Does Zhuoshengwei’s equity incentive involve interest transfer?

Latest update time：2020-12-07

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Source : Content from Semiconductor Industry Observer, thank you.

At the end of November, domestic RF giant Zhuoshengwei released the "2020 Restricted Stock Incentive Plan (Draft) of Jiangsu Zhuosheng Microelectronics Co., Ltd.". The first grant assessment year of this incentive plan is the four fiscal years from 2020 to 2023, and the assessment will be conducted once each fiscal year. Taking the operating income value of 2019 (151.239 million yuan) as the performance base, the average of the cumulative operating income values of each year is assessed to determine the growth rate of the performance base. Among them, the performance assessment indicator of the first vesting period of the first grant is that the company's operating income growth rate in 2020 is not less than 65% and 55%, and the incentive targets will obtain shares at 100% and 80% respectively.

Because of this announcement, Zhuoshengwei was sent a letter of concern by the Shenzhen Stock Exchange, which asked whether there was a situation of deliberately lowering performance evaluation indicators to transfer benefits to relevant personnel and whether it harmed the interests of shareholders of listed companies. As a result, Zhuoshengwei's stock price plummeted by 13% on the same day, and its market value directly decreased by 6 billion yuan.

深交所在关注函中指出，结合公司收入确认政策、主要产品的委托生产、销售发货和收入确认周期，以及主要客户订单签署、预计销售发货、确认收入情况及对应时间节点等，详细说明你公司 11 月 30 日披露激励计划时，公司 2020 年营业收入是否已经基本确定、设定 2020年营业收入增长率考核指标显著低于2020 年前三季度已实现营业收入增长率的原因及合理性，以及将其作为第一个归属期考核年度、后续归属期营业收入累计值的均值考核组成部分是否客观公正、清晰透明，是否有利于股权激励作用的发挥。

Because according to Zhuoshengwei's financial report, the company has achieved operating income of 1.972 billion yuan in the first three quarters of 2020, a year-on-year increase of 100.27%; among them, the first to third quarters achieved operating income of 451 million yuan, 547 million yuan and 975 million yuan respectively. The Shenzhen Stock Exchange expressed its concern because Zhuoshengwei's 2020 financial data showed that the company completed the assessment indicators of the first vesting period performance in the first three quarters.

In response to this question, Zhuoshengwei responded:

Under the influence of the complex external environment, 2020 is a year full of opportunities and challenges. The proportion of the company's assessment targets in the fourth quarter of 2020 to operating income and the year-on-year growth are shown in the following table:

The first vesting assessment year of the company's incentive plan is based on the company's operating income in 2020, which is divided into two vesting ratio levels corresponding to operating income of 2.49545 billion yuan and 2.34421 billion yuan respectively. If the company can achieve 100% and 80% vesting performance assessment indicators of this incentive plan, the operating income in the fourth quarter will account for 20.96% and 15.86% of the annual operating income in 2020, corresponding to 522.99 million yuan and 371.75 million yuan respectively.

Taking into account factors such as changes in customer structure and industry supply chain conditions, the company's fourth quarter business development faces great challenges, which directly affects the end-customer demand and purchase of the company's products in the fourth quarter, resulting in a certain impact on the company's fourth quarter delivery and revenue. Therefore, the operating income required to be achieved in the fourth quarter of 2020 for this incentive plan is in line with the company's actual situation and is reasonable.

They pointed out that since the beginning of the year, the integrated circuit industry has been affected by the COVID-19 pandemic and the international political situation. Competition in the domestic and foreign raw material markets has intensified, wafer production capacity has been scarce, and the supply of major accessories for mobile terminal manufacturers has been affected to varying degrees. The complete device support required for mobile phones will directly affect customers' demand and purchase of the company's products. At the same time, the commercialization of 5G communication technology has brought about a new round of phone replacement, and consumer demand has continued to increase, which has led to a more tense procurement of major accessories for mobile terminal manufacturers, resulting in the company's orders and actual shipments in the fourth quarter of this year being uncontrollable and uncertain.

