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Blue Whale News, September 24 (Reporter Wang Jianwen) After three revisions to the acquisition draft, the first "A to H" acquisition on the STAR Market is still in progress. On September 23, AsiaInfo Security once again updated its share acquisition draft, supplementing information on the first-half performance and risk factors of the acquisition target, AsiaInfo Technologies.

As a company spun off from AsiaInfo Technologies, AsiaInfo Security has developed rapidly since its independence in 2015 and has become one of the leading companies in the domestic cybersecurity industry. However, since 2023, the company has begun to incur losses and has frequently attempted to break this cycle through acquisitions.

According to AsiaInfo Security's plan, the company will invest between HK$1.311 billion and HK$1.385 billion to acquire 19.24% or 20.32% of AsiaInfo Technologies' shares, thereby gaining control of the company. If this transaction is successful, AsiaInfo Security's revenue will approach RMB 10 billion, but the company's goodwill balance will also exceed RMB 570 million, potentially further increasing the risk of goodwill impairment in the future.

First 'A to H' acquisition on the STAR Market, acquiring control for over HK$1.3 billion

AsiaInfo Security and AsiaInfo Technologies share similar names and were both co-founded by Tian Suning, China's first "Mr. Internet."

Tian Suning graduated with a degree in biology from Liaoning University and later studied abroad in the United States. In 1993, Tian Suning and Ding Jian established AsiaInfo Technologies, a telecom software supplier, in the United States. In 2000, AsiaInfo Technologies was listed on NASDAQ. However, in 2014, the company chose to go private, with the privatization initiated by CITIC Capital and Tian Suning. After privatization, SKIPPER INVESTMENT, the investment entity under CITIC Capital, became the company's largest shareholder. In 2018, AsiaInfo Technologies was relisted on the Hong Kong Stock Exchange.

After AsiaInfo Technologies delisted from NASDAQ, its founder Tian Suning planned another "startup." In 2015, AsiaInfo Technologies spun off its information security-related businesses and acquired Trend Micro's China operations, reorganizing into AsiaInfo Security. In 2022, AsiaInfo Security successfully listed on the STAR Market.

Currently, Tian Suning serves as both the actual controller of AsiaInfo Security and a shareholder of AsiaInfo Technologies. As of June 30 this year, SKIPPER INVESTMENT, AsiaInfo Technologies' largest shareholder, held a 22.87% stake, while Tian Suning held a direct and indirect stake of 12.91% and served as the company's Chairman and Executive Director. At the same time, Tian Suning controls a total of 47.87% of AsiaInfo Security's shares.

As a company that started by spinning off AsiaInfo Technologies' businesses, AsiaInfo Security's acquisition of AsiaInfo Technologies' shares can be seen as a "role reversal." Additionally, this acquisition marks the first time a STAR Market-listed company has officially announced the acquisition of control of a Hong Kong-listed company.

According to the announcement issued by AsiaInfo Security, the company plans to jointly establish AsiaInfo Jinxin through its wholly-owned subsidiaries AsiaInfo Jin'an and AsiaInfo Chengdu, as well as external investors Kehai Investment and Zhineng Fund. AsiaInfo Jin'an and AsiaInfo Jinxin will then jointly establish AsiaInfo Xinning, which will, in turn, establish an offshore SPV (Special Purpose Vehicle) as the acquisition entity to purchase 19.24% or 20.32% of AsiaInfo Technologies' shares held by SKIPPER INVESTMENT for cash. Additionally, AsiaInfo Security will obtain 9.57% to 9.61% of AsiaInfo Technologies' voting rights held by Tian Suning through voting rights entrustment.

Regarding the consideration, in the initial draft released by AsiaInfo Security in May this year, the company expected to acquire shares at a price of HK$9.45 per share, with a total amount of approximately HK$1.70 billion to HK$1.796 billion.

However, AsiaInfo Technologies' share price continued to decline thereafter. The pricing reference date for the initial draft was January 15, when the company's share price was HK$7.99 per share. By the latest pricing reference date of September 5, the share price had fallen to HK$5.12 per share. Additionally, AsiaInfo Technologies distributed dividends in July this year, prompting AsiaInfo Security to revise the transaction amount. According to the revised draft released on September 6, the company's acquisition price for AsiaInfo Technologies has been reduced to HK$7.29 per share, with the transaction consideration also reduced to HK$1.311 billion to HK$1.385 billion.

Upon completion of this transaction, AsiaInfo Security can indirectly control 28.81% to 29.92% of AsiaInfo Technologies' voting rights, higher than the 19.49% held by China Mobile, the second-largest shareholder post-acquisition. Moreover, AsiaInfo Security has the right to nominate six directors, including four non-independent directors and two independent directors, accounting for half of the company's 12-member board. In other words, if the acquisition is successfully completed, AsiaInfo Security will gain control of AsiaInfo Technologies.

