Since September 24, the market has shown signs of warming, facilitated by a continuous loosening of policiesThis trend has vastly accelerated mergers and acquisitions (M&A) and restructuring among listed companies on the A-share marketInvestors are increasingly paying attention to emerging opportunities surrounding these corporate strategiesIt is anticipated that M&A and restructuring will become a focal point in the capital markets moving forward.

Beginning in late September 2024, the pace of M&A activity has surged significantly within the A-share marketData from Choice indicate that more than 40% of all listed companies initiating M&A or restructuring during this period occurred after September 24, a notable increase compared to earlier in the year.

Currently, there are over 5,000 listed companies on the Shanghai and Shenzhen exchanges

A review of annual reports from 2023 reveals that more than 2,500 of these companies reported net profits attributed to shareholders of less than 100 million yuan, while over 1,000 companies posted negative profitsFor these organizations, external acquisitions will become crucial to unlock new growth avenues amidst cyclical recoveries and organic growthAdditionally, many leading firms in mature industries will seek to sustain steady growth through M&A, while a considerable number of assets under state-owned and local government enterprises will require infusion into their publicly listed counterparts.

On the primary market front, as initial public offerings (IPOs) have tightened, many private equity funds are in search of exit strategiesCompanies that previously halted IPOs must now identify platforms for securitization to propel their expansions.

Looking ahead, M&A and restructuring are poised to become vital components of the capital market's rhythm

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The Dongcai M&A and Restructuring Index, launched on October 28, 2024, saw a considerable rise of nearly 20%, with an overall increase of more than 5% by December 9. This performance outstripped the Shanghai Composite Index, which saw a modest rise of 3.7%. While short-term comparisons may not hold weight, the continued balancing of IPO dynamics and supportive policies bode well for a new wave of M&A and restructuring activity on the A-share market, meriting investors' attention.

Examining data on M&A activity, as of December 10, 2024, a total of 72 companies on the Shanghai and Shenzhen exchanges successfully completed IPOsThis indicates that, following the first 11 months of the year, the total number of IPOs is projected to remain below 80 for the yearHistorically, such a figure is only higher than the 11 and 2 IPOs seen in 2005 and 2013 respectively, the latter being influenced by a market adjustment that momentarily halted IPO activities.

The shrinkage in the number of IPOs can be attributed to policy adjustments

In August 2023, the China Securities Regulatory Commission (CSRC) introduced a series of measures aimed at supporting the capital market, which included a commitment to dynamically regulate the pace of IPOsConsequently, the number of new listings has decelerated sharply.

With the overall strictness surrounding IPO processes, an increasing number of companies set to list have decided to withdraw their applicationsAccording to Wind data, until December 3, 2024, as many as 425 companies seeking to go public halted their IPO plans (including those that voluntarily withdrew, were denied, or terminated review). This figure marks a dramatic increase of 49.64% compared to the 284 companies that withdrew their applications throughout 2023, resulting in notable historical peaksAmong these, over 96% chose to withdraw voluntarily, amounting to 408 companies.

The relief brought by the withdrawal of more than 400 applications has alleviated the backlog of IPO candidates

Data from exchanges show that by December 6, 2024, there are currently 237 companies awaiting IPO approvalsThis includes 46 companies on the Shanghai main board, 23 on the STAR Market, 33 on the Shenzhen main board, and 55 on the ChiNext boardExcluding the Beijing Stock Exchange, which typically has a higher capital threshold and smaller funding amounts, the combined figure from the Shanghai and Shenzhen exchanges stands at 156, a stark reduction from previous backlogs exceeding 700.

Initiating from 2017, the IPO rhythm in the A-share market acceleratedAlthough it faced minor slowdowns due to the market turmoil in 2018, the introduction of the STAR Market in 2019 revived momentumFrom 2020 to 2022, the number of IPOs reached 436, 523, and 428 respectivelyDespite a decline in the latter part of 2023, the total number of IPOs still reached 313.

In stark contrast to the slowdown in IPOs, the pace of M&A has quickened

According to Choice data, 89 M&A cases involving equity-based acquisitions were initiated or completed at the start of 2024. Notably, from September 24 to December 6, 37 listed companies announced M&A or restructuring intentions, contributing to more than 40% of these activities within a short span of under three months.

The rapid growth of listed companies over several years has led to a significant increase in their numbersAs of May 19, 2023, the Shanghai and Shenzhen exchanges had a total of 5,351 listed companies, with 2,217 on the Shanghai Stock Exchange (including 1,691 on the main board and 526 on the STAR Market) and 2,783 on the Shenzhen Stock Exchange (including 1,522 on the main board and 1,261 on ChiNext).

