The high premium acquisition of Luyitong involving "Bitcoin" for 3.06 billion yuan is questionable

As regulatory authorities tighten their review of mergers and acquisitions of A -share listed companies, high-premium acquisition cases involving popular concepts are increasingly attracting market attention.

On the 9th , Luyitong ( 300423 ) issued an announcement stating that the company plans to purchase 100% of the equity of Hangzhou Canaan Creative Information Technology Co., Ltd. (hereinafter referred to as "Canaan Creative") held by Zhang Nangeng and 14 other parties through a combination of issuing shares and paying cash. The transaction price is 3.06 billion yuan. After the acquisition is completed, the target company will become a wholly-owned subsidiary of the listed company.

What amazed investors was that as of April 30 this year , the book value of Canaan's fixed assets was only 4.414 million yuan, the net value was only 3.9787 million yuan, and the owner's equity (unaudited) was 205 million yuan. However, the valuation given by Luyitong was as high as 3.077 billion yuan, with an estimated appreciation rate of 1398.74% , and the premium was staggering.

In this regard, Yao Qinghua, an electronic information industry analyst at Zhongcheng Consulting, told the Economic Herald reporter that the blockchain that Canaan Creative is involved in is the core technology behind "Bitcoin". It is regarded as the core technology with the greatest potential to trigger the fifth wave of disruptive revolutionary waves after the Internet . It has broad application prospects. In addition, market funds have already set off a round of speculation on the concept of "blockchain" , which has led to continuous improvement in expectations for related concept targets and rising valuations.

However, some industry insiders interviewed said that China is far behind foreign countries in blockchain technology research, and there are still certain obstacles in the implementation and promotion of technology in related fields, so the profit prospects are questionable. In addition, as far as Canaan Creative is concerned, its sudden increase in net profit in the first four months of this year and its high customer concentration have also increased the uncertainty of future performance , which should attract investors' attention.

A staggering 14 times

According to the announcement of Luyitong, the company plans to acquire all the equity of Canaan Creative by paying 1.061 billion yuan in cash and issuing shares to pay 1.999 billion yuan, with a total transaction price of 3.060 billion yuan.

At the same time, the company plans to use the method of pricing issuance to non-publicly issue stocks to raise matching funds to pay the cash consideration of this transaction, build blockchain ASIC chip industrialization projects, artificial intelligence A-SIC chip R&D center and other project investments, as well as pay intermediary agency service fees. The total amount of matching funds raised shall not exceed RMB 1.67 billion, which shall not exceed 100% of the transaction price of the assets to be purchased this time .

According to information, Canaan Creative's chip products and equipment are mainly used in the field of repetitive computing. Currently, they are mostly used as basic computing equipment in digital blockchain systems and in Bitcoin blockchain systems to provide underlying computing power support for Bitcoin transactions and maintain the security of the entire blockchain system.

Luyitong said that after the completion of this transaction, the company will transform from an electrical equipment manufacturing enterprise dedicated to the R&D, design, production and sales of complete sets of electrical equipment to a dual-core company with R&D and manufacturing of electrical equipment and chip design and sales in parallel, and will expand from the traditional equipment manufacturing industry to the upstream integrated circuit industry, dispersing operating risks and providing more reliable performance guarantees for listed companies.

An individual investor told the reporter that the concept of "Bitcoin" involved in Luyitong's deal is indeed eye-catching. As early as 2013 , "Bitcoin" attracted Chinese capital because it appreciated 100 times in one year . Although it was quiet afterwards, the price of Bitcoin has continued to rise this year. The increase in the last four trading days of May once exceeded 30% , which has once again attracted the attention of investors. "Canaan Creative mainly provides 'mining machines' for producing Bitcoin. If the Bitcoin market is good, the demand for 'mining machines' will also increase greatly."

Yao Qinghua said that compared with the "Bitcoin" concept that some investors are concerned about, the "blockchain" technology that Luyitong has entered through the acquisition of Canaan Creative is a hot spot for capital attention recently. "This technology can be applied to payment and settlement, government services, medical care, securities trading and other fields to solve the problem of lack of integrity in Internet transactions. The market application prospects are very broad."

