kunlun” before its secondary listing in Hong Kong in March this year, and both companies have completed their first round of financing, with a combined valuation of more than 34 billion yuan, and are expected to be listed independently in the future.

Two days ago, on May 26, NetEase also announced that its mobile music business unit “NetEase Cloud Music” will be spun off and independent, and submitted a prospectus to the Hong Kong Stock Exchange, and will soon land on the capital market.

In addition, including BYD, Geer, RuiSheng Technology, Quti Technology, Dongshan Precision, Hikvision and many other semiconductor concept stocks have also launched subsidiary spin-off plans.

The capital market ushered in a wave of corporate spin-offs.

According to incomplete statistics, up to now, nearly 80 A-share companies have disclosed their intention or plan to spin off, 32 of which are clearly intended to spin off to the GEM and 15 to the Science and Technology Innovation Board; while more than 23 Hong Kong-listed companies in the Hong Kong stock market have launched actions to spin off their subsidiaries for listing.

In the context of the global pandemic, overseas changes and market weakness, and the deepening reform of the domestic A-share securities market, companies have chosen to split their important business segments to raise funds and go public, which is an important trend signal that the trend of corporate spin-offs is gradually heating up.

A spin-off listing is when a parent company separates the operations of a subsidiary legally and organizationally from those of the parent company by allocating the shares it owns in the subsidiary to the shareholders of the existing parent company on a pro rata basis, and spins off some of the assets or businesses within the listing scope of that parent company for independent listing on the Hong Kong Stock Exchange, the Mainland (each board of the Shanghai and Shenzhen stock exchanges and the New Third Board) and overseas (New York Stock Exchange, NASDAQ) exchanges.

In an interview with Titanium Media App, Gao Shang, investment director of Beijing JiangYi Capital Management Co., Ltd, said that there are more cases of spin-off listing this year, on the one hand, because China’s macro economy and corporate development are in the key node of transformation and upgrading, and most of the spin-off subsidiaries are in high-growth emerging industries, which have big differences with the industry, business model and growth stage of the parent company; on the other hand, with the capital On the other hand, with the deepening of capital market opening and reform, the investor structure is more mature and diversified, and the proportion of foreign capital is increasing, enterprises need a more matching corporate governance structure to obtain better development, which is another important reason for enterprises to choose to divest and list.

Spin-offs are not “mergers, acquisitions and demergers”
Although both M&A and Equity Carve Outs are ways to restructure corporate assets, they represent two different strategies.

In particular, through M&A, a listed company can broaden its industrial chain and achieve synergies on a larger platform, while a spin-off is a means of divesting assets from a business that is less relevant to its main business, which is very different.

In April 2014, Alibaba Group acquired 16.5% of Youku Tudou for $1.22 billion, and later issued a non-binding offer directly to the board of directors of Unity Group (Youku Tudou). It became one of the most important film and television businesses, fully realizing the synergy effect of “Ali Economy”.

In fact, mergers and acquisitions have been very common in the A-share market in the past, but there have been strict regulatory restrictions on spin-offs. This is because of the problems behind the spin-off, such as the “hollowing out” of the parent company and the transfer of interests, which can harm the interests of small and medium shareholders.

In the A-share market, there is already a precedent for spin-offs. In 2004, the Securities and Futures Commission issued the “Notice on the Regulation of Overseas Listing of Domestic Listed Companies” and in April 2010, it held the “Business Communication Meeting on GEM Issuance Supervision” to set the rules for overseas listing of subsidiaries of listed companies and GEM respectively. However, in a subsequent training session of the SFC’s insurance agent in November 2010, the GEM spin-off was interpreted as “more controversial, less operational, and needs to be grasped strictly”, so companies with spin-off needs in the past basically targeted Hong Kong, overseas or the New Third Board market in China.

However, from 2019 onwards, the pace of capital market reform accelerated and the ice was broken for spin-off listings. The pilot registration system of the Science and Technology Innovation Board was quickly implemented, the “12 Articles of Deep Reform” set the strategic direction of capital market reform, and the market-oriented reform of factors was opened, confirming the strategic status of the capital market.

In December 2019, the China Securities Regulatory Commission (CSRC) officially issued “Certain Provisions on Pilot Domestic Listing of Subsidiaries of Listed Companies”, which marked the breakthrough of A-share market spin-offs, and the “A split A” spin-offs no longer became an obstacle, triggering a boom of spin-offs in capital market stocks.

So far, the full path related to the spin-off of domestic listed companies has been opened, including domestic spin-off of overseas listing, domestic spin-off of domestic listing, spin-off of domestic listing of Hong Kong stocks and spin-off of domestic listing of listed companies in other regions.

