China Strategy Goodwill: The Karma of Acquisitions

Transcription

1 Strategy Note China December 5, 2018 China Top-Down Lowdowns Insert China Strategy Goodwill: The Karma of Acquisitions There are few top-down analyses on the performance of companies which paid a large premium in acquisitions, despite the vast literature on goodwill impairment. Our analysis of 283 M&A from shows the median change in the of the acquirers was +11% by Year 2, significantly higher than the market change. Our numbers run counter to the orthodox view that M&As by Chinese companies tend to destroy value; in fact, over 60% of our cases created value. Our findings are surprisingly positive; they indicate that Chinese companies may be better at acquisitions than supposed. More proactive M&As may lead to better overall corporate profitability and efficiency gains for the economy. Being And Nothingness, Part III Being Constructive The CSRC s new regulations have prompted concerns about potential earnings disappointments from goodwill impairment charges, which may also affect leverage, valuation or dividend calculations in the more extreme cases. Our first report on this subject, The Hollow Crown, identified the individual sectors and companies (healthcare, consumer/media) with the highest risks. Our subsequent report pointed out that impairment risks in some sectors, such as construction, were overblown. This report has an even more constructive view. Look at the Origins, Not Just the Symptoms The market is recently saturated with nearly a hundred different reports on goodwill treatment. These are mainly reviews on potential impairment charges and imply many acquisitions fail to deliver, but there is little exploration of the key issue the actual track record of acquisitions by the A-share companies, and how this would affect future corporate performance if there is a resurgence in M&As. We Examined M&As in Which the Acquirers Paid a Huge Premium We selected 283 case studies out of a universe of the 1,523 companies whose current market cap exceed RMB5bn. In these cases, the companies have paid significantly over the top in acquisitions, thereby creating substantial goodwill at least 25% of shareholders equity. We then tracked the changes in their return on average equity. Figure 1: Median changes of Companies after Expensive Acquisitions Rel. performance vs. Acquiring companies the universe Accumulated change in Year 1 2.6% 9.2% Accumulated change by Year % 19.9% Accumulated change by Year 3-0.1% 8.5% Sources: CGI Research, WIND Analysts Johnson Cheung T E johnsoncheung@chinastock.com.hk Jasmine Chin T (852) E jasminechin@chinastock.com.hk Acquirers Have Significantly Better ROE Improvement Although higher ROE is only one of many measurements of value creation, this analysis yields an interesting conclusion. As the cost of funding for many A-share companies ranged from 4% to 10% pa, the return on an acquisition would need to exceed that to raise a firm s. At the end of Year 2 (12-24 months after the acquisitions were completed), we found the median increase in the of the acquirers was 11.1%, almost 20% outperformance against that of our universe. Although the improvement started to taper off in Year 3, it was 8.5% better than that of our universe. Surprisingly Positive Outlook on A-Share Companies M&As Our results do not support the conventional view, which has been reinforced by recent reports, that M&As of Chinese corporates are mostly value destructive. Naturally, there were some badly executed acquisitions, but in aggregate, these A-share companies seem to have acquitted themselves better than most investors may assume. In fact, our data shows that in 60% of the cases, the acquirers ROE improvement exceeded the broader market s, although this effect could taper off. These initial findings suggest the goodwill impairment charges, while may have drastic impact on individual companies, are less significant for the market as a whole. Moreover, they suggest that, if the CSRC s stricter guidance on goodwill reduces the number of problematic deals and overall M&A activity accelerates, this may: (i) lead to better overall corporate profitability, and (ii) generate efficiency gains for the Chinese economy.