The reporter of the Guide noted that in June alone , 7 securities firms including Industrial Securities ( 601377 , Stock Bar ) , Huachuang Securities , and China Merchants Securities ( 600999 , Stock Bar ) issued more than 10 reports on the prospects of "blockchain", all of which were optimistic about the development prospects of this technology. Since mid- May , the increase of popular "blockchain" concept stocks such as Feitian Chengxin ( 300386 , Stock Bar ) ( 300386 ) has exceeded 50% .

However, industry analysts said that as of April 30 this year , the book value of Canaan's fixed assets was 4.414 million yuan, the net value was only 3.9787 million yuan, and the owner's equity (unaudited) was 205 million yuan. However, the valuation given by Luyitong was as high as 3.077 billion yuan, with an estimated appreciation rate of 1398.74% . Even if the concept is popular, its premium is amazing.

The prospect of the target is in doubt

It is worth noting that in the announcement on the 9th , Luyitong also explained the issue of the high valuation of the transaction target. It said that with the continuous development of the entire integrated circuit industry and the ASIC chip market, Canaan Creative's profitability in subsequent years is expected to increase further. Therefore, according to the income method, the company's overall value estimate is relatively high. In addition, the transaction party also promised that Canaan Creative's net profit from 2016 to 2018 will be no less than 180 million yuan, 260 million yuan and 350 million yuan respectively, and a total of no less than 790 million yuan.

The reporter of the Herald noted that although Canaan Creative was established in April 2013 , it did not conduct actual business in the early stage of its establishment. It was not until the second half of 2015 that the company developed the AvalonMiner digital blockchain computing device and its products were officially put on the market for sale. The operation time was relatively short. According to the financial report of the target company, the company achieved a net profit of only 2.4553 million yuan in 2015 , but in 2016 , its operating conditions showed explosive growth, and achieved a net profit of 44.4981 million yuan in the first four months .

The above performance has also aroused suspicion among industry insiders. An unnamed institutional person told the reporter that the target company's performance increased significantly before the acquisition, which may have inflated its valuation. The company's top five customers accounted for 81.29% and 57.49% of sales in 2015 and January-April 2016 , respectively , which also increased the uncertainty of its future performance.

The person from the institution also said that the current R&D capabilities and achievements of domestic "blockchain" technology are inferior to those of foreign countries. At the same time, since the application and exploration of this technology are mostly concentrated in the fields of finance, transactions and other highly security-sensitive areas, it is difficult for the lack of mature technology to gain market recognition, so there are many obstacles in the promotion of technology. The higher technology R&D and maintenance expenses will increase the cost burden of enterprises, so the M&A prospects may be lower than market expectations.

Luyi Tong also pointed out in the announcement that although Canaan Creative was in good operating condition and had strong profitability as of the end of April 2016 , and the transaction parties had also made performance commitments and compensation arrangements, given that the company has been in operation for a short time, its future business development and sustainable profitability are still subject to great uncertainty. Investors are especially reminded to pay attention to the relevant risks and uncertainties when judging the future business development level and sustainable profitability of Canaan Creative and the listed company.

Yao Qinghua and other interviewees also said that high-premium acquisition cases of A- shares are not uncommon in the mergers and acquisitions of listed companies. The problems of "painting cakes" and "telling stories" have attracted the attention of the regulatory authorities, and the relevant companies have frequently received inquiries from the management. At the recent sponsor training meeting, the relevant person in charge of the China Securities Regulatory Commission also repeatedly emphasized that on the one hand, it is necessary to strengthen the supervision of information disclosure on the performance commitments of mergers and acquisitions, and on the other hand, to strictly review the cross-border mergers and acquisitions that are deceptive and pursue new concepts. In this case, the mergers and acquisitions of related listed companies will be subject to more stringent review, and investors should be alert to the risks and should not blindly participate in concept speculation.