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Introduction: "We focus on two aspects in our attention to Kaifa Technology's listing on the Beijing Stock Exchange. First, according to Kaifa Technology's listing financing plan, its fundraising amount is a record compared to the Beijing Stock Exchange. Whether this huge financing plan can be accommodated by the Beijing Stock Exchange will also affect our formulation and adjustment of similar companies' listing financing plans on the Beijing Stock Exchange in the future. Second, Kaifa Technology's spin-off will challenge the relevant regulatory red lines for A-share spin-off listings. The adaptability of the spin-off listing regulations to the Beijing Stock Exchange has been discussed in the past few years. Under the current special circumstances, what kind of definition will the Beijing Stock Exchange make on this? This is also something we urgently need to know the answer to." A senior investment banker told Kekou Finance.

This article was exclusively published by Koukou Finance (ID: koukouipo)

Author: Lei Du@Beijing

Editor: Zhai Rui@Beijing

After formally submitting its listing application to the Beijing Stock Exchange and being accepted, Chengdu Great Wall Kaifa Technology Co., Ltd. (hereinafter referred to as "Kaida Technology"), which has completed two rounds of inquiry responses in the past seven months, is waiting for the arrival of the critical time window for listing to attend the listing committee meeting for review.

Along with Kaifa Technology, there are also several companies and investment bankers that seem to have no connection with Kaifa Technology who are also looking forward to the outcome of its listing.

"At a time when the Shanghai and Shenzhen markets are strictly regulating spin-off listings, the Beijing Stock Exchange has become the only way for many listed companies to spin off their subsidiaries and list them on the A-share market. The review process and results of Kaifa Technology's listing on the Beijing Stock Exchange have strong weather vane significance." A senior investment banker from a large brokerage firm in South China told Kekou Finance.

In the past few months, "A split A" has just ushered in a wave of terminations (see the relevant report of Kekou Finance for details, "Four companies failed in one day, and there is a sudden tightening of strong regulatory policies on "A split A" split listings! Will Shenzhen Huaqiang Electronic Network's IPO spin-off be about to change? The registration approval has expired for nine months, but it is difficult to initiate implementation").

According to incomplete statistics from Kekou Finance, since April 2024, at least 11 listed companies have announced the termination of their originally planned spin-off listings, and the vast majority of these spin-off listing destinations are aimed at the Shanghai and Shenzhen markets.

As early as June 2024, the secretary of a listed company that announced the termination of the spin-off of its holding subsidiary on the Growth Enterprise Market IPO at that time also admitted in response to whether Kekou Finance would continue to promote other listing plans that "it will depend on the policy supervision trend and market environment. There is indeed a great possibility of listing on the Beijing Stock Exchange."

As the most typical spin-off listing project currently under review by the Beijing Stock Exchange since the regulatory authorities clearly stated "strong supervision" on A-share spin-off listings, every move encountered by Kaifa Technology in its listing review will not only reflect the "policy and regulatory trends" but will also bring valuable experience and lessons to later comers.

Kaifa Technology was spun off from Shenzhen Technology, which has been listed on the Shenzhen Stock Exchange for many years.

In May 2024, Deep Technology just celebrated the 30th anniversary of its successful listing.

Public information shows that Kaifa Technology, founded in 2016, is mainly engaged in the research and development, production and sales of smart metering terminals such as smart electricity, water and gas meters and AMI system software.

Before Kaifa Technology applied for listing on the Beijing Stock Exchange in 2023, Shenzhen Technology once held 70% of its shares.

In August 2023, one month after Kaifa Technology started the preliminary guidance work for its listing on the Beijing Stock Exchange, after it introduced external investors through capital increase and stock expansion, Shenzhen Technology's shareholding in Kaifa Technology slightly dropped to 69.72%.

"We focus on two aspects in our attention to Kaifa Technology's listing on the Beijing Stock Exchange. First, according to Kaifa Technology's listing financing plan, its fundraising amount is a record compared to the Beijing Stock Exchange. Whether this huge financing plan can be accommodated by the Beijing Stock Exchange will also affect our formulation and adjustment of similar companies' listing financing plans on the Beijing Stock Exchange in the future. Second, Kaifa Technology's spin-off will challenge the relevant regulatory red lines for A-share spin-off listings. The adaptability of the spin-off listing regulatory regulations to the Beijing Stock Exchange has been discussed in the past few years. Under today's special circumstances, what kind of definition will the Beijing Stock Exchange make on this? This is also something we urgently need to know the answer to." The above-mentioned senior investment banker told Kekou Finance.

