Q3 performance slightly decreases, can the acquisition of Ning Sheng Industrial by Shanghai Electric Group (02727, 601727.SH) drive the company's performance recovery?

Since the China Securities Regulatory Commission released the "Six Regulations on Mergers and Acquisitions" on September 24th, the capital market has entered an active period of mergers and acquisitions. As of now, the number of major restructuring developments disclosed by listed companies has exceeded the total for the whole year of 2023. As the first case after the "Six Regulations on Mergers and Acquisitions", Shanghai Electric Group (02727, 601727.SH) saw a significant increase in stock prices after releasing positive news on mergers and acquisitions. Its A-share market witnessed an impressive 15-day rise in the stock price, while its Hong Kong stock market also saw an accumulated increase of over 100% in just one month. With the news of mergers and acquisitions, the market value of Shanghai Electric Group in both markets increased by over a trillion within just one month. However, as market sentiment cooled down, Shanghai Electric Group's stock price also saw a significant decline. As of the close on November 14th, within just 5 trading days, Shanghai Electric Group's A-share stock price fell by over 20% from its peak, while the Hong Kong stock market fell nearly 30%. The drastic fluctuations in stock prices have attracted the attention of many investors. So, what is the target of Shanghai Electric Group's acquisition? Acquisition of Ning Sheng Industry, with the potential for a significant increase in performance in the short term It was reported that on October 19th, Shanghai Electric Group announced that its wholly-owned subsidiary Automation Group intends to acquire 100% equity of Ning Sheng Industry for 3.082 billion yuan. Ning Sheng Industry is the holding management platform for the industrial Siasun Robot & Automation related business, holding a 50% equity in Shanghai Fansuc Siasun Robot & Automation Co., Ltd. ("Fansuc Siasun Robot & Automation") and a 25% equity in Shanghai Fansuc International Trading Co., Ltd. ("Fansuc International Trading"). The core asset of Ning Sheng Industry is Fansuc Siasun Robot & Automation. Public information shows that Shanghai Fansuc Siasun Robot & Automation was established in 1997. Fansuc Siasun Robot & Automation is a joint venture between Japanese Fansuc and Ning Sheng Industry, holding 50% equity each, providing more than 260 series of Siasun Robot & Automation products, as well as standard peripheral products such as grippers, repositioning machines, walking shafts, which are widely used in multiple industries such as automotive, electronics, heavy machinery. As one of the leading manufacturers of industrial Siasun Robot & Automation worldwide, Japanese Fansuc occupies an important position in the field of industrial automation with its characteristics of high precision, lightweight, and miniaturization. It is known as one of the "Four Great Families" of industrial Siasun Robot & Automation along with Yaskawa in Japan, KUKA in Germany (acquired by Midea), and ABB in Switzerland, with a global market share of 50%. In August 2023, Japanese Fansuc (FANUC) achieved a cumulative delivery of 1 million units of industrial Siasun Robot & Automation, which once again refreshed the record of delivery of a single brand of industrial Siasun Robot & Automation, making it a well-deserved legend in factory automation worldwide. As a joint venture of Japanese Fansuc, Fansuc Siasun Robot & Automation has benefited from its controlling shareholder both in technology and business promotion. Despite being backed by its controlling shareholder Japanese Fansuc, Fansuc Siasun Robot & Automation has faced continuous performance declines in recent years. Public information shows that from 2022 to the first half of 2024, Fansuc Siasun Robot & Automation achieved operating revenues of 7.593 billion yuan, 7.389 billion yuan, and 3.077 billion yuan, and net profits of 1.332 billion yuan, 1.050 billion yuan, and 0.357 billion yuan, respectively. The decline in performance may be due to the rise of domestic brands in recent years. It is understood that in the Chinese market, the market share of the "Four Great Families" of industrial Siasun Robot & Automation has decreased from a peak of 70% to around 40%. While most of the top ten industrial Siasun Robot & Automation market shares in China in 2023 are still held by foreign manufacturers, domestic manufacturers such as Estun Automation, Shenzhen Inovance Technology, and Efort have continued to rise in rankings. Among them, Estun Automation achieved sales exceeding 20,000 in 2023, with a market share of 8.5%, ranking second, second only to Fansuc (13.3%); Shenzhen Inovance Technology with a market share of 6.5%, ranking fourth in the industry; Efort achieved sales exceeding 10,000 in 2023, ranking 8th in the market, becoming a new player in the top 10. Additionally, it is worth noting that the overall sales of the second-tier domestic manufacturers in 2023 have shown a significant increase, with STEP, CRP, JAKA, AUBO, ROKAE entering or about to enter the camp with sales of 5,000 units per year. As a joint venture company of Japanese Fansuc, Fansuc Siasun Robot & Automation may have been affected to a certain extent by the rise of domestic manufacturers. However, from the perspective of the acquisition valuation, the acquisition of Fansuc Siasun Robot & Automation by Shanghai Electric Group is undoubtedly a very profitable deal. As of the end of June 2024, the net assets of Fansuc Siasun Robot & Automation were 5.171 billion yuan, and the book value of the parent company was 5.234 billion yuan, with an appraisal value of 5.554 billion yuan, representing an increase in valuation.Value is only 6.13%.It is worth mentioning that in 2023, Shanghai Electric Group's profit was