2 Impairment risks have been discussed ad nauseum Goodwill is the difference between the payment consideration and the net market or historic value of the underlying assets in an acquisition. The recently announced CSRC Risk Warning Document No. 8 has raised concerns over looming potential impairment losses by listed companies. The aggregate goodwill of A-share companies now amounts to RMB1.45 trillion, having increased from 1% of shareholders equity in 2011 to the current 4% (even higher if we exclude banks), in part due to the sizable M&A in the past few years. Total Goodwill impairment charges in 2017 totaled RMB26.4bn (with RMB17bn coming from the ChiNext and SME boards). Impairment charges, while lowering earnings, are non-cash items that relate to costs of historical corporate actions. Consequently, the accounting treatment should not affect the fundamental views of companies, except in the more extreme cases where they distort the perception of leverage and valuation. Our last report, The Hollow Crown, identified sectors and companies which have the highest risk of impairment charges. Analyse the Origins, Not the Symptoms We believe impairment losses are symptoms of poor acquisitions. Investors should be concerned about costly and poor acquisitions, regardless of the impairment treatment. As industries consolidate and M&A pick up again, the more fundamental issue for investors is the track record of acquisitions by A-share companies. Based on the number of reports that have come out on the subject, anecdotal evidence indicates that investors are concerned that many M&A deals can be value-destructive for shareholders. If this is really the case, then more acquisitions would mean not just more potential goodwill write-offs, but wasteful utilization of economic resources. To determine whether this is the case, we analyzed the 1,523 A-share companies with a current market capitalization greater than RMB5 billion and examined the operating performance of companies which paid a considerable premium in acquisitions. Significant Improvement in ROE after Acquisitions From this universe, we selected the cases in which companies had made sizable expensive acquisitions in There were 283 instances in which a company had paid a huge premium over the net value of the underlying assets, thus creating goodwill which was more than 20% of the previous year s shareholders equity. The median level of goodwill created was 53% of equity, not an insignificant amount, implying the transactions were sizable. We tracked the accumulated changes to each company s in Years 1, 2 and 3 versus its before the acquisition. As the cost of funding for many A-share companies ranged from 4% to 10%, an acquisition would need to deliver quite a high return rate before it could raise the. This also applies to backdoor listings since the shareholders equity would increase substantially post-acquisition. Figure 2: ROE changes for companies that paid a significant premium on acquisitions Year Total Number of companies Median goodwill created