As the senior investment banker mentioned above said, Kaifa Technology, which is now at the critical juncture of listing, can be said to be a combination of typicality and particularity.

In addition to being a typical spin-off listed company, Kaifa Technology's listing also proposed a "giant" financing plan for the Beijing Stock Exchange.

According to the listing application materials submitted by Kaifa Technology to the Beijing Stock Exchange, it plans to issue no more than 33.4667 million new shares through this listing to raise up to 1.017 billion yuan in funds to invest in three major projects, including "Construction of Chengdu Great Wall Kaifa Intelligent Metering Terminal Automation Production Line", "Renovation and Expansion of Chengdu Great Wall Kaifa Intelligent Metering Product R&D Center", and "Construction of Global Sales and Service Operation Center". In addition, 300 million yuan of the funds will be used to supplement working capital.

The planned financing scale exceeds 1 billion, which is not uncommon in Shanghai and Shenzhen A-share IPO projects, but it is almost rare in the Beijing Stock Exchange.

Among the nearly 80 companies currently waiting for review at the Beijing Stock Exchange, only Kaifa Technology has a financing scale of more than 1 billion yuan, and the fundraising plans of the vast majority of other companies are concentrated around 200 million yuan.

In recent years, before Kaifa Technology's application, Henan Hongdongfang Chemical Co., Ltd. (hereinafter referred to as "Hongdongfang") submitted a listing financing plan to the Beijing Stock Exchange, which was once as high as 1.29 billion yuan, which was once the largest listing financing plan on the Beijing Stock Exchange.

However, as the review progressed, Hongdongfang had to reduce its financing scale to around 1 billion yuan and completely cut the part used to supplement working capital.

Even so, Hongdongfang ultimately failed to obtain listing approval from the Beijing Stock Exchange by voluntarily withdrawing its listing application.

Since the Beijing Stock Exchange officially opened in September 2021, among the companies that have truly completed IPO fundraising, Anda Technology has the largest financing scale.

Anda Technology was listed on the Beijing Stock Exchange in early March 2023, and the financing scale of its new share issuance in this listing ultimately reached 650 million.

"If Kaifa Technology is successfully listed on the Beijing Stock Exchange and raises sufficient funds as planned, and does not modify its financing plan during the period, it will become the first company since the establishment of the Beijing Stock Exchange to raise more than 1 billion yuan while listing." The above-mentioned senior sponsor representative said that this will further fully verify that the Beijing Stock Exchange allows and is able to support the large financing needs of large enterprises.

It is still unknown whether Kaifa Technology will eventually reduce the scale of financing in order to complete the listing on the Beijing Stock Exchange as soon as possible. At least so far, Kaifa Technology has not modified its issuance plan. However, due to the existence of large cash dividends on one hand and huge capital replenishment on the other hand, the rationality of Kaifa Technology's listing and financing on the Beijing Stock Exchange is also being disputed by regulators and the outside world.

In addition to the "huge" capital demand that may set a record for fundraising on the Beijing Stock Exchange, the special feature of Kaifa Technology's listing on the Beijing Stock Exchange lies in its "sudden" violation of the A-share spin-off listing regulatory red line.

Before Kaifa Technology applied for listing on the Beijing Stock Exchange at the end of 2023 and its 2023 annual report data was updated, it met the implementation requirements for A-share spin-off listing. However, with the release of the latest financial data, its skyrocketing performance has put it on the regulatory red line.

"In the past few years, there have been many companies that did not meet the A-share spin-off listing regulatory rules and completed spin-off listings on the Beijing Stock Exchange. Therefore, the industry has reached a consensus on the adaptability of the spin-off listing regulatory regulations to the Beijing Stock Exchange. However, since the end of 2023, there have been regulatory cases showing that the regulatory authorities have a trend of incorporating the Beijing Stock Exchange into relevant regulations, and clearer strong regulatory signals have been released recently." The above-mentioned senior investment banker added.

1) Behind the “high” financing of 1 billion: Is it difficult to achieve expected performance growth? Dividends and cash flow are both available!

Kaifa Technology's plan to raise funds of over 1 billion yuan is an attempt to achieve the highest financing record among companies listed on the Beijing Stock Exchange. To a certain extent, this plan is based on its performance and market valuation.

During the past few years of its listing reporting period, Kaifa Technology has also experienced downturns in its fundamentals.

