Amid the craze for spin-off listings, PE institutions are entering the semiconductor industry chain in a big way. What are the potential targets?

On February 25, Shengyi Technology's subsidiary Shengyi Electronics was listed on the Shanghai Stock Exchange Science and Technology Innovation Board, becoming the first A-share listed company to be spun off since the implementation of the new spin-off listing regulations. The company's successful listing also triggered a spin-off listing boom in the A-share market.

At present, many listed companies such as BYD, Goertek, AAC Technologies, Q Technology, Dongshan Precision, and Hikvision have successively launched spin-off listing plans. As of March 12, more than 60 companies in the A-share market have issued announcements related to the spin-off and listing of subsidiaries, and spin-off listings are gradually heating up.

A-shares usher in a wave of spin-off listings

In December 2019, the "Several Provisions on the Pilot Program of Domestic Listing of Subsidiaries of Listed Companies" was officially implemented, and the "A split A" split listing was officially launched in the A-share market.

Since then, spin-off listing has gradually become a hot word in the A-share market, especially after Shengyi Technology spun off its holding subsidiary Shengyi Electronics and listed it on the Science and Technology Innovation Board. More and more large A-share listed companies have also joined the spin-off listing team. As of March 12, more than 60 A-share listed companies have issued announcements to spin off their subsidiaries and list them on the A-share market.

In the field of semiconductors and their industrial chain, according to incomplete statistics from Jiwei.com, 23 related companies have started the listing of their subsidiaries. In the A-share listing sector, due to the promotion of the registration system, the Growth Enterprise Market and the Science and Technology Innovation Board have become popular sectors for spin-off listings. Among the 23 companies that have been spun off and listed, 8 companies have clearly applied for the Growth Enterprise Market, 5 have applied for the Science and Technology Innovation Board, and another 10 have not yet mentioned the specific listing sector.

In terms of listing progress, two companies have successfully listed, namely Shengyi Electronics and Tianneng Shares, and both are listed on the Science and Technology Innovation Board. CRRC Electric, Tongguan Copper Foil, and Ruitai New Materials have also submitted prospectuses and have entered the inquiry stage. At the same time, 11 companies including Aifu Electronics, Han's CNC, Kunshan QUTI, Chengrui Optics, and BYD Semiconductor have also registered for listing and are in the listing guidance stage. In addition, 7 companies including Goertek Microelectronics, EZVIZ Networks, Huachuang Vision, and Virtual Motion are still in the preparation stage.

From the perspective of business, many of the spun-off and listed subsidiaries are leading companies in their respective segments. For example, BYD Semiconductor is the leading domestic automotive-grade IGBT company; Aifu Electronics, a subsidiary of Dongshan Precision, focuses on the 5G ceramic dielectric RF device business and has become a supplier to Huawei; Han's Laser's spin-off Han's CNC, whose PCB business contributed nearly 40% of Han's Laser's net profit in 2019; and Goertek Microelectronics' revenue in 2019 ranked 9th in the global MEMS industry enterprise revenue ranking, making it the only Chinese company to enter the top ten in the world.

Industry insiders said that for most companies that are spun off and listed, the core competitiveness of the enterprises can be better enhanced by further focusing on the business areas in which they excel.

Many companies "attract investment for their children", and well-known PE institutions have entered the market in large numbers

In general, spin-off listings give many high-quality assets within listed companies the opportunity to come to the fore, and at the same time, they also bring new opportunities to strategic investors such as PE institutions.

According to capital market insiders, strategic investors previously mostly acquired shares through private placements or agreement transfers, but direct investment in subsidiaries of listed companies was rare. The implementation of new rules for spin-off listings will help strategic investors to directly participate in investment. Looking at the list of investors introduced by spin-off subsidiaries of well-known listed companies, many local state-owned assets and PE institutions have entered the market in a big way.

In May 2020, BYD introduced strategic investors such as Sequoia Capital China Fund and CICC Capital to its holding subsidiary BYD Semiconductor. One month later, BYD Semiconductor introduced new strategic investors by increasing capital and expanding shares. After the completion of the strategic investment, investment institutions led by more than 30 well-known companies such as South Korea's SK Group, Xiaomi, SMIC, SAIC, and BAIC became shareholders of BYD Semiconductor.

