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Hongqi Civil Explosives, once known as the "No. 1 Civil Explosives Stock in Shaanxi", was once again exposed to being acquired.

Recently, Jiangnan Chemical (002226) announced that it plans to sign a share transfer agreement with the major shareholder of Shaanxi Hongqi Civil Explosives Group Co., Ltd. (hereinafter referred to as Hongqi Civil Explosives) and other parties to acquire the controlling stake in Hongqi Civil Explosives.

It is worth noting that last year, another listed company, Jinaobao (002917), also announced that it planned to acquire the controlling stake in Hongqi Civil Explosives. The equity share to be acquired was consistent with the share that Jiangnan Chemical planned to acquire. However, due to differences in the negotiations between the two parties, Jinaobao announced the termination of the acquisition in less than half a month.

"Daily Economic News" noted that Hongqi Civil Explosives, as the leading civil explosives enterprise in Shaanxi, had a rather bumpy road to enter the capital market. Before the two acquisitions of listed companies, Hongqi Civil Explosives had failed in its sprint to the A-share market, and then moved to the New Third Board. Just a few years after its listing, it was delisted from the New Third Board.

Another acquisition

On August 6, Jiangnan Chemical announced that it plans to sign a "Share Transfer Agreement on Shaanxi Hongqi Civil Explosives Group Co., Ltd." with Hongqi Civil Explosives' shareholders, Baoji State-owned Assets Supervision and Administration Commission (hereinafter referred to as Baoji SASAC) and Baoji Industrial Development Group Co., Ltd. (hereinafter referred to as Baoji Industrial Development Group).Jiangnan Chemical plans to acquire 35.9721% of Hongqi Civil Explosives shares held by Baoji State-owned Assets Supervision and Administration Commission and Baoji Industrial Development Group in cash.

After the completion of this transaction, Hongqi Civil Explosives will become a wholly-owned subsidiary of Jiangnan Chemical.

Source: Jiangnan Chemical Announcement

This is not the first time that Hongqi civil explosives has been "sold".

As early as April 2023, Jinaobao, the leader in the domestic civil explosives intelligent equipment industry, had planned to purchase a controlling stake in Hongqi Civil Explosives.

At that time, both parties believed that this transaction was in line with the company's development plan to become a large integrated group of scientific research, production and blasting services. It would further strengthen the deep integration of the company's intelligent equipment technology advantages and production resources, give full play to the synergy effect, and achieve effective extension of the industrial chain, which would be beneficial to improving the company's industrial integration capabilities and comprehensive profitability.

But in less than half a month, the acquisition ended in failure.

On the evening of April 19, 2023, Jinaobao announced that due to the failure to reach an agreement on relevant transaction conditions, the company terminated the major asset reorganization to obtain control of Hongqi Civil Explosives, and the company's stock resumed trading on April 20.

Jinaobao also stated in the announcement that, given the large number of counterparties involved in this major asset restructuring and the large differences in the needs of the parties, it was not possible to reach a consensus on the relevant transaction conditions, and it was expected that it would be difficult to achieve the purpose of this major asset restructuring if it continued to move forward. After friendly consultation and careful research between the company and all parties, it was decided to terminate the planning of this major asset restructuring.

Looking further ahead, in 2019, Hongqi Civil Explosives planned a major asset reorganization and planned to acquire 83.76% of the equity of Northern Civil Explosives. Northern Civil Explosives is mainly engaged in the research and development, production and sales of civilian explosives, and provides blasting services. Its business overlaps highly with that of Hongqi Civil Explosives. If the acquisition is successful, it will undoubtedly bring considerable improvement to Hongqi Civil Explosives' performance.

However, reality is often not as good as one would like. As the parties to the transaction could not reach an agreement on the terms, Hongqi Civil Explosives' proactive attack ended in failure.

Make performance commitments

Jiangnan Chemical is a company that integrates the "dual-core drive" of civil explosives business and new energy business.

In the field of civil explosives business, Jiangnan Chemical is mainly engaged in the research and development, production and sales of civil explosives such as industrial explosives, industrial detonators and industrial ropes, as well as providing engineering construction services to customers. It is one of the domestic civil explosives companies with the most complete range of civil explosives products, and its overall production capacity and scale are among the top domestic civil explosives listed companies.

In recent years, the profitability of Jiangnan Chemical's main business has continued to improve.From 2020 to 2023, Jiangnan Chemical's operating income was RMB 3.919 billion, RMB 6.481 billion, RMB 7.043 billion and RMB 8.895 billion, respectively. The non-GAAP net profit in the corresponding years was RMB 404 million, RMB 542 million, RMB 717 million and RMB 792 million, respectively. Its strength is still strong.

The target of this acquisition, Hongqi Civil Explosives, is a state-controlled civil explosives enterprise group that owns a complete industrial chain of civil explosives research, production, sales and blasting services. Its licensed production capacity of industrial explosives is 114,000 tons/year, including 56,000 tons of packaged explosives and 58,000 tons of mixed explosives.

Once the acquisition is completed, Hongqi Civil Explosives will be included in the consolidated financial statements of Jiangnan Chemical, which will be conducive to Jiangnan Chemical's subsequent further market integration and regional coordinated management of the civil explosives industry, and will help to continuously enhance the competitiveness of Jiangnan Chemical's civil explosives business in Shaanxi and Northwest regional markets, making it a major supplier in the Northwest civil explosives market, and will also further build its radiation capabilities to the Central Asian market.