For example, in 2021 and 2022, the operating income of Kaifa Technology was 1.474 billion and 1.79 billion respectively, and the corresponding non-net profit also reached 79.3976 million and 131 million respectively. Both revenue and profit maintained a large increase, but in fact, compared with 2020, the fundamentals of Kaifa Technology have almost fallen off a cliff in the past two years.

Public data shows that in 2020, the operating income of Kaifa Technology reached 2.138 billion yuan, and its non-net profit was as high as 298 million yuan.

That is to say, in 2021, the year-on-year decline in Kaifa Technology's non-net profit once exceeded 73%. Even though its profitability recovered in 2022, it still declined by more than 50% year-on-year compared with 2020.

Fortunately, in mid-2023, Kaifa Technology once again ushered in a new round of performance explosion.

According to Kaifa Technology's latest updated 2023 financial data, in the past year, its operating income returned to over 2 billion, reaching 2.549 billion, an increase of 42.39% over the same period in 2022, and a year-on-year increase of 16.1% over the "highlight moment" in 2020. The surge in revenue naturally brought huge profits. Kaifa Technology's 498 million non-net profit in 2023 not only set a peak since its establishment, but also laid a solid foundation for its listing on the Beijing Stock Exchange.

For the companies planning to go public on the Beijing Stock Exchange, which generally have lower profit scales, the abundant performance achieved by Kaifa Technology in 2023 has made it difficult for other companies to match it. Therefore, its IPO financing plan of up to 1 billion yuan does not seem out of place in the face of profits of such a scale.

In addition, market valuation recognition is also the key to Kaifa Technology's courage to launch this record-breaking financing plan.

As mentioned above, in August 2022, on the eve of Kaifa Technology's application for listing on the Beijing Stock Exchange, it carried out a round of capital increase and stock expansion to introduce external investors.

At that time, Kaifa Technology issued 400,000 shares to Xiamen Qun Sheng Tianbao Investment Partnership (Limited Partnership) at a price of RMB 28.75 per share, raising a total of RMB 11.5 million. The overall valuation of Kaifa Technology at this time had reached nearly RMB 3 billion.

Even if calculated based on the price of the additional issuance that occurred two years ago, the corresponding financing scale of the 33.4667 million new shares that the Beijing Stock Exchange plans to issue in this listing has reached 962 million yuan.

However, even with performance and market recognition as a guarantee, there are risks and uncertainties behind the 1 billion "high" IPO financing of Kaifa Technology that people have to be wary of.

After experiencing a substantial growth in 2023, the most critical time for the listing, can Kaifa Technology's high growth performance continue? This is probably one of the biggest concerns of regulators and the outside world about Kaifa Technology's listing.

"The listing of Kaifa Technology can be regarded as a 'giant stock' for the Beijing Stock Exchange. The regulatory authorities have always been cautious about such large-scale financing plans, and have further tightened their control over the past year." An insider close to the regulatory authorities told Kekou Finance that the first thing to ensure is that the performance of such companies has sustainable growth under real conditions.

Anda Technology, which just completed its issuance in mid-2023 and set a record for listing financing on the Beijing Stock Exchange, is a typical negative case. While the project is now controversial, it has also made regulators more stringent in approving similar listing projects.

When it was trying to go public, Anda Technology, like Kaifa Technology, had perfect financial data to support its huge fundraising.

Although the scale of financing is far lower than that of Kaifa Technology, Anda Technology's operating data during the listing application period is not inferior to the former, and is even better than the former.

For example, in 2021, Anda Technology created a non-net profit of 233 million yuan with an operating income of 1.577 billion yuan. In 2022, the most critical year for Anda Technology to sprint to the Beijing Stock Exchange, it achieved a miracle of revenue growth of 315.80% year-on-year to 6.558 billion yuan, and its net profit attributable to the parent company also reached 811 million yuan, an increase of 251.52%.

During the listing review of Anda Technology, in the face of its substantial performance growth during the reporting period, the Beijing Stock Exchange once asked it to explain the sustainability of the substantial performance growth and questioned whether it had the risk of a decline in performance after the period.

In response to relevant inquiries from the Beijing Stock Exchange, Anda Technology insisted that "the company continues to develop well-known customers in the industry and the cooperation is good. The company has the ability to continuously obtain contract orders, and orders in each period are continuous and stable, and the business is stable and sustainable."

Thus, under a thriving "rhetoric" and false prosperity, on January 4, 2023, Anda Technology was officially registered for listing on the Beijing Stock Exchange, and completed its issuance and listing in March of the same year.

What surprised the market and regulators was that in the year that Anda Technology went public, its performance not only failed to achieve its so-called "stability and sustainability", but instead experienced a cliff-like decline.