According to the latest regulations issued by the SEC in 2019, listed companies are required to meet the following five conditions to conduct a spin-off.

1) To have been listed for 3 years.

2) Continuous profitability for the last 3 years, less the portion of profits of subsidiaries by equity, with an aggregate net profit attributable to the mother for 3 years of not less than RMB 600 million.

(3) The net profit of the subsidiary to be spun-off by equity in the latest fiscal year does not exceed 50% of the net profit attributable to the listed company and the net assets of the subsidiary does not exceed 30% of the total assets of the listed company.

(4) The shares of the proposed spin-off subsidiary held by the directors, senior management and related parties of the listed company shall not exceed 10% of the shares of the subsidiary before the spin-off, and the shares held by the directors, senior management and related parties of the subsidiary shall not exceed 30%.

(5) The business or assets to be acquired through a major reorganization or the issuance of shares and the raising of funds, as the main assets to be divested and listed need to be completed three years.

On February 25, 2021, SangYi Electronics, a subsidiary of SangYi Technology, was listed on the Science and Technology Venture Board of the SSE, becoming the first A-share spin-off company to be listed since the new spin-off regulations came into effect.

At present, domestic companies are mainly divided into three types of spin-offs: A-share split A-share, Hong Kong-share split A-share and Hong Kong-share split Hong Kong-share. Gao Shang explained these three models in an interview with Titanium Media App.

A-share split A-share: Before the launch of the Science and Technology Innovation Board, most companies had to split their subsidiaries to be listed outside of China due to the restrictions on domestic split listings. However, with the arrival of the Keitron board, domestic spin-offs are now allowed, but there are some hard and hidden condition constraints, the number of companies meeting all the conditions is small (less than 100), and the review is more prudent and strict.

Hong Kong stock split A shares: Hong Kong stock split to A shares mode had ushered in a boom in 2015 after a period of cold, with the spin-off of the science and technology innovation board listing policy to open up the path of domestic spin-off listing or will once again usher in an outbreak. As it involves cross-market spin-off, it needs to obtain the consent of both market parties. The major issues involved in the mainland concern points include independence and pre-listing financing and equity incentives, while listed companies in Hong Kong present different equity designs and restructuring paths when spinning off based on factors such as main business, equity structure, and corporate governance structure.

Hong Kong stock spin-off: The spin-off can be divided into the concept of “object” and the concept of “person”, the difference lies in whether the equity of the spin-off subsidiary belongs to the parent company or the shareholders of the parent company. The so-called “physical spin-off” is the transfer of business or property from the parent company to the subsidiary, and the equity of the subsidiary belongs to the parent company after the spin-off, i.e. “mother-son split”; the so-called “human spin-off “, that is, after the separation of the subsidiary’s equity is allocated to the shareholders of the parent company, that is, the “brother division”. Currently, developed markets such as the U.S. and Hong Kong allow the use of “personal separation” for spin-offs, which is relatively mature and has been used in many cases. For example, real estate companies, technology companies, biopharmaceutical companies, etc.

“Currently, Hong Kong stock spin-offs are mainstream in the form of in-kind distribution + share issuance, i.e. the parent company distributes the new shares of the subsidiary to the shareholders of the parent company in the form of special dividend, and then issues some new shares to ensure the quota when issuing.” Gao Shang said to Titanium Media App.

According to a research report issued by Everbright Securities, there are three types of companies that are currently motivated to undergo a spin-off listing.

First, the company has huge assets, diversified business, there is a certain debt pressure, its subsidiary has strong profitability, in the growth period; second, incubation platform companies, such as Tencent, equity portfolio distribution social, entertainment, financial payments, e-commerce, education and other fields, after the subsidiary is listed, the parent company can choose to exit the shareholding, access to investment income; third, companies with state-owned enterprise reform claims. For example, the key industries of mixed reform electricity, railroads, oil, military industry, etc.

Just from the semiconductor industry public data, up to now, there are 23 related A-share companies have opened the split subsidiary listing matters. Among them, there are two companies successfully listed, respectively, Shengyi Electronics, Tianneng shares, listed on the board are science and technology board. And three companies, CEC, Copper Crown Copper Foil and Ruitai New Material, have also submitted their prospectuses, which are now in the inquiry stage. Another 10 companies have not mentioned the specific declaration of listing board for the time being.

Five reasons behind the spin-offs
Why do these companies want to split up and go public?

Specifically, the reasons behind corporate spin-offs are analyzed from five perspectives: performance enhancement, value discovery, structural optimization, strategic focus, and capital market boom.

