M&A boosts valuation

"M&A will become a long-term hot spot in the A-share market." A fund manager predicted. In fact, mergers and acquisitions have allowed investors to see its value. From Sinopec's integration of its subsidiaries Yangzi Petrochemical, Qilu Petrochemical, Zhongyuan Gas, and Petroleum Daming, to Intime Department Store's continuous listing of Top 100 Groups and G Wushang, all A-share investors can enjoy the benefits brought by mergers and acquisitions.

"If China enters a sustained bull market in the next few years, mergers and acquisitions must be an important driving force." Jutian Fund said, "Business operations create corporate value, while mergers and acquisitions themselves do not create corporate value, but mergers and acquisitions are the realization of corporate value. It is an important way of value.”

“In a fully-circulated market environment, when the value of an enterprise is underestimated by the market, other companies with operational capabilities and financial investors will generate synergy through stock price increases before and after acquisitions, tender offers, and corporate mergers. The real intrinsic value of the company can be fully realized by various means such as the effect of the company's economic development, asset spin-off and sale."

The integration of subsidiaries of central enterprises is worth looking forward to

Securities analysts believe that in mergers and acquisitions, the privatization of subsidiaries of state-owned enterprises and mergers and acquisitions of multinational companies will be the two main lines.

On the surface, privatization is a last resort for the stock reform. In fact, the motivation for privatization comes from consolidating resources, increasing market value, reducing related-party transactions and acquiring undervalued assets.

The wealth effect of Sinopec's high premium integration of four subsidiaries has stimulated market expectations for the integration of Sinopec's remaining subsidiaries, including Shanghai Petrochemical, Taishan Petroleum, Wuhan Petroleum, and Sinopec. It is believed that the integration of Sinopec's subsidiaries will continue.

"Cash repurchase of subsidiary stock, share swap, shell reorganization, etc. are all possible ways of reorganization. Of course, the investment value of Sinopec itself is also worthy of attention." Jutian Fund believes.

It is also expected by the market that the central enterprise Chinalco will integrate its subsidiaries. Chinalco controls nearly 80%-90% of domestic bauxite resources and almost monopolizes the domestic alumina supply market. Large aluminum companies, due to the expansion of their own industrial chain Since 2005, it has continuously extended its tentacles to downstream electrolytic aluminum production enterprises. It is against this background that Chinalco's acquisition of Jiaozuo Wanfang occurred. Aluminum Corporation of China will issue A shares, and it is necessary to integrate Lanzhou Aluminum and Shandong Aluminum which it controls. If you refer to Sinopec's integration bid, Chinalco's integration of Lanzhou Aluminum and Shandong Aluminum is worth looking forward to.

Integration in various ways

In addition to central enterprises, some state-owned group companies will also accelerate the pace of restructuring their subsidiaries.

According to the statistics of Shenyin & Wanguo Securities Research Institute, there are currently 168 companies in which the major shareholders in the A-share market simultaneously control one or more other listed companies, that is, the privatization of the group company will not cause it to lose investment platform. Among these 168 companies, 29 companies have lost the qualification for rights issue, and 65 companies have lost the qualification for additional issuance. For the 29 subsidiaries that have lost at least the qualification for allotment, it is a waste for the parent company to spend a lot of human and financial resources, disclose information, and maintain transactions.

In the case of ST Longchang, Yuneng Holding and other companies, their net cash (net cash = monetary funds + net short-term investment + net accounts receivable - short-term borrowings - accounts payable - other payables) accounted for their The proportion of circulating A-share market value reaches or exceeds 50%. That is, if the parent company is privatized according to the current stock price, the actual cost paid is only about half of the market value.

Other companies, such as ST Zhongxi, G Longtou, G Electronics, and Shanghai Sanmao, may adopt reorganization methods such as selling shells, and the parent company does not need to pay for unnecessary asset market transactions.

From the perspective of market valuation, privatization can enhance the overall value of the group company. Because some subsidiaries are seriously undervalued by the market, the weak share price performance is not good for the Group's reputation. Or the valuation level of the subsidiary company is seriously lower than that of the parent company.

For example, the privatization of Sinotrans Development of Sinotrans and the privatization of three A-share companies under Shanghai Electric can increase the overall market value, because the parent company enjoys a higher valuation, but the valuation level of the classified subsidiaries is relatively high. Low.

The acquisition of Sinotrans Development by Sinotrans means that the transfer of assets with higher profitability from the low-valued market to the high-valued market can significantly increase the overall market value of the group.

In addition to the privatization event, there are many large groups that may restructure their assets.

Shenwan analysts reminded investors to pay attention to the asset restructuring of some large groups before and after the share reform. For example, Shanghai Bailian Group will likely carry out asset integration for its various assets - supermarket chains, hypermarkets, department stores, and trade, and for listed companies - Friendship, Hualian, Lianhua, Wumao, Dashang, etc. The restructuring process of the assets of the four major aerospace departments will involve more than 30 A and H-share companies under the four major groups of Aerospace Science and Technology, Aerospace Science and Industry, Aerospace Industry First Group, and Aerospace Industry Second Group.

The pace of foreign mergers and acquisitions is accelerating

The mergers and acquisitions of A-share companies by multinational companies will also enter a new realm with the gradual liberalization of policies. "Overseas capital has launched a new enclosure movement of equity investment in China's capital market." Jutian Fund said in its investment strategy report.

