At the end of September, with the market starting, many high-performing stocks emerged, with gains even up to tenfold.

Shanghai Electric Group's stock price fluctuations were not particularly obvious at the beginning, even during the past two to three years, it has been like boiling a frog in warm water, lacking catalyzing factors for an increase.

Starting on Monday the 21st, it embarked on a series of daily limit up trends, creating 11 limit up boards in 15 trading days, doubling its market cap unexpectedly!

Observing the stock price, compared to the high point in 2015, the company has only risen to half of that level.

The legend of Shanghai Electric Group, perhaps many people still have some impression of it.

01

The rumors hit the mark.

With such performance, in the current theme restructuring market, shanghai electric group may not be considered a superstar yet, but after doubling of its share price, shanghai electric group has a market cap close to 190 billion, and this company is also listed on the Hong Kong Stock Exchange, but the rise is not as strong as in the A-share market, and the premium is quite severe, with the A-share market cap nearly 3.3 times that of the Hong Kong stock market cap, indicating more attention from mainland funds to the company.

Behind this, playing a decisive role in the increase of the company's market cap, is the speculation expectation of the restructuring of domestic lithography giant - Shanghai Micro Electronics assets.

This company should not be unfamiliar to investors familiar with shanghai zhangjiang hi-tech park development. Shanghai Micro Electronics Equipment Co., Ltd. (SMEE) was established in 2002 and undertook a major national 863 scientific research project at the beginning of its establishment - the development of scanning projection lithography machine. After years of efforts, it made significant breakthroughs in core technology, with processes covering 90nm, 110nm, and 280nm. It has now successfully developed a 28nm immersion lithography machine, breaking the domestic gap in this field.

With the halo of being the leading domestic lithography machine, Shanghai Micro Electronics is expected to break through the advanced process of domestic chip production, getting closer to true independent controllable capabilities.

Lithography machines are the core process equipment for wafer manufacturing, and the R&D and manufacturing costs will continue to increase with the advancement of chip processes. In the over 20 billion USD global lithography machine market, foreign equipment manufacturers ASML, Canon, Nikon almost monopolize the entire market.

On the ultra-high-end EUV lithography machines used for advanced processes, ASML, which has a completely dominant position, has been prohibited by the United States from selling this equipment to China.

Therefore, the development of Shanghai Micro Electronics represents the progress of domestic advanced high-end manufacturing levels and needs to break through the technological blockade faced by high-end chips with the lithography business as the breakthrough.

If listed, the market cap ceiling must be greater than the valuation that can be matched with its own growth stage.

Externally, there are estimates of three trillion, five trillion, or even one trillion. Referring to the current valuation of semiconductor equipment,

Moreover, with Trump taking office, the trade and technology policies towards China are bound to become tougher, and the situation of domestic semiconductor substitution may once again recur.

Since 2017, the company has been planning to go public, but due to changes in the market environment and regulatory policies, it withdrew the counseling filing for the first IPO in October this year.

Coincidentally, with the new 'Nine National Policies,' the 'Eight Policies for the Star Market,' and the latest 'Six Merger Policies' issued, the number of cases where listed companies acquire and withdraw IPO companies has increased. Therefore, the outside world speculates that Shanghai Microelectronics may achieve listing through shell restructuring, with Shanghai Electric being one of the possible targets for injection.

02

Reorganization dilemma

However, at present there is no definite explanation about how Shanghai Microelectronics will be listed and who will achieve this.

However, uncertainty is exactly the reason why A-shares like to ferment topics. If choosing which company to inject is like shooting a target with 10 rings, then at least Shanghai Electric is not far from the bull's-eye.

From the perspective of equity structure, Shanghai Electric is a listed company of Shanghai Electric Group (47.77%), and Shanghai Electric Group is the largest shareholder of Shanghai Microelectronics, with a shareholding ratio of up to 30%.

But the approximate relationship is not only Shanghai Electric, Shanghai Electric Control also holds shares in Shanghai Highly (26%), as well as indirectly holds shares in Shanghai Mechanical & Electrical (48.02%) and Electrical Wind Power (61.40%) through Shanghai Electric.

These companies have successively hit the daily limit purely based on the expectation of asset injection, which can be completely regarded as asset injection concept stocks around Shanghai Microelectronics, but the emphasis on logic is still somewhat different.

Shanghai Electric is a listed platform for the group's power generation equipment and high-end manufacturing business. Not long ago, it acquired Ningsheng Industrial, whose core asset is Shanghai Fanuc Robotics. This was jointly established by one of the four major global industrial robot giants, Fanuc of Japan, and Shanghai Electric. In 2022, the revenue reached 7.6 billion, with a net income of 1.33 billion.

Shanghai Mechanical and Electrical's main business is elevator services, with Shanghai Mitsubishi Elevator contributing over 90% of its revenue. Through the acquisition of Shanghai Jiyu, it aims to expand its second curve in wind power and precision components for the auto industry.

These two companies have relatively good revenue scale and quality of free cash flow compared to the other companies. Therefore, if the group wants to absorb businesses like lithography machines that are currently in a loss-making state and may continue to require continuous financing in the coming years, the logic of utilizing the original subsidiary's main business to meet the research and production needs of the lithography machine business is also acceptable.