From the perspective of performance enhancement, the development and innovation of the spun-off company will be further accelerated, and the growth of its performance will be reflected in the overall performance of the Company simultaneously, which in turn will enhance the profitability and robustness of the Company. And after the listing and circulation of the subsidiary’s shares, management and key employees will have richer incentive means, management’s remuneration system will be more directly linked to the performance of the business unit, and a share ownership plan for the top management of the subsidiary will be arranged, and the management will realize the role change to that of a shareholder, with higher motivation to operate and drive sustained performance improvement.

From the perspective of value discovery, a spin-off company helps its intrinsic value to be fully released, can launch its multiple sub-brands, and with the influence of the parent company, the equity value is expected to be further enhanced. It can also cooperate with the parent company’s competitors, which will significantly improve the independence and liquidity of the business.

From the perspective of structural optimization, the spin-off will help further broaden financing channels, improve overall financing efficiency and reduce the overall gearing ratio. For technology companies, using platform resources to incubate different business segments at an early stage before spinning off and listing independently will gain higher valuation while giving the spun-off group more room for independent development and enhancing the comprehensive strength of the parent company. Moreover, the spin-off listing will have a positive impact on the interests of the parent company, shareholders of subsidiaries (especially small and medium-sized shareholders), creditors and other stakeholders.

From the perspective of strategic focus, the spin-off can reduce information asymmetry, enable the market to fully understand the company’s operating condition and growth capability, and assign a reasonable valuation. The spin-off makes the company’s industrial strategy and corporate resources more focused and its products and services more specialized, and the higher the investors’ recognition of the nucleation strategy will be.

From the perspective of the capital market boom, it has been a relatively common practice in the European and American capital markets for listed companies to implement spin-offs, while the A-share market has benefited from the hot performance of the science and technology innovation board and the registration system of the Growth Enterprise Market, coupled with the changing overseas situation and weak technology stocks after the new crown epidemic, which has forced companies to choose the spin-off method to obtain greater capital gains.

On September 30, 2020, Baidu announced the spin-off of its Smart Life Group (SLG) business “Xiaodu Technology” and completed the financing, led by Baidu Capital and CPE, and followed by IDG Capital, with a post-investment valuation of RMB 20 billion (about USD 2.9 billion). Baidu still has absolute control over Xiaodu Technology.

When Xiaodu launched its technology brand “Tim Tim” in May this year, its smart screen products achieved access to platforms including Akiyee, Tencent Video, B Station, Mango TV, Tiger Live, Youku, China Mobile’s MIGU, Alipay, and National K Song, many of which are competitors of Baidu’s products.

In response, Jing Kun, vice president of Baidu Group and CEO of Xiaodu Technology, pointed out in an interview with Titanium Media App and others that Xiaodu needs a wider range of services by accessing these products so that the Xiaodu software platform (DuerOS conversational artificial intelligence system) behind the smart screen hardware can be more open.

“I don’t think of Mango TV and them as friends, but partners. Xiaodu has the attributes of a platform that connects a wide range of scenarios and services. So Android also did not make Microsoft a competitor, Office suite also to run on Apple’s devices, it is the same for us.” Jing Kun revealed to Titanium Media App that Xiaodu has done a lot of communication with platforms such as National K Song and Jitterbug in advance. All manufacturers have the demand to introduce new traffic sources, and Xiaodu Technology attracts new users by launching new series of products, and these companies will benefit from this, which is one of the important reasons why both sides can cooperate with each other.

Eight months after Xiaodu was spun off as independent, Baidu’s Q1 FY2021 earnings report released in May this year showed that Xiaodu’s overall smart device revenue achieved strong double-digit growth in the first quarter, and Xiaodu’s series of smart speakers and smart screen products continued to lead the industry track. According to IDC, Canalys and Strategy Analytics three major industry research institutions, in 2020, Xiaodu smart screen shipments are the first in the world and smart speaker shipments are the first in China.

Jing Kun stressed that Xiaodu through the company’s financing independent way, listed naturally become Xiaodu in the capital operation of the next goal.

There are many other examples of companies splitting subsidiaries. For example, Sina Corp. split its microblogging business to go public, realizing the success of the investors behind both sides; ZTE Group spun off National Technology, using an indirect spin-off listing to divest assets to smooth out earnings performance; Poly Real Estate spun off Poly Property, realizing the release of value and enhancing business synergy.

A preliminary conclusion can be drawn from the above examples: the parent company chooses to implement a divestment more for corporate governance and long-term strategic considerations, thus allowing the parent company to focus more on its main business. A spin-off is an important step to increase operational efficiency and improve governance.