as a % of net assets in the previous year 45.8% 50.3% 54.3% 52.1% Accumulated change in Year % -9.2% -1.5% 20.2% 2.6% Accumulated change by Year % 3.0% 11.3% 9.2% 11.1% Accumulated change by Year % 1.5% -8.6% -0.1% The improvement in in these 283 cases was most noticeable in the second year. The median improvement in by Year 2 was 11.1%, i.e months after the acquisitions. The change in the Year 1 was more diverse, which is to be expected since the impact of the acquisition might not be fully reflected in Year 1. The accumulated change by Year 3 was less obvious, suggesting some remissions. 2

3 Outperformance vs. the Broader Benchmark We also monitored how our universe of 1,523 companies performed as a whole in terms of improvement in , which has proved to be a very turbulent period for the stock market. As Figure 3 shows, the accumulated changes to by Year 2 were -15%, -13%, -1% and 2%, respectively, for 2014 to Figure 3: improvement of our universe of 1,523 stocks Year Median 11% 10% 10% 10% Median of accumulated change in Year 1-6% -9% -4% 0% Median of accumulated change by Year 2-15% -13% -1% -2% Median of accumulated change by Year 3-14% -9% -5% Finally, Figure 4 shows the changes of the acquirers versus the universe of 1,523 stocks during the same time frame. The findings show that most of the acquirers generated a sustainable outperformance against the universe after the acquisitions. The median outperformance was 19.1% for the two-year period. Figure 4: Median outperformance by the Acquiring Companies Total 1 Year from Base Year 35.4% 0.0% 2.5% 19.7% 9.2% 2 Years from Base Year 55.6% 18.7% 12.5% 11.0% 19.9% 3 Years from Base Year 45.5% 11.3% -3.6% 8.5% SOURCES: CGI, WIND Conclusion While Chinese companies use M&As as a means to grow their business, whether this creates value is more controversial. Acquisitions are intended to create value through economies of scale, sharing of knowledge, better utilization of assets, and stronger bargaining power with suppliers or customers. In reality, acquisitions often destroy value due to poor execution, hubris, incompatible corporate culture, or simply over-payment. We have done further analyses based on the companies market capitalization and other factors. Despite its simplicity, the core analysis of the M&A record of A-share companies presents a surprisingly positive interpretation that runs counter to recent fears about goodwill impairment. We performed a similar analysis of cases where the premium paid on the acquisitions was greater than 10% of shareholders equity in the previous year, increasing the number of cases to 380+ from the present 283, and the results were broadly similar. Approximately 60% of the acquirers generated better ROE improvement than our universe of 1,523 stocks up to three years after acquisitions, despite their relatively high cost of funding. While it is true that the acquisitions may not be the only reason a company s ROE improved, unless the original operations of the acquirer performed significantly better than most companies in our universe, the new operations likely contributed. Year 1 ROE changes were more diverse and lower because the actual date of completion of the transactions could have affected the fraction of the target s earnings which would be incorporated. Synergies might also take time to develop. Year 2 results could be stronger because the acquirers might have identified the lowhanging fruit from the acquisitions. 3