However, what is relatively difficult to be convincing is that before the push, the two companies had already started merger actions, with a clear strategic positioning within Shanghai Electric Group. For example, Shanghai Electric may possibly become a platform focusing on power generation equipment and robot manufacturing business in the future, while Shanghai Mechanical & Electrical is a platform for electric machines and mechanical manufacturing, and it is just a subsidiary.

It is difficult to say that lithography, this type of semiconductor equipment, can play a significant synergistic role in terms of business with the two companies. When it comes to synergy, Shanghai Highly may have a more feasible shell acquisition.

Shanghai Highly has a certain technological strength in the field of cooling technology and automotive thermal management systems, providing cooling systems for semiconductor lithography packaging systems, but the business scale is relatively small, accounting for less than 1% of annual revenue in the past three years. It is expected to upgrade from component supply to system-level supply in the future.

The other electrical wind power company is a relatively clean shell resource, with Shanghai Electric controlling 60% of the shares. The company's wind power business is relatively weak in competitiveness, suffering heavy losses in the past two years, and it is also listed on the STAR Market. The requirements for injecting assets may be more lenient. This not only ensures the maximization of the interests of the controlling shareholders but also meets the policy requirements to encourage companies to enter the STAR Market.

Apart from Shanghai Electric, whose market cap is approaching 190 billion, the market cap of other companies is not over 20 billion. From a speculative perspective, there is a lot of room for imagination. However, because the restructuring expectations are speculative and it is not certain to be any specific company, the anticipated market cap should not be compared individually with any of the companies.

The current focus is undoubtedly on Shanghai Microelectronics' backdoor listing, which will have a significant impact once it is finalized.

Currently, many mergers and acquisitions themes are on the decline. We have written multiple articles before analyzing that we are entering the second stage of mergers and acquisitions, after eliminating a large number of debunked companies, the market will focus on identifying high-quality merger cases.

At that time, the lithography concept cannot naturally accommodate so many stock market concepts. With more and more stocks hitting the limit-up price, the logic doesn't even need to be falsified, and the differences will become larger. Still, as the saying goes, believe, believe sooner.

03

Is history repeating itself?

Recent continuous surges have made this state-owned enterprise listing platform with a market capitalization of hundreds of billions familiar. Little did people know that during the merger bull market of 2014-2015, this stock was also a big winner.

From September 2014 to May of the following year, the market value of shanghai electric group surged a total of 4.8 times, which was even more exaggerated than today.

As a global leader in advanced thermal management, nuclear power equipment manufacturer, shanghai electric group implemented a shareholding reform in 2004, and successively listed on both the Hong Kong and A-share markets in 2005 and 2008. In 2014, the stock price increase was stimulated by many catalysts.

First, in September 2014, the restart of nuclear power, the National Development and Reform Commission issued the "Notice on Accelerating the Major Projects Construction of Clean Energy", proposing to launch a batch of coastal nuclear power projects, reopening the market space for core equipment, which is a direct bullish for the company.

Another main theme is the unfolding of a new round of state-owned enterprise reform.

In July 2014, the State Council announced six central enterprises as "four reform pilots", accelerating the reform of state-owned enterprises in the real estate sector through mixed ownership reform. The Shanghai state-owned enterprise reform plan proposed to promote the listing of enterprises, improve operational and management quality, establish a state-owned assets flow platform, and optimize the layout and structure of state-owned assets.

As a well-established local state-owned enterprise's sole proprietorship under Shanghai Electric Group, the listed platform has business involvement in key utility sectors, attracting very high attention in this aspect.

Furthermore, there is also mergers and acquisitions. In order to actively expand globally and consolidate the core technological advantage in nuclear power equipment, in December 2014, the company invested 0.4 billion yuan to acquire 40% of the equity of Ansaldo Energia S.p.A., one of the world's top five heavy-duty gas turbine suppliers based in Italy.

At that time, Shanghai Electric aimed to become China's "Siemens". The company's leaders at the time hoped to concentrate superior resources on the company through various means such as absorption mergers, and asset restructuring.

Therefore, from December to January the following year, the company's stock price quickly surged by 76%.

Although at that time, announcements of shareholding reductions by controlling shareholders had been made, Shanghai Electric was heavily influenced by the triple themes of nuclear power, state-owned enterprise reform, and equipment going global. The bearish factors were easily selectively overlooked. It wasn't until it doubled again in April and May that, with the market sentiment peaking, the company's stock price suffered a heavy setback.

Afterwards, it took nearly ten years to digest the valuation.

Looking back at the performance of Shanghai Electric Group, due to the general long confirmation cycle of power generation equipment, the company's inventory and accounts receivable ratio are relatively high, and the proportion of sales, management, and R&D expenses is difficult to decrease in the long term, lacking obvious economies of scale. Therefore, the company's profit level is not outstanding, and the price-to-earnings ratio indicator has long been distorted.

But the company's popularity has always been high, with a market cap of 190 billion and a high turnover ratio of 12%, it can make a comeback in the A-share market. This sky-high fortune has once again been grasped by Shanghai Electric Group.