In addition, for institutional investors, the spin-off of new high-quality assets is undoubtedly a good business to invest in future company listings and receive high returns. For example, Dinglong’s wholly-owned subsidiary Dinghui Microelectronics announced in 2019 that it intends to introduce a strategic shareholder Hubei High-Tech Industry Investment Group Co. by way of capital increase and share expansion, and one of the core terms is that the subject company will declare the material of the science and technology innovation board and obtain the acceptance of the SSE by December 31, 2022.

Gao Shang told Titanium Media App that in the PE incubator model, listed companies obtain a controlling stake in their subsidiaries by PE/VC investment, and make larger-scale and more widely laid-out investments through industrial funds before spin-off listing; there are few examples of PE giants heavily involved in spin-off listing, but more overseas. For industries in the wind, PE’s big entry may push up the valuation to a relatively high level before listing, which is not conducive to subsequent IPO review and refinancing.

Listed companies still have risks in spinning off their businesses
Although in terms of capital, policy and other external environment, spin-offs are one of the options for healthy corporate development. However, there are risks in the stock market, and listed companies may use spin-offs as a means to transfer benefits.

For example, in March 2020, Yanan Bikang issued a proposal to spin-off the listing of Jiujiu Technology, which was subsequently investigated by the SFC for alleged information disclosure violations, as it did not meet the requirements of “the listed company and its controlling shareholders and actual controllers have not been subject to administrative punishment by the CSRC within the last 36 months; and the listed company and its controlling shareholders and actual controllers have not been subject to administrative punishment by the CSRC within the last 12 months. The company decided to suspend the spin-off of the listing review because it did not meet the requirements of “the listed company and its controlling shareholders and actual controllers have not been subject to administrative punishment by CSRC within the last 36 months; and the listed company and its controlling shareholders and actual controllers have not been publicly condemned by the stock exchange within the last 12 months”.

On March 25, the Shenzhen Stock Exchange issued an inquiry letter to Yanan Bikang regarding the spin-off plan, requesting the company to further explain whether there is a duplicate listing of the listed entity, whether Jiujiu Technology has sustainable profitability, whether the relevant decision is prudent and reasonable, whether it involves a lukewarm spin-off, and whether there is a violation of the principle of fair disclosure and active catering to market hotspots. Subsequently, in October last year, Shaanxi Regulatory Bureau issued an announcement, stating that the relevant annual report of Yanan Bikang had false records and inflated monetary funds; and that there were material omissions in the annual report and failure to disclose the non-operating appropriation of funds by the controlling shareholder and its related parties, etc. Shaanxi Regulatory Bureau decided to order correction, give a warning and impose a fine of 600,000 yuan on Yanan Bikang Pharmaceutical Co. impose a penalty of more than RMB 1 million.

On January 11, 2021, Yananbikang issued an announcement to announce the termination of the transfer of 74.24% equity interest in Jiangsu Jiugou Technology Co., which means that the company no longer announced the spin-off and terminated the relevant equity transfer to advance the matter transaction.

“There are certain risks associated with the spin-off listing, such as it may lead to irregular connected transactions between the parent and the subsidiary, or trigger the subsidiary to occupy the parent company’s funds, harming the interests of small and medium-sized investors in the parent company, or even the formation of a competitive relationship between the parent and the subsidiary.” Gao Shang told Titanium Media App that “independence”, “connected transactions”, “core technology”, “competition in the same industry The review of “independence”, “connected transactions”, “core technology”, “interbank competition”, “information disclosure” and “compliance with spin-off listing procedures” will be the focus of the regulators in the future.

In addition, for the gradual increase of IPO threshold of the Science and Technology Board, Gao Shang believes that the spin-off listing should not be limited to the Science and Technology Board, but needs to be oriented to the whole market, “The Science and Technology Board is more suitable for emerging industries, hard technologies, and large-cap companies.”

Gao Shang stressed that the IPO on the board has multiple sets of applicable criteria, is highly advanced and inclusive, and has room for selection for companies with high R&D investment and short-term unprofitability.

In fact, there are already many companies that have been spun off and listed. In the future, with the full implementation of the registration system, the continuous expansion of A-shares and the increasing attractiveness of institutions to high-quality assets in the semiconductor, intelligent equipment and other hard technology industries, coupled with the need for high-quality companies to find new financing channels in order to support rapid business expansion and other reasons, corporate spin-offs, especially spin-offs to A-share listings may become a major trend.

We understand that a number of leading Internet companies are still planning to spin-off their IPOs.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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