4 Figure 5: Companies that paid a significant premium on acquisitions in 2014 Share Goodwill Mkt. Cap. Goodwill Accumulated change price created (Rmb (Rmb mn) created as a % (%) (Rmb) mn) of net assets Ticker Company Industry 2018/12/4 2018/12/4 FY14 in 2013 FY13 FY14 FY15 FY16 1-year 2-year 3-year SZ 视觉中国 Media , % 8% 18% 10% 10% SZ 上海莱士 Healthcare ,105 5, % 13% 10% 15% 15% SH 南京新百 Wholesale & Retail ,186 3, % 10% 29% 19% 18% SZ 亿帆医药 Healthcare ,087 1, % 5% 16% 13% 20% SZ 三七互娱 Media ,413 1, % 0% 3% 28% 29% 572 5,677 5, SZ ST 冠福 Healthcare ,373 1, % 4% 0% 8% 7% SZ 跨境通 Wholesale & Retail , % 4% 2% 9% 14% SH 鹏起科技 Nonferrous Metals ,259 1, % 3% 4% 1% 2% SZ 世纪华通 Media ,435 1,503 91% 5% 8% 11% 12% SH 中源协和 Healthcare , % 4% 5% 15% 3% SZ 凯利泰 Healthcare , % 13% 8% 12% 10% SZ 科大智能 Industrial Engineering , % 2% 8% 11% 11% SZ 茂业通信 Telecommunication , % 8% 6% 7% 9% SZ 华策影视 Media ,669 1,124 62% 16% 16% 11% 8% SZ 美晨生态 Construction Decoration , % 5% 11% 12% 18% SZ 信邦制药 Healthcare , % 4% 9% 7% 5% SZ 华闻传媒 Media ,871 2,217 48% 21% 17% 11% 11% SZ 利欧股份 Media , % 4% 12% 6% 9% SZ 卫宁健康 Computer services , % 13% 17% 18% 30% SZ 泰格医药 Healthcare , % 13% 16% 18% 11% SZ 东方国信 Computer services , % 10% 11% 14% 11% SZ 奥飞娱乐 Media , % 14% 19% 17% 12% SZ 神州信息 Computer services , % 27% 12% 12% 6% SZ 神州泰岳 Computer services ,942 1,119 31% 15% 14% 6% 9% SZ 力源信息 IT Hardware , % 4% 5% 6% 5% SZ 立思辰 Computer services , % 9% 10% 8% 8% SZ 中化岩土 Construction Decoration , % 9% 10% 10% 8% SZ 南洋科技 IT Hardware , % 2% 3% 4% 4% SZ 兴源环境 Public Facility , % 4% 10% 9% 9% SH 时代新材 Chemicals , % 5% 1% 7% 5% SZ 东方精工 Automobiles , % 7% 12% 8% 9% SZ 旋极信息 Computer services , % 4% 10% 10% 18% SH 兴发集团 Chemicals , % 2% 10% 2% 3% SZ 潍柴动力 Automobiles ,002 6,916 20% 12% 15% 5% 8% First quartile 89% 13% 15% 13% 12% MEDIAN 46% 6% 10% 10% 9% Third quartile 28% 4% 7% 7% 7% MEDIAN OF UNIVERSE OF STOCKS 11% 11% 10% 10%

5 Figure 6: Companies that paid a significant premium on acquisitions in 2015 Share Mkt. Cap. Goodwill Goodwill Accumulated change price (Rmb created created as a (%) (Rmb) mn) (Rmb mn) % of net Ticker Company Industry 2018/12/4 2018/12/4 FY15 assets in 2014 FY14 FY15 FY16 FY17 1-year 2-year 3-year SH 大晟文化 Media ,035 1, % 6% 0% 9% 16% SH 广汇汽车 Automobiles ,925 7, % 4% 19% 12% 12% SH 国投资本 Non-bank Financials ,216 4, % 1% 34% 9% 9% 4,194 1,080 1, SZ 天神娱乐 Media ,659 3, % 41% 13% 10% 16% SZ 艾格拉斯 Media ,398 2, % 1% 8% 6% 9% SH 科达股份 Media ,641 2, % 7% 5% 10% 9% SZ 奥特佳 Automobiles ,952 1, % 1% 10% 10% 7% 1,003 1, SZ 通化金马 Healthcare ,877 1, % 1% 0% 7% 6% SZ 延安必康 Healthcare ,117 1, % 3% 19% 14% 10% SZ 神州高铁 Industrial Engineering ,597 1, % 1% 11% 12% 13% SZ 万达电影 