On December 9, Huizhi Technology (603160), a Chinese semiconductor company, will resume trading following the disclosure of a significant restructuring planAccording to the company's announcement, Huizhi plans to acquire 100% of the shares of Yunyinggu Technology Co., Ltd(hereafter referred to as "Yunyinggu") through a combination of issuing new shares and paying cashFurthermore, Huizhi intends to raise matching funds by issuing shares to no more than 35 specific investors.

Yunyinggu, a firm specializing in OLED display driver chips (DDICs), is primarily engaged in research and development (R&D), design, and sales in the field of display technologyHowever, as of the signing of the agreement, the audit and valuation of the target assets had not been completed, meaning the final transaction price remains undetermined.

Interestingly, the shareholder list of Yunyinggu includes some high-profile investors, such as Xiaomi’s Hubei Changjiang Industrial Fund Partnership (Limited Partnership) and Huawei's Shenzhen Hubble Technology Investment Partnership (Limited Partnership). Yunyinggu has attracted attention due to its "unicorn" status and its illustrious investors, leading to considerable market expectations regarding the potential synergies from the merger of the two companies

Despite this, the company's financial performance in recent years has been less than stellarYunyinggu has suffered consecutive net losses, with revenues for 2022, 2023, and the first three quarters of 2024 (unaudited) standing at approximately RMB 552 million, RMB 721 million, and RMB 704 million, respectivelyIn contrast, its net profit attributable to shareholders has been -RMB 101 million, -RMB 258 million, and -RMB 162 million in those same periods.

In light of these losses, Huizhi has stated that the semiconductor design industry—Yunyinggu’s core area of operation—requires substantial early-stage R&D investmentsYunyinggu reportedly invests over RMB 100 million annually in R&D, and Huizhi believes that once the company’s research results start to be scaled commercially, its revenue will grow significantly, leading to an eventual turnaround in profitability.

Besides R&D investment, Huizhi also noted that Yunyinggu has implemented employee stock incentive plans to attract and retain key personnel

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This strategy has resulted in significant share-based payment expenses, estimated in the tens of millions annuallyFurthermore, compared to its competitors, Yunyinggu is still in the early stages of revenue growth, and its product manufacturing costs remain relatively high.

Huizhi remains optimistic about the future, predicting that as Yunyinggu’s revenue scales up, its share-based payment expenses will decrease, thereby improving profitabilityAdditionally, with the shared customer resources and optimized procurement costs within the supply chain, both sales revenue and gross profit margins are expected to rise, leading to significant improvements in the company's financial performance.

However, it’s essential to zoom out and examine Huizhi Technology’s own performance over the yearsHuizhi went public in 2016, and for the first six years following its listing, the company consistently reported net profits exceeding RMB 700 million annually

At that time, it seemed like a rising star in the tech world, navigating the challenges of the market with vigor and achieving substantial gainsBut the tide has turnedIn 2022, Huizhi’s net profit fell to -RMB 748 million, a sharp contrast to the growth trajectory of its earlier yearsThis was followed by a modest recovery in 2023 and the first three quarters of 2024, where the company reported net profits of RMB 165 million and RMB 448 million, respectivelyWhile the company’s performance in 2023 and 2024 shows signs of recovery, it’s clear that 2022 was a difficult year, marking a significant setback for HuizhiIt was as if the company had encountered a storm at sea, with its “sails” damaged, forcing it to adjust its course.

This situation illustrates the volatility of the tech sector and the challenges faced by companies, particularly in the highly competitive semiconductor industry

According to Zhang Xuefeng, a financial commentator, acquisitions of loss-making companies are not uncommon in the capital market, especially when firms are pursuing strategic transformation, resource integration, or business expansionHowever, the acquisition of a company like Yunyinggu, which has posted losses for several years, carries significant uncertaintyIf Yunyinggu fails to turn a profit in the future, it could drag down Huizhi’s overall performance, especially if the expected synergies don’t materialize.

Nevertheless, there is potential upside to such acquisitionsHuizhi may hope to enter new industries or niche markets through the acquisition, aiming for a strategic shiftFor instance, Yunyinggu may possess cutting-edge technology, significant market potential, or unique resources that could become valuable in the future, despite its current lossesThe presence of prominent investors in Yunyinggu also adds another layer of appeal, potentially enhancing Huizhi’s image in the capital markets and providing a valuation premium to its stock.

This case highlights a broader trend in the technology sector, where acquisitions are increasingly seen as a means of transformation and growth

Companies often bet on the future potential of an acquisition, even if the target company is currently underperformingThis is especially true in the fast-paced world of high-tech industries, where the right technology or market position can rapidly shift a company’s fortunes.

Huizhi’s journey exemplifies both the opportunities and risks inherent in the semiconductor and tech industriesDespite facing setbacks, Huizhi’s recovery in recent years shows that companies can navigate difficult times and emerge strongerAs it prepares to acquire Yunyinggu, Huizhi is placing a bet on the future, hoping that the synergies between the two companies will help both navigate the choppy waters of the market and chart a course toward sustained growth. 

For investors and analysts, the key question will be whether Yunyinggu can indeed turn the corner and become a profitable venture in the coming years