In a significant strategic maneuver, Songfa Co., a ceramics manufacturer, has announced its acquisition of Hengli Heavy Industry, a shipbuilding company owned by its controlling shareholder, Hengli GroupThis move involves divesting its existing daily-use ceramic manufacturing operations, reflecting a broader trend of transformation within the companyFollowing the announcement on October 17, Songfa Co.'s stock surged to a limit-up price of 15.79 yuan per share, boosting its market valuation to approximately 2 billion yuan by the end of the trading day.

At the heart of this transaction is Chen Jianhua, the mastermind behind both Songfa Coand Hengli GroupThe latter acquired control of Songfa Cofor 820 million yuan in 2018, yet the ceramics arm faced dwindling sales, culminating in significant losses shortly after the acquisitionStarting from 2021, Hengli Group has injected substantial financial support to stabilize Songfa Co.'s operations

Despite these efforts, by 2023, the company's net profit attributable to shareholders has suffered continuous losses for three years, positioning it precariously close to delisting.

This restructuring marks yet another transformation for Songfa Co., primarily re-shaping its business focus from ceramics to high-end shipbuildingEssentially, Chen Jianhua is moving assets within his empire, as the transaction would result in Songfa Cogaining 100% control of Hengli Heavy Industry, effectively capitalizing on its shipbuilding assets.

The asset swap, which was formally announced on the evening of October 16, entails a significant exchangeSongfa Cowill trade all its assets and operational liabilities as assessed to a company called Zhongkun Investment, which holds a 50% stake in Hengli Heavy Industry, while the remaining stake is to be acquired through an issuance of new sharesFurthermore, the proceeds from this share issuance are planned to facilitate the acquisition of the remaining half of Hengli Heavy Industry, which is held by other entities associated with Chen.

Hengli Heavy Industry operates under Hengli Group, a conglomerate with diverse interests spanning from petroleum refining and petrochemicals to new polyester materials

Hengli Group boasts some of the largest production facilities for PTA (Purified Terephthalic Acid) and is among the top global players in the functional fiber production sectorChen Jianhua and his spouse, Fan Hongwei, hold direct and indirect control over all shares in Hengli Group, thereby cementing their role as the ultimate controlling shareholders.

Currently, Zhongkun Investment holds a 50% interest in Hengli Heavy Industry, while the other significant shareholders include Suzhou Hengneng and Chen, each owning about 16.67%. Notably, all counterparties in this transaction are entities under Chen's control, indicating a transfer of assets within his portfolioAlthough the valuation of Hengli Heavy Industry is still under assessment, the completion of the transaction will position Songfa Coas the sole owner, thereby achieving the long-term objective of capitalizing its shipbuilding endeavors.

During an interview, Chen emphasized that shipbuilding is integral to supporting Hengli’s oil, coal, and finished product transportation needs

In July 2022, Hengli Group invested 2.11 billion yuan to acquire STX (Dalian), previously the largest foreign-invested shipyard in ChinaThe South Korean STX Group ranked as the world’s fourth-largest shipbuilding entity, previously earmarking over 3 billion USD to develop a marine base in Dalian.

Despite initial challenges in realizing economies of scale, Hengli Heavy Industry managed a net profit of merely 4.05 million yuan in 2023. By July 2023, Hengli Group initiated a significant investment of 9.2 billion yuan to establish a new industrial park for Hengli Heavy Industry in Dalian, with expectations of achieving an annual construction output capacity of 7.1 million deadweight tonsJust two days later, an additional investment of 2 billion yuan was declared, totaling 11.2 billion yuan earmarked for expansion efforts.

The surge in corporate orders has been promising, with 140 new vessels lined up for production, translating to an approximate contract value of 10.8 billion USD

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The ship designs range from bulk carriers to Very Large Crude Carriers (VLCCs) and container shipsIn September, existing shareholders, including Chen, committed an extra 2.5 billion yuan to bolster the shipbuilding sector's development.

The financial uptick in Hengli Heavy Industry contrasts sharply with the struggles faced by Songfa Co., particularly following its acquisition by Hengli GroupAfter the latter took control in 2018, Songfa Co.’s profits began to erode sharplyBy 2021, it fell into losses, with cumulative deficit extending through 2023. The company's six-month report indicates its survival as a ceramics supplier, focusing on household, custom, and hotel ceramics, achieving revenue of about 114 million yuan yet incurring a loss of roughly 34.73 million yuan during the same period.

Faced with economic downturns and shrinking demand, Songfa Coannounced its intention to withdraw from ceramic manufacturing entirely, redirecting focus toward shipbuilding and high-end equipment development

As of June 30, 2023, the company had only 14.07 million yuan in liquid assets against short-term loan liabilities amounting to over 100 million yuan, showcasing a dire financial landscape.

Since 2021, Hengli Group has propped up Songfa Cowith periodic financial assistance to cover its shortfalls, initiating with a 20 million yuan loan in September of that year, which expanded to multiple loans totaling 75 million yuan in 2021. As losses continued into 2022, requests for support escalated to 100 million yuan, increasing further to 300 million yuan in 2023. Yet, the capital flow, while helpful, is insufficient to entirely bridge the liquidity gap.

Additionally, the announcement regarding the recent financing confirmed that the raised funds would be allocated towards merger costs, projects under construction, and possibly support for ongoing operational expenses and debt repayment

However, a stipulation was set that such allocations would not exceed 25% of the transaction value.

As of now, Hengli Group oversees various subsidiaries, including Hengli Petrochemical and Songfa Co., and has ambitious plans beyond ceramicsEarlier in June 2023, Songfa Cosought to enter the energy storage sector by attempting to acquire a significant stake in Ningbo Liwei Energy Storage Systems Co., a transaction that would have brought lithium battery production into its portfolioConcurrently, the founder of Songfa, Lin Daofan, proposed selling his 21.1% stake for 625 million yuan, effectively marking a strategic exit from a company that had been under the financial umbrella of Hengli Group.

This link with Ningbo Liwei, backed by prominent investors such as Shanshan Group and Sequoia Capital, however, only lasted for four monthsBy October, the acquisition attempt fell apart due to disputes over pricing and performance guarantees, resulting in the discontinuation of Lin's stake transfer proposal.

As Songfa Co