only 285 million yuan, which is only about a quarter of the profit of the target assets Siasun Robot & Automation acquired this time. Therefore, for Shanghai Electric Group, acquiring Siasun Robot & Automation not only allows them to enter the Siasun Robot & Automation track, but also has the potential to significantly improve their performance. Although the performance of Shanghai Electric Group is expected to improve through the acquisition, the company itself faces challenges due to the lackluster growth of its three main businesses. The performance in the first three quarters has declined, but the backlog of orders is stabilizing It is understood that the history of Shanghai Electric Group can be traced back to 1902, with its predecessor being the Shanghai Dalong Machinery Factory. As one of the earliest machinery and electrical industries in China, Shanghai Electric Group has undergone several important reforms and developments. China's first 6000KW thermal power unit, the world's first dual water-cooled generator, China's largest 12,000-ton water press, the world's first mirror grinding machine, China's first 300,000-kilowatt nuclear power unit, China's first million-kilowatt ultra-supercritical thermal power unit, all come from Shanghai Electric Group. Currently, Shanghai Electric Group is a leading global provider of industrial green intelligent system solutions, focusing on three main business areas: smart energy, intelligent manufacturing, and digital integration. In the first three quarters of this year, the company's total operating income reached 76.595 billion yuan, a year-on-year decrease of 2.27%; net profit attributable to equity holders was 758 million yuan, a year-on-year decrease of 7.67%. The decline in performance is closely related to the sluggish growth of the company's three core business segments: energy equipment, industrial equipment, and integration services. In the field of energy equipment, Shanghai Electric Group's revenue in the first half of the year reached 24.654 billion yuan, a decrease of 3.98% compared to the same period last year. In terms of new orders, the energy equipment sector added 48.45 billion yuan in new orders in the first half of the year, a decrease of 2.04% year-on-year. Among them, nuclear power equipment was 4.33 billion yuan, coal-fired power equipment was 21.99 billion yuan, energy storage equipment was 5.39 billion yuan, and wind power equipment was 6.01 billion yuan. Among the new orders, wind power equipment performed the best, with a year-on-year increase of 95.13%. Although the performance of wind power equipment growth is impressive, its base is low, the proportion is small, and the new orders do not yet have delivery conditions, so its impact on performance is limited. However, the wind power bidding and tendering next year are expected to enter a peak year, and its wind power sector is expected to achieve good growth. As for the industrial equipment business, the business recorded operating income of 18.959 billion yuan in the first half of the year, a decrease of 3.31% year-on-year. The weakness of this segment is mainly due to the impact of the real estate industry, especially in the elevator business, as the demand for elevators weakened with the cooling of the real estate market. In addition, although there has been some layout in the industrial basic parts and automation equipment field, the revenue and profit contributions are still not enough to offset the overall downturn of the business. It is worth noting that the industrial equipment business added 22.58 billion yuan in new orders, a year-on-year increase of 5.37%, combined with the newly acquired Siasun Robot & Automation by the company, it is expected to generate synergies. As for the integration services segment, the performance in the first half of the year was unsatisfactory, with total operating income of 7.961 billion yuan, a significant decline of 22.44%. Although the new orders in the integration services segment reached 12.63 billion yuan in the first half of the year, a year-on-year increase of 13.58%, the significant drop in revenue in this area reflects the company's clear weaknesses in project execution efficiency and market development. Furthermore, Shanghai Electric Group also faces the problem of continuously rising asset-liability ratio. By the mid-2024, the company's asset-liability ratio had reached 72.5%, far higher than the industry average. With operating cash flow long-term negative, Shanghai Electric Group's financial pressure has significantly increased. Overall, as the first acquisition company after the "Six Guidelines for Mergers and Acquisitions", Shanghai Electric Group naturally attracts a lot of attention from the market, and looking at the target of the acquisition, its valuation is not high and the performance of Shanghai Electric Group is expected to achieve significant growth after the acquisition. However, in recent years, domestic Siasun Robot & Automation has risen rapidly, while the performance of Siasun Robot & Automation has declined for several years, and it remains to be seen whether the two can develop synergistically after being incorporated into Shanghai Electric Group. In addition, Shanghai Electric Group itself has sufficient backlog of orders, but due to the fact that most of the wind power orders are not ready for delivery, it affects the company's current performance, coupled with the drag of the integration services sector, resulting in a decline in performance in the first three quarters. With the delivery of other orders, such as wind power, next year, its performance is expected to stabilize. With the catalysis of the earlier market optimism, Shanghai Electric Group's stock price has deviated significantly. Therefore, a significant pullback is inevitable as the enthusiasm cools, causing sharp fluctuations in share prices.