However, the quality of these companies varies significantlyFor example, analysis of 2023 performance highlights that among the 5,351 companies disclosing annual reports, the total attributed net profits amounted to approximately 5.29 trillion yuan, showing a year-on-year decrease of 1.2%. Meanwhile, 2,731 companies saw profit growth, accounting for 51.04%, while 1,126 companies reported negative profits, representing 21.04%. Sector-wise, net profits consistently declined, with the STAR Market experiencing the steepest drop at -39.93%, followed by the Beijing stock market and ChiNext, which saw declines of -24.85% and -10.62% respectively.

Moreover, data from Choice indicate that in 2023, not only did over 1,000 listed companies experience profit declines, but more than 2,500 reported net profits of less than 100 million yuan.

CITIC Securities posits that M&A can augment profit channels and enhance profitability

In the short term, strategic mergers can lead to an immediate boost in corporate valuationsOver the long haul, asset injections can enhance intrinsic value.

Drawing on excess returns and core investment theses, it's worth noting that a surge in M&A activities traditionally ushers in attractive profit opportunitiesBetween 2013 and 2016, A-shares experienced a M&A-driven rallyFollowing a freeze on IPOs at the end of 2012, the Ministry of Industry and Information Technology in 2013 pushed for a restructuring of key traditional industries, subsequently leading exchanges to implement a categorized review system for M&A and restructuringThe favorable regulatory environment set the stage for a significant uptick in M&A activity, further augmented by supportive policies like the "National Nine Articles" that advocated market-based restructuring.

According to Guolian Securities, this wave of M&A generated impressive excess returns, with the Wind restructuring index registering an excess return rate of approximately 246% from 2013 to September 2016. Notably, trends in the stock market's rises and falls were often closely correlated with the volume of restructuring activities.

While each market wave may showcase unique logic, the current trajectory of IPOs and existing policies bears resemblance to the patterns observed in 2013 and 2014. This has prompted various investment firms to intensively explore M&A prospects since late September 2024.

Huachuang Securities explicitly asserts that several policy measures are reinvigorating the M&A/restructuring landscape, signaling that A-share mergers and acquisitions are entering an "active phase". As a result, M&A/restructuring activities among listed firms are expected to pace up significantly.

Potential beneficiaries are being examined through five main frameworks: asset injections, shell companies, industry chains, innovation-driven initiatives, and debt-restructuring of state-owned enterprises

Huachuang Securities identified these as the "Five Generals of M&A and Restructuring". Analysis from September 18 to October 31 revealed substantial gains among these categories, with shell resources up by 39%, innovation-based restructuring up 38%, asset injections at 37%, industry chain consolidation up 34%, and state-owned debt restructuring up 26%—all exceeding the Shanghai Composite Index's 21% rise in the same period.

Despite a preceding trend of speculating on shell companies within the A-share market, new regulations intend to diminish the value of such resourcesHowever, there are still opportunities for market players possessing valuable restructuring potentialHuachuang Securities notes that some quality assets could still leverage existing conditions to seek financing via backdoor listingsCompanies with smaller market caps, dispersed shareholdings, weaker profitability, and higher debt might increasingly face acquisition possibilities, particularly in the machinery, IT, chemical, and utilities sectors.

The term "innovation-driven restructuring" refers to restructurings initiated by companies listed on the ChiNext and STAR markets

Since the STAR Market's debut in 2019, the capital market's support for technology-based enterprises has intensifiedIn 2023, the dual-innovation sectors enjoyed substantial oversubscription in IPOs, marked by fundraising amounts reaching 240.9 billion yuan for the STAR market and 138.6 billion yuan for ChiNext, collectively accounting for 62% and 36% of overall oversubscription amounts across the entire A-share market.

With ample oversubscription funds at their disposal, firms in the dual-innovation segments that reported declining performance in 2023 are further incentivized to engage in M&A and restructuringDongwu Securities recognizes that there are ample investment opportunities from the perspective of acquirers, particularly among firms with strong surpluses of funds in the semiconductors and dual-innovation segments.

Companies advance mergers to capitalize on strategic incentives to consolidate supply chains and enhance core technological capabilities

Careful attention should be given to technology companies that have halted listings yet are pursuing avenues for capital infusions through restructuringThis creates favorable scenarios for M&A activities that can contribute to overall growth.

It is noteworthy that the trend of asset injections isn't limited to state-owned companies but is observable among private firms as wellRecent examples include the infusion of shipping assets into Songfa CoLtdby its major shareholder and the injection of ITO target materials into Guangzhi Technology by its controlling stakeholder.

Industry chain integration tends to be prevalent in mature sectorsOften, due to overcapacity or insufficient market influence, companies undergo mergers to bolster their market positioning and achieve economies of scale