Changdian Technology (600584.SH), which has been planning to suspend trading for important matters for several days, has taken a new position.

Changdian Technology announced on March 27 that China Integrated Circuit Industry Investment Fund Co., Ltd. (hereinafter referred to as “Big Fund”) and Semiconductor Semiconductor (Shanghai) Co., Ltd. (hereinafter referred to as “Core Semiconductor”), which are shareholders of the company, have each reached a share transfer agreement with Panshi Hong Kong Co., Ltd. (hereinafter referred to as “Panshi Hong Kong”), a subsidiary of China Resources.

According to the arrangement, both shareholders mentioned above transferred 9.74% and 12.79% of their shares to Panshi Hong Kong at a price of 29 yuan/share, respectively. According to Ruoan's estimate of 403 million shares, the acquisition would require China Resources to spend as much as 11.69 billion yuan in capital.

Through this transfer, the shares of Changdian Technology held by large funds will drop to 3.5%, while Chip Semiconductor will completely withdraw from it; at the same time, Panshi Hong Kong's shareholding ratio in Changdian Technology will reach 22.54%.

Since then, this leading semiconductor packaging testing company with a market value of 50 billion dollars will also change from having no actual controller to a China Resources company. This means that China Resources, as a central enterprise, will add another member to the listed army with 17 A-share and Hong Kong stock companies.

As early as 4 years ago, China Resources Wei (688396.SH), the IDM leader in power semiconductors owned by China Resources, completed the listing on the Science and Technology Innovation Board. This acquisition is undoubtedly another major position of China Resources in the semiconductor industry.

However, since China Resources Micro's sealing and testing business also has external OEM activities and potential competition with Changdian Technology's main business, China Resources promised to resolve this issue within five years to meet regulatory requirements.

Furthermore, at the beginning of March this year, Changdian Technology proposed a new semiconductor packaging and testing asset acquisition plan. It plans to acquire 80% of the shares of Shengdi Semiconductor (Shanghai) Co., Ltd. (hereinafter referred to as “Shengdi Semiconductor”), a subsidiary of Western Digital Corporation (Western Digital), for US$624 million.

If the two transactions proceed smoothly, China Resources's acquisition will simultaneously include Changdian Technology and Shengdi Semiconductor, achieving the effect of “killing two birds with one stone.”

Ten billion won the “Twin Cities”

Changdian Technology, founded in 1972, is still the third largest semiconductor sealing and testing leader in the world and number one in the country. Its global market share in 2023 is about 10.27%.

However, under the cyclical pressure of semiconductors, the performance of Changdian Technology, which focuses on the field of packaging and testing, has also slowed down.

According to the performance reduction announcement, Changdian Technology expects to achieve net profit of 1,322 billion yuan to 1,616 billion yuan in 2023, a year-on-year decline of about 49.99% to 59.08%.

“In the inventory removal cycle, the overall valuation of the semiconductor industry is relatively low, and the degree of bubble is not high. Although there is some pressure on performance, as long as there is an inventory inflection point, it may be an opportunity for buyers to double hit Davis.” An investment banker in North China who is concerned about semiconductors said, “Entering an industrial transaction at this point is a good time for buyers. They have at least escaped the 20-year or 21-year semiconductor valuation bubble.”

It should be noted that Changdian Technology itself, which is viewed by China Resources, is also expanding in a “countercyclical” manner.

On March 4 of this year, Changdian Technology announced that its wholly-owned subsidiary Changdian Technology Management Co., Ltd. (hereinafter referred to as “Changdian Management”) plans to spend 624 million US dollars (about 4.5 billion yuan) in cash to acquire 80% of Western Digital's shares in Shengdi Semiconductor, thereby increasing the memory chip sealing and testing circuit that the latter focuses on.

After the announcement of this acquisition, Changdian Technology also carried out a capital increase of 4.5 billion yuan to Changdian Management, which was the acquirer, of which 2.1 billion yuan was raised capital for the change of investment, obtained from the targeted increase planned by Changdian Technology in 2021; as of the end of September 2023, Changdian Technology had a monetary capital of 4.678 billion yuan.

Shengdi Semiconductor also has a certain scale. In 2022 and the first half of 2023, it achieved operating revenue of 3.498 billion yuan and 1,605 billion yuan, respectively, and realized net profit of 357 million yuan and 221 million yuan respectively. As of the end of June 2023, Shengdi Semiconductor's total net assets in decibels was 4.362 billion yuan and 3.285 billion yuan.

If we estimate the net profit for 2022 and the end of June 23, the PE and PB of Changdian Technology's current transaction are about 15.8 times and 1.71 times, respectively, lower than the current 34 times PE and 2 times PB of Changdian Technology's secondary market.