Media ,994 5, % 31% 20% 14% 14% SZ 英唐智控 IT Hardware , % 4% 3% 11% 9% SZ 协鑫集成 Electronic Equipments , % 11697% 33% -1% 1% SZ 梦网集团 Media ,909 2, % -13% 3% 5% 5% SZ 合力泰 IT Hardware ,613 2, % 11% 6% 12% 12% SZ 利欧股份 Media ,727 2, % 12% 6% 9% 6% SZ 久其软件 Computer services , % 10% 9% 10% 14% SZ 捷成股份 Computer services ,411 1, % 17% 18% 15% 11% SZ 高新兴 Telecommunication , % 14% 6% 9% 9% SZ 众信旅游 Entertainment , % 25% 19% 13% 13% SZ 美年健康 Healthcare , % 10% 16% 11% 13% SZ 天广中茂 Industrial Engineering ,854 1,297 86% 10% 4% 10% 13% SZ 北斗星通 National Defense ,009 1,118 84% 5% 2% 2% 3% SZ 奋达科技 Home Appliances , % 14% 16% 15% 10% SZ 常山北明 Computer services ,694 2,014 81% 1% 6% 6% 6% SZ 利亚德 IT Hardware , % 18% 19% 19% 24% SZ 领益智造 IT Hardware , % 0% 3% 6% 23% 1,214 2,520 9, SZ 宋城演艺 Entertainment ,943 2,416 69% 11% 14% 15% 15% SZ 中金环境 Industrial Engineering , % 14% 11% 13% 14% SH 长电科技 IT Hardware ,029 2,462 61% 6% -3% -5% 1% SZ 岭南股份 Construction Decoration , % 20% 20% 14% 16% SZ 游族网络 Media , % 70% 33% 24% 20% SZ 金一文化 Light Manufacturing , % 10% 12% 12% 9% SZ 宜华健康 Healthcare , % 4% 4% 35% 8% SZ 恒康医疗 Healthcare , % 27% 13% 10% 5% SZ 胜利精密 Industrial Engineering ,120 1,657 55% 7% 7% 7% 5% SZ 蓝色光标 Media ,081 2,507 54% 17% 2% 12% 4% SZ 旋极信息 Computer services , % 10% 10% 18% 10% SZ 雷科防务 National Defense , % 3% 8% 4% 4% SZ 东诚药业 Healthcare , % 9% 7% 8% 8% SZ 数知科技 Media , % 6% 4% 6% 8% SZ 科陆电子 Electronic Equipments , % 9% 10% 11% 12% SZ 众生药业 Healthcare , % 12% 15% 15% 12% SH 长园集团 Electronic Equipments ,359 1,454 48% 14% 12% 11% 15% SH 锦江股份 Entertainment ,765 4,121 47% 7% 7% 6% 7% SZ 茂业通信 Telecommunication , % 6% 7% 9% 9% SH 凯乐科技 Telecommunication , % 3% 5% 8% 19% SZ 金达威 Healthcare , % 14% 7% 16% 20% SZ 博雅生物 Healthcare , % 13% 12% 14% 16% SH 鹏起科技 Nonferrous Metals ,259 1,009 38% 4% 1% 2% 9% SH 益丰药房 Healthcare , % 26% 18% 10% 10% SZ 欧比特 IT Hardware , % 4% 6% 5% 6% SZ 深圳华强 IT Hardware , % 22% 12% 11% 11% SZ 迪安诊断 Healthcare , % 20% 20% 19% 17% SH 老百姓 Healthcare , % 24% 16% 16% 16% SZ 乐普医疗 Healthcare ,766 1,079 33% 15% 14% 13% 15%

6 Figure 7: Companies that paid a significant premium on acquisitions in 2015 (Continued) Share Mkt. Cap. Goodwill Goodwill Accumulated change price (Rmb created created as a (%) (Rmb) mn) (Rmb mn) % of net Ticker Company Industry 2018/12/4 2018/12/4 FY15 assets in 2014 FY14 FY15 FY16 FY17 1-year 2-year 3-year SZ 渤海租赁 Non-bank Financials ,687 4,045 32% 11% 8% 8% 9% SH 刚泰控股 Nonferrous Metals , % 17% 10% 9% 9% SZ 华宇软件 Computer services , % 14% 15% 16% 13% SH 首创股份 Public Facility ,615 2,358 30% 8% 7% 5% 5% SH 智慧能源 Electronic Equipments , % 6% 12% 6% 2% SZ 金科文化 Media , % 9% 10% 8% 6% SZ 齐心集团 Light Manufacturing , % 3% 2% 9% 8% SZ 联络互动 Computer services , % 26% 32% 10% 1% SZ 蓝盾股份 Computer services , % 5% 12% 13% 11% SZ 安科生物 Healthcare , % 15% 13% 15% 18% SZ 得润电子 IT Hardware , % 6% 4% -1% 6% SZ 步步高 Wholesale & Retail , % 10% 5% 2% 2% SH 鸣志电器 Electronic Equipments , % 18% 17% 22% 13% SZ 东方国信 Computer services , % 11% 14% 11% 10% SZ 凯利泰 Healthcare , % 8% 12% 10% 10% SZ 东方园林 Construction Decoration ,294 1,391 24% 12% 10% 17% 21% SZ 立思辰 Computer services , % 10% 8% 8% 4% SZ 一心堂 Healthcare , % 19% 16% 15% 14% SZ 华邦健康 Chemicals ,581 1,306 23% 9% 8% 6% 5% SZ 亿帆医药 Healthcare , % 16% 13% 20% 24% SZ 瑞康医药 Healthcare , % 10% 9% 12% 16% SH 隆鑫通用 Automobiles , % 16% 17% 16% 15% First quartile 93% 15% 15% 14% 14% MEDIAN 50% 10% 10% 10% 10% Third quartile 31% 6% 6% 8% 7% MEDIAN OF UNIVERSE OF STOCKS 11% 10% 10% 10%