In December 2020, BYD officially announced that BYD Semiconductor was planning to spin off and list, and authorized the company and BYD Semiconductor management to start the preliminary preparations for the spin-off and listing of BYD Semiconductor. In fact, when introducing strategic investment, BYD had already stated that BYD Semiconductor would "actively seek an appropriate time to go public independently."

Chengrui Optics, a subsidiary of AAC Technologies engaged in optical business, is another classic case. In July 2020, Chengrui Optics raised funds and introduced four first-round strategic investors, including Xiaomi Changjiang Industry Fund, OPPO Strategic Investment Department, Huiyou Investment, and Jiangsu Huarui Investment. In October of the same year, Chengrui Optics once again introduced 18 well-known investment institutions, including Sequoia China, SDIC Innovation, CICC, and Gongqingcheng.

It is worth noting that after two rounds of equity financing of 2.808 billion yuan, the valuation of Chengrui Optics reached about 17.9 billion yuan based on the second round of transaction price, which was a 35% increase compared with the valuation of the first round of financing. Currently, Chengrui Optics is in the process of listing guidance, and its guidance institution is CICC.

Similarly, on March 1 this year, Goertek announced that its controlling subsidiary Goertek Microelectronics plans to increase capital and expand shares by introducing 15 external investors including CITIC Construction Investment Capital and CICC Qichen. This round of investors will invest a total of RMB 2.15 billion in Goertek Microelectronics, and will collectively acquire 10.4075% of Goertek Microelectronics' equity after the capital increase and share expansion.

Behind the introduction of relevant strategic investors, Goertek also has the ambition to spin off and go public. Goertek announced that the company's board of directors agreed to the company's holding subsidiary Goertek Microelectronics to plan for a spin-off and listing, and authorized the company and management to start the preliminary preparations for the spin-off and listing of Goertek Microelectronics.

In addition, Trede also introduced strategic investors for its subsidiary Teladian in January this year. Well-known and resource-rich strategic investors at home and abroad, such as GIC, Jiushi Group, and Tiefa Fund, invested in Teladian through their investment companies, with a total capital increase of about 300 million yuan. It is worth mentioning that due to the expectation of Teladian's spin-off listing, the valuation of this financing has jumped significantly, from a post-investment valuation of 7.85 billion yuan a year ago to a pre-investment valuation of about 13 billion yuan this time.

In fact, in the past year or so, a number of A-share listed companies including Nasdaq, Zhongying Electronics, Tianqi Lithium, and Desay Battery have launched plans to introduce strategic investors into their subsidiaries.

From the perspective of institutional investment, the semiconductor industry chain has become a hot spot for investment. This is related to the growth opportunities of domestic semiconductor companies. First, under the background of domestic substitution, semiconductor companies have ushered in new opportunities; second, industrial upgrading and the emergence of emerging industry applications have greatly expanded the market size of the semiconductor industry chain, and high-quality companies in high-quality tracks have quickly received additional investment from PE institutions.

Spin-off listing becomes a trend, what are the potential targets? 

At present, there are already quite a few companies related to the semiconductor industry chain 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 attraction of institutions to high-quality semiconductor assets, coupled with the fact that high-quality companies in the semiconductor industry need to find new financing channels to support rapid business expansion and other reasons, it is expected that the spin-off and listing of high-quality assets, especially spin-offs to A-shares, will become a major trend in the future.

From the perspective of the semiconductor industry chain, some companies have diversified businesses and have subsidiaries with strong profitability and are in the growth stage. Although they have no plans to spin off and list for the time being, they may spin off and list in the future as the industry continues to develop.

For institutional investors, investing in high-quality assets under well-known semiconductor listed companies is undoubtedly a good business for investing in future listed companies, and the targets of such split listings are also growing. For example, Dinglong Co., Ltd.'s wholly-owned subsidiary Dinghui Microelectronics plans to introduce strategic shareholder Hubei High-tech Industry Investment Group Co., Ltd. by increasing capital and expanding shares. One of the core terms is that the target company shall submit materials for the Science and Technology Innovation Board before December 31, 2022 and obtain acceptance from the Shanghai Stock Exchange.