“After the completion of this acquisition, the seller SANDISK CHINA and its parent company Western Digital will continue to be the main or sole customers of Shengdisk Semiconductor for a period of time, and the target company's operating performance will be guaranteed to a certain extent.” Luo Tong, chief electronics analyst at Open Source Securities, pointed out in this regard, “The company will indirectly control and consolidate its finances, which will help enhance the company's long-term profitability.”

Since the acquisition of Changdian Technology is still in progress, China China Resources's control of Changdian Technology means that it is expected to simultaneously take Changdian Technology and Shengdi Semiconductor through this acquisition, thus achieving the effect of “killing two birds with one stone.”

“The investment in the acquisition of Shengdi (semiconductor) is 4.5 billion yuan, and the acquisition of Changdian (Technology) is close to 11.7 billion yuan. If the portion of Shengdi is deducted, the net amount equivalent to the acquisition of control of Changdian is actually only 7.2 billion yuan.” An electronics industry analyst at a listed brokerage firm in Beijing pointed out, “This is equivalent to 117 acquisitions taking over two semiconductor sealed assets in one fell swoop.”

“As a central enterprise, China Resources has strong financial resources, and its entry into the semiconductor packaging and testing business may need to be continuously updated in the future, which in itself will help the latter's capital expenditure and expand recycling production.” The analyst pointed out.

Consolidated expectations for closed testing

China Huarun, the “big buyer” of this transaction, is originally a veteran player in the semiconductor industry.

China Resources Wei, a science and technology innovation board company owned by China Resources, has been the leading IDM model power semiconductor company in China for many years, and its revenue has reached 10 billion dollars since 2021.

However, in the current high semiconductor inventory cycle, China Resources Wei's overall performance is also under pressure to grow.

According to the performance report, China Resources Wei achieved revenue of 9.9 billion yuan and net profit of 1.48 billion yuan in 2023. The two indicators decreased by 1.59% and 43.45% year on year, respectively.

As of the close of trading on March 27, the A-share market value of Changdian Technology and China Resources Wei is still above 50 billion. After the acquisition is completed, the total market value of China Resources's semiconductor sector will reach 100 billion dollars.

As a leader in integrated semiconductors, China Resources Micro's sealing and testing production capacity also provides external OEM services, and this clearly poses a risk of competition with Changdian Technology's main packaging and testing business.

To this end, China Resources promised to meet regulatory requirements relating to peer competition within 5 years of completion of the acquisition, that is, to resolve this obstacle through methods including but not limited to trusteeship, asset restructuring, cessation of related business by one party, adjustment of product structures, and establishment of joint ventures.

This has stimulated the market's imagination that China Resources Micro may divest its sealed assets in the future.

“Seal testing is the main business of Changdian (Technology). If we want to resolve competition in the industry and let the company focus on the main business, we cannot rule out the possibility that China Resources Wei will divest its sealed testing assets and centrally place them in Changdian.” The North China investment banker mentioned above pointed out.

However, some industry sources pointed out that the IDM model is highly collaborative, and it remains to be seen whether China China Resources will “sell” China Resources Wei's sealed testing assets to Changdian Technology in the future.

“IDM's contract manufacturing is because its own sealing and testing production capacity is idle, but it is still more established to meet its own integration requirements.” An IC industry person in North China pointed out, “There is some uncertainty as to whether it will be possible to meet IDM's synergy requirements if downstream sealed assets are divested in the future.”

You need to know that China Resources Micro's packaging testing business revenue already has a certain scale and far exceeds internal transactions.

According to the regular reports for 2022 and the first half of 2023, the external revenue of China Resources Micropackaging Testing Division reached 1,479 million yuan and 630 million yuan respectively, accounting for 14.70% and 12.52% of total revenue for the same period, respectively. The “inter-division” sealing revenue for the same period was only 774 million yuan and 113 million yuan.

As a downstream in the semiconductor industry chain, the added value and gross margin of the sealing and testing business are relatively limited. China Resources Micro did not disclose the gross profit margin of this portion of its business after its listing, but judging from the IPO prospectus, the gross margins of its closed beta business from 2016 to 2018 were 7.29%, 8.20%, and 7.86%, respectively.

In contrast, China Resources Wei's overall gross margin is not low — in 2022, the gross margins of its main businesses of “manufacturing and service” and “products and solutions” were as high as 49.49% and 49.47% respectively.

According to investment researchers, if China Resources were to later divest its sealed testing business from China Resources Micro in order to resolve competition in the industry, it would not necessarily be a bad thing for the latter.

“After the divestment of the low-margin business, the company (China Resources) can focus more on the main power semiconductor business, and can also have higher added value and industry premium rates supported by scale effects.” An investment manager concerned with the semiconductor industry in East China pointed out, “Conversely, cash obtained from asset sales and divestitures can meet new capital expenses, or be used for share repurchases or dividends.”