Jiangnan Chemical said that after the completion of this transaction, the company's industrial explosives production capacity will be further improved, and both total assets and net assets will increase, which will help reduce operating risks and enhance the ability to resist risks. The company's licensed production capacity for explosives will be further increased, increasing the company's industrial explosives production capacity by approximately 114,000 tons/year.

On the same day when the share transfer agreement was signed, Jiangnan Chemical signed a Performance Commitment Compensation Agreement with Baoji State-owned Assets Supervision and Administration Commission and Baoji Industrial Development Group with effective conditions. Baoji State-owned Assets Supervision and Administration Commission and Baoji Industrial Development Group promised that the target company's cumulative net profit in 2024, 2025 and 2026 will not be less than the cumulative net profit in the same period predicted by the evaluation report jointly filed by Baoji State-owned Assets Supervision and Administration Commission and China North Industries Group Corporation.

Source: Jiangnan Chemical Announcement

After the performance commitment period expires, if the end-of-period impairment amount of the target assets is greater than the amount of compensation payable by Baoji SASAC and Baoji Industrial Development Group, Baoji SASAC and Baoji Industrial Development Group shall make additional cash compensation to the company in accordance with the agreement.

At present, the share transfer agreement and performance commitment compensation agreement signed by the two parties to the transaction are the consensus intention reached by all parties on the acquisition. The specific transaction amount and performance compensation amount are still subject to further negotiation, promotion and implementation.

Regarding the acquisition, a reporter from the Daily Economic News also called the secretary's office of Jiangnan Chemical, but as of press time, no one answered the call.

The bumpy road of capital

With two reports of "selling itself" to a listed company, coupled with the previous failed IPO and delisting from the New Third Board, Hongqi Civil Explosives' journey into the capital market has been bumpy.

Hongqi Civil Explosives is one of the earliest companies in China to engage in the production of industrial explosives. It was restructured into Shaanxi Hongqi Civil Explosives Co., Ltd. in 1999. In 2011, the company submitted a prospectus for listing on the A-share market. Judging from the prospectus, the company's assets are of high quality, and its performance in the industrial and civil explosives sectors is also remarkable.

Public information shows that Hongqi Civil Explosives owns two first-class engineering blasting companies, a provincial technology research and development center, an investment management company, a civil explosives equipment distribution company, a metal composite materials company, an international trade and investment company and an overseas explosives production and operation company. It has a complete industrial chain of civil explosives product research, production, sales and blasting services.

At that time, the top three shareholders of Hongqi Civil Explosives were Baoji State-owned Assets Supervision and Administration Commission, Shanghai Fosun Industrial Investment Co., Ltd. and Shaanxi Technology Progress Investment Co., Ltd., which held 32.32%, 22.82% and 17.07% of Hongqi Civil Explosives' shares respectively.

Source: VCG211447794194

The shareholders include local state-owned assets and investments from well-known institutions. At that time, it was called "the first civil explosives stock" by the market and attracted much attention and optimism.

However, due to the conflict of interest between the company and the employees of its major customer Yulin Chint, and the lack of independence, the IPO failed. It is reported that Yulin Chint is a state-owned holding company and was the largest customer of Hongqi Civil Explosives at that time, accounting for 56.27%, 48%, 51.4% and 54.5% of sales during the IPO reporting period. Yulin Chint has 19 employees who are shareholders of Hongqi Civil Explosives, holding a total of 1.73% of the company's shares.

Perhaps unwilling to give up, Hongqi Civil Explosives did not give up on IPO after its failure in the main board. It switched to the New Third Board in August 2015 and was officially listed on the New Third Board on September 1.

Hongqi Civil Explosives, which is listed on the New Third Board, has solved the independence and compliance issues in its rush for IPO. In terms of shareholder structure, the major shareholder, Baoji State-owned Assets Supervision and Administration Commission, acquired the shares of Hongqi Civil Explosives held by 19 employees of Yulin Chint. At the same time, Fosun Investment withdrew and transferred the shares to Hengyi Investment and Xiesheng Trading.

However, the journey on the New Third Board will not last long. According to the announcement of Hongqi Civil Explosives, in view of the company's current business situation, the development status of the industry it is in and the long-term development strategy planning, and at the same time to improve the company's resource integration capabilities, decision-making efficiency, and reduce operating costs, Hongqi Civil Explosives will terminate the listing of its stocks on the New Third Board from September 30, 2020.

Since then, there has been no major news about Hongqi Civil Explosives at the market level until April 2023, when the listed company Jinaobao issued an announcement on major asset reorganization, stating that it would plan to issue shares and/or pay cash to purchase the controlling stake in Hongqi Civil Explosives, that is, 35.9721% of the shares.

However, this acquisition by a listed company was terminated in just one week due to differences between the two parties over the acquisition.

The latest news is that a listed company announced that it plans to acquire the 35.9721% shares of Hongqi Civil Explosives held by Baoji State-owned Assets Supervision and Administration Commission and Baoji Industrial Development Group in cash. If successful, Hongqi Civil Explosives will become a holding subsidiary of Jiangnan Chemical.

The reporter noticed that Jiangnan Chemical had integrated a number of civil explosives companies and seemed quite confident in taking over Hongqi Civil Explosives. However, the specific acquisition amount and plan have not yet been announced. Whether Hongqi Civil Explosives, which has had a bumpy ride in the capital market, can be acquired by a listed company ultimately requires subsequent disclosure.

Regarding the twists and turns and setbacks that Hongqi Civil Explosives has encountered in the capital market, the reporter also called Hongqi Civil Explosives to inquire about the situation, but the staff there said "no need".

Daily Economic News