7 Figure 8: Companies that paid a significant premium on acquisitions in 2016 Share Mkt. Cap. Goodwill Goodwill Accumulated change price (Rmb created (Rmb created as a % (%) (Rmb) mn) mn) of net assets Ticker Company Industry 2018/12/4 2018/12/4 FY16 in 2015 FY15 FY16 FY17 FY18E 1-year 2-year 3-year SZ 智度股份 Media ,734 2, % -3% 13% 11% 14% SZ 深大通 Media ,057 2, % 5% 9% 7% 5% SZ 华铁股份 Industrial Engineering ,734 2, % 7% 1% 13% 7% SH 华创阳安 Non-bank Financials ,325 3, % 84% -2% 1% 2% SZ 纳思达 IT Hardware ,792 18, % 23% -9% 25% 7% SH 中昌数据 Media , % 83% 0% 7% 7% SZ 天润数娱 Media , % -5% 10% 0% 2% SZ 天夏智慧 Computer services ,783 3, % -1% 12% 11% 3% 2,351 2, SZ 紫光股份 Computer services ,029 13, % 8% 8% 9% 9% SZ 国盛金控 Non-bank Financials ,989 3, % 3% 8% 5% -3% SZ 京蓝科技 Public Facility ,523 1, % -3% 1% 8% 5% SZ 金科文化 Media ,799 2, % 10% 8% 6% 13% SZ 天茂集团 Non-bank Financials ,347 6, % 15% 28% 11% 9% SZ 神州数码 Computer services , % 12% 28% 24% 13% SH 首旅酒店 Entertainment ,406 4, % 8% 8% 9% 14% SZ 诚志股份 Chemicals ,342 6, % 6% 2% 5% 5% SZ 南洋股份 Electronic Equipments ,031 4, % 3% 2% 6% 0% SZ 光环新网 Telecommunication ,646 2, % 12% 9% 7% 10% SZ 龙蟒佰利 Chemicals ,725 4, % 5% 6% 20% 19% SZ 金财互联 Computer services ,470 1, % 5% 2% 6% 6% SH 均胜电子 Automobiles ,951 7, % 13% 8% 5% 11% SZ 西王食品 Agriculture ,775 2, % 11% 8% 14% 13% SZ 立思辰 Computer services ,377 2, % 8% 8% 4% 1% SZ 海联金汇 Industrial Engineering ,014 2, % 5% 6% 6% 6% SZ 北京文化 Media ,653 1, % 2% 19% 7% 1% SZ 顺利办 Computer services , % -19% 2% 3% 15% SH 海航科技 IT Hardware ,629 15, % 2% 3% 7% 1% SZ 金卡智能 Industrial Engineering ,646 1, % 9% 5% 12% 14% SZ 迪安诊断 Healthcare ,053 1, % 20% 19% 17% 18% SZ 耐威科技 National Defense , % 12% 7% 4% 7% SZ 仁东控股 Non-bank Financials ,007 1, % 1% 9% -22% 5% 1,583-4, SH 新智认知 Entertainment , % 12% 8% 7% 10% SH 茂业商业 Wholesale & Retail ,816 1,291 98% 6% 20% 21% 17% SZ 旋极信息 Computer services ,447 1,357 95% 10% 18% 10% 9% SZ 捷成股份 Computer services ,411 3,686 85% 18% 15% 11% 10% SZ 科大智能 Industrial Engineering ,155 1,212 82% 11% 11% 9% 7% SZ 正业科技 Industrial Engineering , % 9% 9% 13% 11% SH 锦江股份 Entertainment ,765 6,698 79% 7% 6% 7% 9% SZ 美尚生态 Construction Decoration , % 15% 12% 10% 9% SZ 大洋电机 Electronic Equipments ,652 2,958 77% 10% 9% 5% 2% SZ 宜华健康 Healthcare ,815 1,228 73% 4% 35% 8% 13% SZ 超图软件 Computer services , % 9% 11% 11% 7% SZ 东山精密 IT Hardware ,411 1,770 65% 2% 5% 10% 11% SH 青岛海尔 Home Appliances ,054 20,612 64% 19% 19% 21% 21% SZ 信邦制药 Healthcare ,736 1,671 63% 7% 5% 5% 5% SZ 兴源环境 Public Facility , % 9% 9% 10% 5% SZ 顺网科技 Media , % 25% 30% 21% 22% SZ 神州高铁 Industrial Engineering ,597 1,626 56% 11% 12% 13% 2% SZ 航天科技 Industrial Engineering , % 4% 6% 5% 2% SH 中珠医疗 Properties ,321 1,374 52% 3% 7% 3% 1% SH 润达医疗 Healthcare , % 13% 8% 12% 17% SZ 天音控股 Wholesale & Retail ,883 1,152 50% -15% 11% 9% 0% SZ 万里扬 Automobiles ,140 1,193 49% 9% 8% 11% 8% SZ 蓝盾股份 Computer services , % 12% 13% 11% 8% SZ 雷科防务 National Defense ,326 1,022 48% 8% 4% 4% 4% SOURCES: CGS-CIMB RESEARCH, WIND 7