Foreign investors can consolidate their business in China and consolidate their competitive advantages through mergers and acquisitions. Taking the automobile industry as an example, China's automobile industry policy stipulates that each foreign manufacturer cannot establish more than two Chinese joint ventures in China.

Due to its late entry into China and its relatively loose industrial layout, Ford Group urgently needs to integrate its domestic vehicle joint venture resources through mergers and acquisitions.

In 2005, under the drive of Ford, Changan Automobile successfully incorporated Jiangling Motors into the Changan Group through Jiangling Holdings, which holds 50% of the shares. Changan-JMC has become an important part of Ford's system in China. Ford has further integrated its joint venture resources in China with the help of Changan Automobile. Ford itself holds 30% of the shares in Jiangling, and is the actual controlling party. This saving of joint venture quotas and the integration of the system will help Ford's business development in China. Lay a good foundation.

Foreign investors also take advantage of overcapacity in some domestic industries and are at the bottom of the cycle to carry out low-cost strategic mergers and acquisitions.

The development of cyclical industries such as steel and cement has been driven by the alternate cycle of profit and mergers and acquisitions. At the high point of the profit cycle, all companies in the industry are full of optimistic expectations for future development, so they have expanded production capacity and launched new projects, resulting in excess production capacity in the industry, a rapid decline in corporate profits, and a trough of industry development. As a result, people are full of pessimistic expectations about the development prospects of the industry, resulting in repeated reductions in the level of corporate valuations, and the undervaluation of companies finally leads to mergers and acquisitions. Therefore, the bottom of the cycle of declining industry profits is often a golden period for mergers and acquisitions.

Switzerland's HOLCHIN.BV's holding of Huaxin Cement, Morgan Stanley's Tim Hui Asia Co., Ltd. and International Finance Corporation's bid to acquire Conch Cement, Lafarge's acquisition of Sichuan Shuangma, and Heidelberg's stake in Jidong Cement all illustrate foreign mergers and acquisitions The parties and strategic investors choose the industries that have a strategic development position and are currently undervalued.

There are investment opportunities in steel industry mergers and acquisitions

Not only in the cement industry, but also in the global steel industry mergers and acquisitions trend, foreign capital is also eyeing China's steel industry, Arcelor has acquired Laigang, and Mittal has acquired Valin Pipeline. The mergers and acquisitions of foreign capital have also severely challenged the status of China's leading enterprises. Baosteel and other large state-owned enterprises have also launched mergers and acquisitions of domestic steel enterprises.

In 2006, Baosteel Group signed the "BMW Alliance" and "Eight Treasures Alliance" with Maanshan Iron and Steel and Bayi Iron and Steel Group on January 18 and March 11 respectively, which has opened the prelude to Baosteel's low-cost expansion. . Baosteel also purchased the tradable shares of Handan Iron and Steel through the secondary market, and became the largest tradable shareholder of Handan Iron and Steel in one fell swoop.

China's steel industry has entered the era of mergers and acquisitions, and the reorganization and integration of Chinese steel companies will be a continuous hot spot in the next stage of the stock market.

Guosen Securities believes that objectively, compared with other industries, my country's steel industry is currently undervalued at the same return on equity. This is mainly determined by the pessimistic mentality of investors. With the deepening of mergers and acquisitions, the psychological price of investors will gradually increase as the valuation of mergers and acquisitions increases, moving towards a more rational valuation.

The logic of M&A to improve the industry valuation level is: after the completion of the M&A, the production level of the target company will be improved, the value will be improved first, and then the acquired company will become bigger and stronger, and then the value will be improved; the overall integration of the industry, the concentration of the industry It has been improved, production efficiency has improved significantly, and the overall valuation of the industry has improved.

Analysts said that the investment themes in the steel sector in 2006 were still industry mergers and acquisitions, stock reform and overall listing and financial innovation. There are strong transaction-based investment opportunities, and the premium of mergers and acquisitions will boost the stock price.

Investors should look to acquiring and target companies for possible future mergers and acquisitions. The target company has the first opportunity to rise.

Combining the profitability of listed companies and considering the possibility of corporate mergers and acquisitions, GF Securities proposed that there are two types of companies worthy of attention.

First, the three leading iron and steel enterprises: G Baosteel, G Wuhan Iron and Steel, G Anshan Iron and Steel. The reason is that they have a strong ability to absorb costs; they have the strength of mergers and acquisitions. Industry leaders will achieve leapfrog development in difficult times for the industry.

The second is the small and medium-sized enterprises that highlight the value of mergers and acquisitions: such as G Guangzhou Iron and Steel, G Hangzhou Iron and Steel, G Shao Iron and Steel, etc. Under the pressure of rising costs, these companies will accelerate the pace of seeking strategic investors. In addition, the valuation of these companies is obviously low, and the cost of mergers and acquisitions is low.

As for the timing of investment, "the best entry point for steel stocks may appear in the middle or second half of 2006." Liang Mingchao, a researcher at Tianxiang Industry, believes, "At this stage, you can selectively hold steel stocks with clear performance growth expectations, and choose Sexually intervene in steel stocks with lower valuations to enjoy the pulling effect of rising steel prices on their valuations, but it is not suitable for large-scale interventions for the time being.”