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Haley Bio's $1B Acquisition: Can 952% Valuation Boost Succeed?
Recently, Heil Bio (603718.SH, referred to as "the Company") announced a plan for significant asset acquisition and disposal.
According to the plan, the Company intends to purchase 55% of Rui Sheng Bio's equity held by Mei Lun Management for a cash consideration of 935 million yuan. At the same time, the Company will sell its 30% equity in WuXi Biologics to WuXi Biologics for a price of $108 million (approximately 710 million yuan).
This multi-party transaction involves two targets and three companies. Heil Bio plans to juggle the assets, akin to operating an abacus, with various strategies and calculations fully displayed within.
High Valuation in the Abacus
With one acquisition and one disposal, Heil Bio begins to play the "abacus."
The plan shows that the Company's acquisition of Rui Sheng Bio has an appreciation rate as high as 952.12%. The target is mainly engaged in oral repair and regenerative products, controlled by Mei Lun Management, and the ultimate controller, Zhang Zhengwu, also owns enterprises such as Qi Rui Regenerative Medicine, Aier Corneal, and Aier Fu Tissue, among others.
In 2022, Rui Sheng Bio planned to go public on the A-share market and provided incentives to senior executives the following year, but the listing was eventually shelved due to changes in the market environment. When plans could not keep up with changes, a scheme was born. In July 2023, Heil Bio and its controlling party signed a share pledge contract with two companies under Zhang Zhengwu, who obtained a loan of 350 million yuan with 45% of Rui Sheng Bio's equity.
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Before the accountant moves the beads on the abacus, he often observes carefully to see the entire abacus. Over the years, Rui Sheng Bio's internal situation has been complex. As of April this year, the company's related parties have lent it a total of 111 million yuan, mainly for daily operations, and all the funds have been repaid by September.
In terms of performance, Rui Sheng Bio's operating income for 2022, 2023, and the first four months of 2024 were 117 million yuan, 225 million yuan, and 71 million yuan, respectively, with net profits attributable to the parent company being 51 million yuan, 112 million yuan, and 34 million yuan, respectively. In the transaction plan, the company promises that the net profits after deducting non-recurring gains and losses for 2024, 2025, and 2026 will be at least 125 million yuan, 137 million yuan, and 151 million yuan, respectively, with the cumulative audited net profit not lower than 414 million yuan.Based on this calculation, Rui Sheng Bio's performance commitment growth rate is approximately 10%, which may be the basis for the company's high premium acquisition. However, it should be noted that Zhenghai Bio, a comparable listed company, saw a year-on-year decrease of 2.71% in net profit excluding non-recurring gains in 2023. It is important to point out that Zhenghai Bio's oral repair membrane is a leading domestic product, but its sales in the first half of this year were 96 million yuan, a year-on-year decrease of 9.8%.
Is Rui Sheng Bio's high valuation reasonable? The Shanghai Stock Exchange has also issued an inquiry letter to Haili Bio, requiring it to explain the rationality. At the same time, the company was also questioned about the main customers and core competitiveness of the acquisition target.
In response, the company replied from the perspective of market prospects, believing that the aging process, the cost of dental implants, and domestic substitution, and other external environments are actively improving, and therefore it is optimistic about the future of the acquisition target.
The challenge of the three-fingered joint operation
In the abacus, there is a technique called the three-fingered joint operation, which means that the thumb, index finger, and middle finger are operated simultaneously. This skill can improve the efficiency of the abacus operation, but it is difficult and requires finger coordination to be both stable and accurate. In the entire transaction, in addition to involving Haili Bio and Rui Sheng Bio, there is also WuXi Biologics, just like a three-fingered joint operation.
The plan shows that the company said that the funds for acquiring Rui Sheng Bio come from its own funds and the transfer payment for selling 30% of WuXi Biologics; if there is a delay in the process, the company will stage through bank merger loans and actual controller loans to raise some funds. The transferee of WuXi Biologics is WuXi Bio, and after the transaction is completed, the target will become a wholly-owned subsidiary of the WuXi system.
In other words, Haili Bio's "three-fingered joint operation" requires both stable funds and accurate timing. As of the first half of this year, the company's cash and cash equivalents were 37 million yuan. In August, the company announced a plan to add a short-term loan of 250 million yuan to the controlling party Shanghai Haoyuan, for the needs of business development.
Compared with the overall transaction, the company plans to acquire assets for 935 million yuan, and the proceeds from the sale of assets are about 710 million yuan, so the financial arrangements must be carefully calculated.
In fact, WuXi Biologics, which mainly operates CDMO (new drug contract custom research and production), has also experienced ups and downs. Earlier, the company signed a production supply contract with a global vaccine giant, with a total amount of about 3 billion US dollars, mainly for COVID-19 vaccines. In 2021, the company's production revenue reached 890 million yuan, but after that, it was affected by a large amount of exchange loss, and the net profit excluding non-recurring gains in the third quarter of 2023 was a loss.
According to the equity value of Haili Bio's sale of WuXi Biologics, the appreciation rate is 22.98%, which is quite different from the high premium acquisition of Rui Sheng Bio. The exchange requires the company to explain the fairness of the sale price in the inquiry letter, whether the transaction fully protects the interests of the listed company, etc.In response to this, the company noted that there are relatively few transaction cases of similar companies in the market. Therefore, the healthcare services industry was chosen as an alternative, such as the acquisition cases of Mei Nian Health and BGI Genomics, with appreciation rates of 694.36% and 73.54%, respectively.
Perhaps, timely selling WuXi AppTec is more important for the company.
The scene inside the accounting room
The job of the accounting clerk is to take stock of the silver and goods in the room to carry out daily work. For Haili Bio, the main business is not ideal, and the goodwill and related transactions within the company also need to be measured carefully.
In the first half of this year, the company's operating income and net profit attributable to shareholders of the listed company were 110 million yuan and 15 million yuan, respectively, both down 9.5% and 81.5% year-on-year. The decline in performance was mainly affected by the decline in product prices, the decline in WuXi AppTec's performance, and the disposal of assets in the same period last year.
In fact, the company's main IVD (in vitro diagnostics) and animal vaccine businesses have both entered a downturn. In 2018, the company acquired JieMen Bio, which sells test kits. After that, it voluntarily recalled related products, and the business fell into difficulty. In the first half of this year, JieMen Bio's operating income was 51 million yuan, down 12% year-on-year; at the same time, the goodwill balance generated by the company still had 224 million yuan.
In terms of animal vaccines, performance has slightly improved. Under multiple pressures such as the reduction of government procurement and the loss of the upstream breeding industry, Yang Ling Jin Hai, a subsidiary of the company's main business, introduced a new management team. In the first half of this year, the operating income was 56 million yuan, a year-on-year increase of 15.4%, and the net profit was -20 million yuan, with losses narrowing compared to the same period in 2023.
However, in January of this year, the company and the current chairman Zhang Haiming received a warning letter from the Shanghai Regulatory Bureau of the China Securities Regulatory Commission. The main reason was that during a random on-site inspection, it was found that the company had not accurately disclosed financial data. Among them, in the process of transferring two technologies to external parties in 2023, Yang Ling Jin Hai confirmed an income of 9 million yuan, but it was found during the inspection that the technical materials had not yet been delivered to the transferee.
Moreover, the warning letter also mentioned that in 2021 and 2022, the company's wealth expenses underestimated related party loans. As of the first half of this year, the principal and interest of the funds borrowed by Yang Ling Jin Hai from the company's controlling party, Shanghai Hao Yuan, amounted to 170 million yuan.
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