8 Figure 9: Companies that paid a significant premium on acquisitions in 2016 (Continued) Share Mkt. Cap. Goodwill Goodwill Accumulated change price (Rmb created (Rmb created as a % (%) (Rmb) mn) mn) of net assets Ticker Company Industry 2018/12/4 2018/12/4 FY16 in 2015 FY15 FY16 FY17 FY18E 1-year 2-year 3-year SZ 合众思壮 Computer services , % 4% 4% 7% 9% SZ 奥飞娱乐 Media ,012 1,410 46% 17% 12% 1% 2% SZ 齐心集团 Light Manufacturing , % 2% 9% 8% 8% SZ 鼎龙股份 Chemicals , % 13% 13% 11% 8% SZ 领益智造 IT Hardware ,099 1,255 44% 3% 6% 23% -6% SZ ST 冠福 Healthcare ,373 1,239 43% 8% 7% 6% 10% SZ 欧比特 IT Hardware , % 6% 5% 6% 5% SZ 三湘印象 Entertainment ,499 1,246 41% 3% 19% 3% 2% SZ 金一文化 Light Manufacturing , % 12% 12% 9% 0% SH 广汇汽车 Automobiles ,925 8,502 39% 19% 12% 12% 11% SZ *ST 尤夫 Chemicals , % 6% 8% 21% 1% SZ 潍柴动力 Automobiles ,002 15,251 37% 5% 8% 18% 19% SH 光大嘉宝 Properties ,702 1,264 36% 8% 6% 11% 12% SH 华贸物流 Transportation , % 10% 9% 8% 9% SZ 中金环境 Industrial Engineering ,905 1,275 35% 11% 13% 14% 14% SZ 岭南股份 Construction Decoration , % 20% 14% 16% 19% SZ 新国都 Computer services , % 7% 11% 4% 8% SZ 东诚药业 Healthcare , % 7% 8% 8% 10% SH 人福医药 Healthcare ,324 3,117 34% 11% 10% 16% 7% SZ 万达电影 Media ,994 2,958 32% 20% 14% 14% 14% SZ 力源信息 IT Hardware , % 6% 5% 12% 9% SZ 瑞康医药 Healthcare ,218 1,045 31% 9% 12% 16% 16% SZ 利亚德 IT Hardware , % 19% 19% 24% 19% SZ 强力新材 Chemicals , % 20% 15% 12% 10% SZ 通富微电 IT Hardware ,953 1,097 29% 5% 5% 3% 4% SH 长园集团 Electronic Equipments ,359 1,619 29% 12% 11% 15% 19% SZ 万润股份 Chemicals , % 13% 10% 10% 10% SZ 宏大爆破 Chemicals , % 5% 2% 6% 8% SZ 神州信息 Computer services , % 12% 6% 7% 8% SZ 安科生物 Healthcare , % 13% 15% 18% 17% SZ 新纶科技 Public Facility , % -8% 2% 5% 9% SH 歌力思 Textile , % 15% 13% 17% 17% SZ 巨人网络 Media , % -5% 28% 16% 14% SZ 道氏技术 Chemicals , % 9% 12% 14% 24% SZ 中鼎股份 Automobiles , % 22% 18% 16% 17% SZ 昆仑万维 Media , % 22% 19% 24% 20% SZ 中天金融 Properties ,116 2,756 21% 25% 21% 12% 30% SZ 苏交科 Construction Decoration , % 14% 14% 14% 12% SZ 铁汉生态 Construction Decoration , % 11% 12% 13% 7% SH 老百姓 Healthcare , % 16% 16% 16% 16% SZ 亿帆医药 Healthcare , % 13% 20% 24% 13% First quartile 142% 13% 13% 14% 14% MEDIAN 54% 9% 9% 10% 9% Third quartile 34% 5% 6% 6% 5% MEDIAN OF UNIVERSE OF STOCKS 10% 10% 10% 10%

9 Figure 10: Companies that paid significant premium on acquisitions in 2017 Share price (Rmb) Mkt. Cap. (Rmb mn) Goodwill created (Rmb mn) Goodwill created as a % of net assets in 2016 Accumulated change (%) Ticker Company Industry FY17 FY17 FY18E 1-year 2-year SZ 迅游科技 Media ,248 2, % 6% 8% SZ 三丰智能 Healthcare ,055 2, % 4% 8% SZ 中际旭创 Wholesale & Retail ,908 1, % 7% 15% SZ 众泰汽车 Healthcare ,814 6, % 12% 3% SZ 北讯集团 Media ,556 2, % 6% 11% SZ 数知科技 Healthcare ,472 5, % 8% 7% SZ 东方精工 Wholesale & Retail ,704 4, % 11% 6% SZ 沙隆达 A Nonferrous Metals ,779 3, % 15% 17% SZ 金冠股份 Electronic Equipments ,117 1, % 9% 5% SZ 华东重机 Media ,693 2, % 6% 11% SH 南京新百 Healthcare ,186 3, % 16% -14% SZ 力源信息 Healthcare ,518 1, % 12% 9% SZ 炼石航空 Industrial Engineering ,100 2, % 4% -20% SZ 创业软件 Telecommunication ,364 1, % 12% 7% SZ 我爱我家 Media ,356 4, % 1% 8% SZ 先导智能 Construction Decoration ,021 1, % 29% 24% SZ 赛为智能 Healthcare , % 11% 6% SZ 银亿股份 Media ,105 6, % 13% 8% SZ 安洁科技 Media ,464 2, % 8% 8% SZ 天润数娱 Computer services , % 0% 2% SZ 四维图新 Healthcare ,035 3,010 95% 4% 3% SZ 美年健康 Computer services ,507 3,336 93% 13% 10% SZ 深圳惠程 Media ,581 1,220 90% -8% 31% SZ 奋达科技 Computer services ,279 2,545 90% 10% 6% SZ 飞凯材料 Computer services , % 6% 17% SZ 金科文化 IT Hardware ,799 3,930 78% 6% 13% SZ 金城医药 Computer services ,543 1,144 76% 11% 8% SZ 华宇软件 Construction Decoration ,721 1,299 70% 13% 10% SH 瀚叶股份 IT Hardware ,949 1,185 69% 9% 7% SZ 华峰超纤 Public Facility ,926 1,733 66% 7% 8% SH 中昌数据 Chemicals , % 7% 7% 3,040 2, SZ 恺英网络 Automobiles ,234 2,093 62% 40% 15% SZ 恒康医疗 Computer services ,058 2,555 61% 5% -11% SZ 爱尔眼科 Chemicals ,926 1,674 57% 19% 23% SH 润达医疗 Automobiles ,054 1,189 53% 12% 17% SZ 海王生物 Electronic Equipments ,866 3,073 52% 13% 12% SH 浙大网新 Electronic Equipments ,315 1,238 52% 9% 5% SH 盛和资源 IT Hardware , % 10% 8% SZ 南极电商 Electronic Equipments , % 23% 19% SZ 合纵科技 Healthcare , % 9% 6% SZ 正业科技 IT Hardware , % 13% 11% SZ 鸿利智汇 Healthcare , % 15% 16% SH 三爱富 Chemicals ,109 1,419 46% 5% 23% SZ 金一文化 Telecommunication ,117 1,255 42% 9% 0% SZ 国瓷材料 IT Hardware , % 13% 20% SZ 艾格拉斯 Media ,398 1,332 39% 9% 8% SH 上海家化 Transportation ,874 1,961 37% 7% 11% SZ 航锦科技 Electronic Equipments , % 11% 17% SH 科达股份 Computer services ,641 1,537 36% 9% 10% SZ 天神娱乐 IT Hardware ,659 1,989 35% 16% 6% SZ 美的集团 Construction Decoration ,082 23,173 34% 25% 29% SZ 昆仑万维 Computer services , % 24% 20% SZ 瑞康医药 Public Facility ,218 2,248 30% 16% 16% SH 卓郎智能 Construction , % 18% 17% SZ 久其软件 Healthcare , % 14% 10% SZ 通鼎互联 Computer services , % 16% 13%

10 Figure 11: Companies that paid significant premium on acquisitions in 2017 (Continued) Share price (Rmb) Mkt. Cap. (Rmb mn) Goodwill created (Rmb mn) Goodwill created as a % of net assets in 2016 Ticker Company Industry FY17 FY17 FY18E 1-year 2-year SZ 露笑科技 Construction Decoration , % 13% 8% SZ 仙琚制药 Computer services , % 10% 12% SZ 美盛文化 Media , % 5% 4% SZ 三垒股份 Industrial Engineering , % 2% 2% SZ 埃斯顿 Properties , % 7% 7% SZ 顺利办 Automobiles , % 3% 15% SH 上海贝岭 IT Hardware , % 8% 5% SZ 泰格医药 Healthcare , % 14% 15% SH 百川能源 Light Manufacturing , % 29% 24% SZ 洲明科技 Public Facility , % 16% 20% SZ 摩登大道 Nonferrous Metals , % 5% 2% SZ 贝达药业 Computer services , % 13% 9% SZ 凯利泰 Telecommunication , % 10% 10% SZ 利亚德 Media , % 24% 19% SZ 永太科技 Computer services , % 8% 18% SH 楚天高速 Construction , % 11% 11% SZ 三七互娱 Healthcare , % 31% 26% SZ 九强生物 Automobiles , % 19% 17% SH 山鹰纸业 Healthcare ,260 1,683 20% 21% 27% Accumulated change (%) First quartile 102% 15% 17% MEDIAN 52% 11% 10% 20 9 Third quartile 28% 7% 7% MEDIAN OF UNIVERSE OF STOCKS 10% 10%

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