According to the 2023 annual report released by Anda Technology earlier in 2024, its operating income was only 2.964 billion, a year-on-year decline of 54.8%, and its net profit attributable to shareholders of the parent company directly fell from hundreds of millions of profits in 2022 to a loss of 634 million, a year-on-year decline of 178.1%.

In the secondary market, Anda Technology's latest share price has fallen to 3.85 yuan per share, a 70% drop from its IPO price of 13 yuan per share a year ago.

"With the bloody lesson of Anda Technology, a large-cap stock on the Beijing Stock Exchange that raised huge amounts of funds, I believe that the Beijing Stock Exchange will also be more cautious in considering whether to allow Kaifa Technology to go public." The above-mentioned person familiar with the regulatory authorities admitted that in April 2024, with the implementation of a series of strong regulatory policies for IPO companies, the on-site inspection coverage requirements for companies to be listed will also be greatly expanded. After the adjustment, the overall proportion of on-site inspections and supervision will be no less than one-third. "There have been suggestions in the industry that the regulatory authorities should conduct targeted on-site inspections of IPO projects with large amounts of financing to consolidate the authenticity of information disclosure such as financial data of such companies, and to minimize the risk of listing with problems. Such IPO projects with huge financing scales often have a greater impact and a wide range of investors. Once problems arise, the negative effects on the market will be doubled."

Like Anda Technology back then, Kaifa Technology, which is still in the listing review stage, still maintains an optimistic outlook for the future.

But beneath all the details, a hint of danger is being sensed by the outside world.

In March 2024, when Kaifa Technology responded to the Beijing Stock Exchange's first round of listing inquiry letter regarding the rationality of fundraising, it once set the company's operating income growth rate for 2023-2025 at 21.42%, and used this to calculate that its operating capital gap needed in the past three years would reach 420 million.

However, the 2024 profit forecast disclosed by Kaifa Technology at the Stock Transfer Center on May 24, 2024 shows that the operating income in mid-2024 is expected to be around 2.718 billion yuan. Although it continues to grow, the year-on-year growth rate has shrunk to 6.63%.

The year-on-year growth rate of revenue in 2024 has been reduced from the "pre-set" 21.42% to 6.63%. Under the premise that the operating data is far less than the actual situation, is the operating capital gap needed by Kaifa Technology in the future still convincing? In its financing plan for listing on the Beijing Stock Exchange, is the plan to replenish funds of up to 300 million yuan also reasonable? This obviously raises a lot of questions, especially during the reporting period, Kaifa Technology also had huge and frequent cash dividends.

Kaifa Technology itself admitted that from 2020 to 2023, it had experienced four rounds of cash dividends for stocks, with a total dividend amount of 308 million yuan, which is almost equal to the amount of funds it plans to replenish this time.

2) Controversy over regulatory suitability for spin-off listings resurfaces

If there had not been a surge in performance in 2023, Kaifa Technology's listing on the Beijing Stock Exchange might not have been subject to controversy over whether it violated the regulations on spin-off listings and crossed the red line.

According to the "Rules for Spin-offs of Listed Companies (Trial)" (hereinafter referred to as the "Spin-off Rules") issued by the China Securities Regulatory Commission in January 2022, one of the conditions that a listed company must meet for spin-offs is that "the net profit of the subsidiary to be spin-off, enjoyed on an equity basis in the consolidated financial statements of the listed company for the most recent fiscal year, shall not exceed fifty percent of the net profit attributable to the shareholders of the listed company."

In 2021 and 2022, the net profit excluding non-recurring items of Kaifa Technology was RMB 79.3976 million and RMB 131 million respectively, while the net profit excluding non-recurring items of its holding company Shenzhen Technology in the corresponding years was RMB 306 million and RMB 653 million respectively.

This is clearly in line with the relevant spin-off rules.

However, when the 2023 annual report of Development Technology was released, and its "most recent fiscal year" was defined as 2023, doubts arose as to the compliance of Shenzhen Technology's spin-off of Development Technology for listing.

In 2023, the net profit after deducting non-recurring items of Kaifa Technology was RMB 483 million, of which Shenzhen Technology’s shareholding ratio was estimated at 69.72%. In the same year, Shenzhen Technology’s equity interest in Kaifa Technology’s net profit after deducting non-recurring items was RMB 336 million. Compared with Shenzhen Technology’s net profit after deducting non-recurring items of RMB 673.2 million in 2023, the proportion was exactly 50.02%, which just exceeded the spin-off requirement that “the net profit of the proposed spin-off subsidiary enjoyed on an equity basis in the consolidated financial statements of the listed company in the most recent fiscal year shall not exceed 50% of the net profit attributable to the shareholders of the listed company”.

