Nov 28, 2013 02:25 PM

Telecom Equipment Firm Makes Quick Financing Strike with Back-Door Listing


Xinwei Chairman Wang Jing

(Beijing) – By injecting 30.9 billion yuan worth of assets and capital into Shanghai-listed Beijing Zhongchuang Telecom Test Co., telecom equipment and solution provider Beijing Xinwei Telecom Technology Inc. completed a back-door listing at the end of September, the largest in the history of the A-share market.

On September 27, Zhongchuang announced a plan to issue 3.1 million of its shares at 8.6 yuan each to most of Xinwei's shareholders to buy 96.53 percent of the latter's stake. The transaction totaled 26.9 billion yuan. At the same time, Zhongchuang will also raise up to 4 billion yuan in a private share placement.

According to company documents, as of August 16, when Zhongchuang had its stock trading suspended for the reshuffle, the company's market value was about 1.2 billion yuan.

As of June 30, Xinwei's total assets stood at nearly 8 billion yuan with 2013 net profit projected at 3.4 billion yuan.

The deal boosted Zhongchuang's share price when trading resumed. But some analysts have expressed caution due to concerns over Xinwei's future growth potential and the transparency of its background.

Betting on 4G

A senior Xinwei executive indicated the back-door listing was pursued out of time considerations. Since 2011, the company has been preparing for an initial public listing.

However, the move was hindered by the China Securities Regulatory Commission's decision to suspend IPO reviews last October. The regulator's IPO review process has remained closed and more than 700 companies are waiting in a queue.

Xinwei's wait could last two more years, the executive said. "It will be too long for Xinwei to wait," he added.

The executive said Xinwei is counting on upcoming fourth generation (4G) wireless services for business growth. In addition, the company is eagerly seeking capital support for overseas expansion.

Chinese authorities have said that business licenses for the country's telecom operators to launch 4G services will be issued by the end of the year. This means Xinwei needs quick access to the capital market. And what it wanted was a medium-sized "shell" with a clear shareholding and debt structure, the executive said.

Zhongchuang's core business is research and development of telecom network monitoring systems and testing equipment, which overlaps with part of Xinwei's business.

"(Zhongchuang's) business and staff can be directly merged into Xinwei," the executive said. "Also with small market value and clear internal relationships, Zhongchuang is a clear shell. But it has large market share in the meter and monitoring market.
According to company financial reports, ZhongChuang's 2012 revenue declined 8.69 percent from the previous year to 215 million yuan. The company's total assets were 600 million yuan, and it had liabilities of 150 million yuan.

"In general, the deal benefits both and the valuation is reasonable," said Meng Xiaochuan, senior consultant of management consulting firm Detecon International. On one hand, the deal can help the sliding Zhongchuang to turn around. On the other hand, it will offer financing to Xinwei.

Questions Arise

Investors may be excited, as evidenced by the rise in Zhongchuang's share price, but some analysts wonder about the background of the fast growing Xinwei and its current controller, Wang Jing.

Some are also skeptical about Xinwei's future business outlook. A source at telecom equipment giant Huawei Technologies Co. said that "public information shows that the core business of Xinwei is in special networks and the overseas market, and its main technology is McWill technology (Multi-Carrier Wireless Information Local Loop), but it is hard to compete with more mature LTE and other 3G wireless technologies."

Customers are more likely to choose the larger network suppliers such as Huawei and ZTE Corp. rather than Xinwei, the Huawei source.

But Si Xianxiu, a telecom researcher at the Ministry of Industry and Information Technology, said that despite the fact McWill technology is not the most advanced, it holds advantages in terms of confidentiality, flexibility, cost and stability.

"The industry chain of McWill is incomplete," Si said. "Xinwei is the only supplier of chips, software, terminal and base stations."

In addition to technology, there are also concerns regarding the financial situation at Xinwei. Gu Haibo, a researcher at Hongyuan Securities, said that Xinwei has never released business performance information for the special network and overseas markets, prompting questions over its business transparency and future growth.

Adding to these questions is Xinwei's higher-than-average profitability and growth rate. According to Gu, Xinwei reported 1.68 billion yuan in net profit for the first half of this year, a profit margin of 84.4 percent. Meanwhile, industry leader ZTE only reported 310 million yuan with profit margin of 0.82 percent. From 2010 to 2012, Xinwei's average profit growth rate reached 40 percent.

"Xinwei holds complete intellectual property rights (for its products) and does not need to pay any patent fees," the Xinwei executive said. "Meanwhile, Xinwei is focusing on software and core networks, which have higher profits."

He attributed a surge of sales in 2012 to a major order signed with Ukraine.

But Fang Honggang, Deutsche Telekom International Consulting's director in China, said the buyer's credit model adopted by Xinwei will pose risks to the company as it needs to provide guarantees to its clients which are usually small companies in under-developed countries.

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