Post-acquisition revenue target of RMB 10 billion, but looming goodwill impairment risk

As a company primarily engaged in cybersecurity, AsiaInfo Security's performance continued to grow before its listing, but the company's profit performance began to deteriorate in the year of its listing in 2022 and has since incurred continuous losses.

From 2021 to 2023, AsiaInfo Security's operating revenue was RMB 1.667 billion, RMB 1.721 billion, and RMB 1.608 billion, respectively; net profit attributable to shareholders was RMB 179 million, RMB 99 million, and -RMB 291 million, respectively. In the first half of 2024, although the company's operating revenue increased, its losses worsened further. During this period, the company's operating revenue was RMB 661 million, an increase of 17.31% year-on-year; net loss attributable to shareholders was RMB 192 million, an expansion of 12.11% year-on-year.

In terms of specific businesses, AsiaInfo Security's primary operations currently include cybersecurity products, cybersecurity services, cloud and network virtualization software, and other services. A research report from China Merchants Securities indicates that AsiaInfo Security's first-half performance faced pressure, primarily due to factors such as significant cost reductions by operator customers and external environmental factors.

Additionally, the continuous increase in AsiaInfo Security's selling expenses and research and development expenses has led to a sharp decline in the company's profit level.

In its 2021 annual report, AsiaInfo Security stated that it adopted an aggressive market expansion strategy, maintaining high investments in marketing system construction while continuously strengthening research and development investments. At that time, the company's research and development expense ratio was 13.92%, and its selling expense ratio was 22.51%. However, after several years of continuous growth, the company's research and development expense ratio increased to 33.74%, and its selling expense ratio increased to 37.78%. As a result, in its 2024 interim report, the company also stated that it would adjust its sales resource investments and research and development investment pace based on market conditions.

Compared to AsiaInfo Security, AsiaInfo Technologies has a much larger business scale. AsiaInfo Technologies' primary operations include BSS (Business Support System) services, OSS (Operations Support System) services, digital intelligence operations, and other services. From 2021 to 2023, the company's operating revenue was RMB 6.895 billion, RMB 7.738 billion, and RMB 7.891 billion, respectively; net profit attributable to shareholders was RMB 786 million, RMB 832 million, and RMB 533 million, respectively. In the first half of 2024, the company's operating revenue was RMB 2.994 billion, a year-on-year decline of 8.8%; net loss was RMB 70 million, turning from profit to loss year-on-year.

Although AsiaInfo Technologies also incurred losses in the first half of the year, AsiaInfo Security believes that acquiring control of AsiaInfo Technologies can help the company form a parallel development pattern of "security + digitization," extend and enhance its product line, and achieve business complementarity and resource sharing. Additionally, Tian Suning previously stated in an internal letter that after the merger, the combined entity would become a software enterprise with revenue exceeding RMB 10 billion and nearly 15,000 employees.

However, looking at AsiaInfo Technologies' balance sheet, as of the end of June 2024, the company's monetary fund balance was RMB 1.423 billion, while its short-term borrowings and non-current liabilities due within one year totaled RMB 243 million. Although the company has good liquidity, fully funding this acquisition with its own funds would drain its liquidity. Therefore, the company has chosen to introduce external investments and loans to facilitate the acquisition.

The announcement shows that AsiaInfo Chengdu, a subsidiary of AsiaInfo Security, will invest RMB 300 million, while investors Kehai Investment and Zhineng Fund will invest RMB 480 million and RMB 120 million, respectively, for a total investment of RMB 900 million. Additionally, the company will apply for a merger and acquisition loan of RMB 900 million from Bohai Bank.

For AsiaInfo Security, this acquisition of AsiaInfo Technologies is its second large-scale acquisition since 2023. In October 2023, the company announced that it would invest RMB 303 million to acquire a 75.96% stake in CloudSafe Information. CloudSafe Information primarily engages in cloud security services, and at the time, the company stated that acquiring CloudSafe Information would enable product, market, and technology synergies with its existing business and would be beneficial to its profit level post-transaction.

However, the interim report shows that in the first half of 2024, CloudSafe Information only achieved a net profit of RMB 1.4681 million, contributing relatively little to AsiaInfo Security's profit. Additionally, due to this acquisition, AsiaInfo Security recorded goodwill of RMB 268 million. If CloudSafe Information's future performance is poor, the company may face the risk of goodwill impairment.

Furthermore, if AsiaInfo Security successfully acquires a stake in AsiaInfo Technologies, the company's goodwill will further expand. The announcement indicates that after adjusting the acquisition amount, this transaction is expected to bring AsiaInfo Security goodwill of RMB 302 million to RMB 320 million. When combined with its existing goodwill, the company's total goodwill balance will reach RMB 570 million to RMB 588 million, potentially further increasing the risk of goodwill impairment.