On the other hand, the company's customer structure changed in the fourth quarter. The change in the distribution of downstream customers' market share may cause the demand of some of the company's mobile terminal customers to shift to other terminal brands. Since the company has covered most of the mainstream Android mobile phone manufacturers, the company's overall business stability will not be greatly affected in the long run. However, in the short term, the change in customer structure will affect the procurement forecast and order demand of other customers. There is still the possibility of further changes in the structure of mobile terminal customers, so the actual order demand is still uncertain.

Zhuoshengwei also emphasized that 2020 is a special year in the development history of the semiconductor industry. The development of the entire industry faces multiple uncertainties: first, the sudden public health incident, the outbreak of the new crown epidemic and its global spread; second, the changes in the international political environment and the escalation of Sino-US trade frictions. The above changes have had a certain impact on the demand of the terminal market and the stability of the supply chain. Despite this, the company remains committed to its original intention, forges ahead, and actively responds to the complex and changing external environment and various severe tests. With the joint efforts of all employees of the company, the company has achieved a historic breakthrough since its establishment. As of the first three quarters of 2020, the company's operating income reached 1.972 billion yuan, a year-on-year increase of 100.27%. If the 2020 assessment indicators are successfully achieved, the company's full-year performance will set a new record, laying a solid foundation for the company's sustainable development. The achievement of these achievements is inseparable from the unremitting efforts of all employees of the company. At the same time, with the development of communication technology and the outbreak of market demand, the company will usher in a critical period of rapid development in the next few years, and the continuous research and development of new products, new technologies and new materials will face great challenges.

In summary, the operating income target that the company needs to achieve in the fourth quarter of 2020 accounts for a proportion of the full year that is not significantly lower than the company's historical level. The company's performance evaluation target is set reasonably, in line with the company's actual situation, and will help promote the improvement of the company's competitiveness.

When asked to further fully demonstrate the scientificity and rationality of the setting of relevant performance evaluation indicators in combination with the above reply, and whether there is a situation of deliberately lowering performance evaluation indicators to transfer benefits to relevant personnel, and whether it harms the interests of shareholders of listed companies, Zhuoshengwei gave the following answer:

The performance evaluation indicators set by the company's incentive plan are based on the operating income value in 2019. If the average growth rate of the cumulative operating income in 2020-2023 is not less than 65%, 80%, 100%, and 120% respectively, the restricted shares can be fully vested at the company level. The performance evaluation indicators of equity incentives of comparable companies in the same industry in the past two years are shown in the following table. Table 4 lists the available data in the same industry:

According to the requirements of fully vested restricted shares of this incentive plan, the company's revenue growth rate assessment targets for 2020-2023 are set at 65%, 98%, 138%, and 184% of the 2019 base (RMB 1.51239 billion) respectively. According to the assessment target value, the revenue target for 2023, the last assessment year of the incentive plan, is 2.84 times that of 2019, and the absolute value of revenue scale has also increased significantly. By comparing with comparable companies in the same industry, it can be concluded that the performance assessment indicators of the company's equity incentive plan are set higher than the performance level of companies in the same industry.

The growth rates of operating income of comparable companies in the same industry in recent years are shown in the following table:

By comparing with comparable companies in the same industry, the company's performance evaluation index growth rate for this equity incentive plan is higher than that of companies in the same industry, and the growth level is significantly higher than the average and median levels of comparable companies in the past two years. Therefore, the performance evaluation index setting of the company 's incentive plan is reasonable and scientific, and is in line with the actual situation of the company's own development.