Whether the Beijing Stock Exchange should be subject to the "Spin-off Rules" has been a controversial issue in the industry since the relevant rules were promulgated.

In the past few years, whether at the practical level of the Beijing Stock Exchange or at the cognitive level of investment banking intermediaries, the Beijing Stock Exchange does not seem to be regulated by relevant rules.

Because the "Spin-off Rules" clearly stated that "the spin-off of a listed company referred to in these rules refers to the act of a listed company issuing shares for the first time and listing them on the domestic or overseas securities market or achieving a reorganization and listing of part of its business or assets in the form of a subsidiary that it directly or indirectly controls (hereinafter referred to as the affiliated subsidiary)."

In 2023, King & Wood Mallesons, a well-known law firm involved in many A-share listing businesses, also wrote an article stating that "currently, judging from the rules and listing cases, the "Spin-off Rules" do not apply to A-share listed companies splitting off subsidiaries and listing them on the Beijing Stock Exchange." The main reason given was that "under the current rules, the Beijing Stock Exchange implements a 'step-by-step' mechanism for listing, that is, a company needs to first apply for listing on the New Third Board and become a non-listed public company. A company that has been listed on the New Third Board for twelve months and is already in the Innovation Layer can publicly issue shares to unspecified qualified investors and go public, thereby becoming a Beijing Stock Exchange-listed company, which does not constitute a spin-off under the "Spin-off Rules"."

Indeed, before December 2023, many A-share listed companies such as Suzhou Axle Co., Ltd., Senxuan Pharmaceutical, Zhongke Meiling, Weida Optoelectronics and Tianli Composite had successfully achieved a spin-off listing on the Beijing Stock Exchange without meeting the profit conditions required by the "Spin-off Rules".

However, on November 24, 2023, a penalty decision from the Zhejiang Securities Regulatory Bureau made the outside world vaguely feel the precursor of a change in regulatory trends.

On the same day, the Zhejiang Securities Regulatory Bureau issued a decision ordering the listed company Hezong Technology to take corrective measures. The reason for Hezong Technology's violation was that in the process of applying for the listing guidance of its subsidiary Haina Shares on the Beijing Stock Exchange, it "failed to perform the corresponding review procedures for the listing of Haina Shares and failed to disclose information in accordance with regulations."

As a result, Haina Group's plan to list on the Beijing Stock Exchange was halted and has not been launched to date.

It is worth mentioning that in the penalty basis cited by the Zhejiang Securities Regulatory Bureau, it was clearly mentioned that the relevant actions of Hezong Technology violated the provisions of Article 8 of the "Spin-off Rules", namely, "The spin-off of a listed company shall be resolved by the board of directors in accordance with the law and submitted to the shareholders' meeting for approval."

According to the relevant regulatory "penalties" of the Zhejiang Securities Regulatory Bureau, it is obvious that the listing of Hezong Technology's Haina shares on the Beijing Stock Exchange has been included in the regulatory scope of the "Spin-off Rules".

"After the Zhejiang Securities Regulatory Bureau punished Hezong Technology, there has not been a successful case of an A-share listed company splitting and listing on the Beijing Stock Exchange. Therefore, whether the relevant split-off regulatory regulations will affect the current review of the Beijing Stock Exchange will need to wait for the progress of Kaifa Technology's listing review to verify." The above-mentioned senior investment banker said.

Even if there was no regulatory trend revealed by the above-mentioned punishment of the Zhejiang Securities Regulatory Bureau at the end of 2023, the new "Nine National Regulations" promulgated in mid-April 2024 clearly emphasized "strict supervision of spin-off listings", which also made the listing of Kaifa Technology on the Beijing Stock Exchange more uncertain on the premise of violating the "Spin-off Rules" regulations.

According to Kekou Finance, there have been news leaks in the investment banking circle recently that as the regulatory authorities' supervision of spin-off listings will be further strictly restricted, it has been "basically made clear that the Shanghai and Shenzhen stock exchanges cannot be split up." For those who want to spin off and list on the Beijing Stock Exchange, there is still a window, but it needs to be "discussed on a case-by-case basis."

Will Kaifa Technology become the "one-on-one discussion" player in the rumor, and will it be able to successfully promote its listing on the Beijing Stock Exchange? Many companies, investment bankers and Koukou Finance are waiting to see.

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