Finally, they emphasized that this incentive plan did not transfer benefits to relevant personnel:

1. The procedures of this incentive plan are legal and compliant

The incentive plan is in compliance with the relevant laws, regulations and normative documents such as the "Regulations on the Management of Equity Incentives of Listed Companies", "Shenzhen Stock Exchange ChiNext Stock Listing Rules (Revised in 2020)", "ChiNext Listed Company Business Guide No. 5-Equity Incentive" and the "Articles of Association". The procedures are legal and compliant. The company's equity incentive plan will not affect the company's continued operation, nor will it harm the interests of the company and all shareholders.

2. The incentive targets are the company's middle-level management personnel and technical (business) backbone personnel

The scope of the first grant of some incentives to the company's incentive plan is the company's middle-level management and technical (business) backbone personnel, not exceeding 45 people. There are no current directors, senior management, actual controllers of the company, shareholders holding more than 5% of the shares and their immediate relatives who participate in the incentives for this incentive plan. The incentive targets do not participate in the decision-making of the incentive plan. The total amount of the incentive plan will not exceed 90,000 shares, accounting for approximately 0.05% of the company's total share capital at the time of the announcement of the draft incentive plan. Among them, 72,000 shares were granted for the first time, accounting for 0.04% of the company's total share capital of 180 million shares when this incentive plan was announced.

The company's incentive plan initially granted 400 shares per person per year, and the average expected annual return per person is at a reasonable level. The total amount of shares to be granted and the share-based payment expenses of the company's incentive plan are at a lower level than the equity incentive plans announced by comparable companies in the same industry in the past three years. There is no negative impact on the company's daily operations and development, and there is no situation of damaging the interests of listed company shareholders.

3. Improve the long-term stability of core technical talents and ensure the sustainable development of the company

The industry to which the company belongs is characterized by high technology, knowledge intensiveness, and technology leadership. The industry technology is developing and updating at a fast pace, and the requirements for talent resources in the industry are getting higher and higher. In recent years, the international situation has become increasingly tense, and domestic substitution is unstoppable. With the continuous influx and promotion of capital, the domestic talent shortage has become increasingly serious, and the salary level of core talents has continued to rise. Core technical talents are the company's main force and the most valuable talent resource for achieving sustainable development of the company. The company has always attached great importance to the cultivation of talents, continuously improved the assessment system and incentive mechanism, established a fair, just and transparent assessment mechanism, and vigorously strengthened the construction of R&D and technical personnel teams. In the face of increasingly fierce competition for talents, the company uses equity incentive plans other than salary benefits to stimulate the vitality of technical talents, effectively improve the treatment of technical talents, cultivate fertile soil for retaining talents, and let core technical talents take root in the company, contribute to the development of the company, and create value.

4. Double assessment of incentive plan, deep binding of employee interests and company interests

In addition to the company-level performance assessment, this incentive plan also sets up a more stringent individual-level performance assessment. Only when the company-level performance assessment and the individual-level performance assessment meet the assessment requirements at the same time, can the incentive targets be allocated the rights and interests of this incentive plan in batches and in proportion. The dual assessment effectively binds the interests of employees and the development of the company. From the dimension of assessment standards to performance assessment and the setting of performance assessment, the principle of equal incentives and constraints of this incentive plan is reflected. There is no situation of deliberately lowering performance assessment indicators to transfer benefits to relevant personnel, and there is no situation of damaging the interests of the company's shareholders.

"In summary, the implementation of this incentive plan is conducive to stimulating the work enthusiasm of the company's key employees, stimulating their subjective initiative, thereby promoting the improvement of the company's comprehensive competitiveness, ensuring the company's long-term development, and complying with the fundamental interests of the company's shareholders. The company believes that the performance indicators of this incentive plan are in line with the average level of performance appraisal settings of comparable companies in the same industry. They are performance appraisal indicators set in combination with the company's actual conditions. They are scientific and reasonable, and there is no obvious unreasonableness. The company's incentive plan this time follows the principle of equal incentives and constraints. There is no situation of deliberately setting lower appraisal indicators to transfer benefits to relevant personnel, and there is no situation of damaging the interests of the company's shareholders." Zhuoshengwei emphasized.

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