Among the first "old eight stocks" in China's A-share small and medium-sized enterprises board, DAZ Laser has been a significant player in the market for almost two decadesEstablished in 2004, this company has gradually evolved into a major manufacturer of laser equipment and components, contributing to the booming Chinese laser industryWith the advent of the "A to A" spin-off regulations introduced by the capital market in 2019, DAZ Laser has accelerated the independent development of its subsidiaries, giving rise to a new wave of asset optimization and capital restructuringThis trend not only reflects the company's innovative approach but also its strategy to maximize shareholder value.

Just recently, DAZ Laser made headlines once again for completing another spin-off transaction, illustrating its active participation in reshaping its corporate identity.

On January 17, DAZ Laser announced the signing of an agreement to sell its controlling stake in a subsidiary, DAZ Siti, in a deal that attracted attention due to its impressive roster of acquirers

The acquisition consortium includes prominent players such as the three major telecommunications operators in China, alongside investment giants like Alibaba, IDG Capital, Shenwan Hongyuan Group, and several venture capital firms.

DAZ Siti is notably one of the very few companies in the country capable of independently manufacturing grating encoders and was the first in China to successfully develop digital drive boardsThis expertise positions DAZ Siti strongly in the competitive landscape of optical scanning galvanometers, making it a coveted asset in the eyes of investors.

The deal involves the transfer of 65.375% equity in DAZ Siti, and DAZ Laser anticipates generating approximately 900 million yuan from this transaction

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Interestingly, the financial health of DAZ Laser has not been particularly robust, as indicated by its reported net profit of just 633 million yuan in the first three quarters of the previous year, marking a stark 37.59% decline compared to the same period the year beforeFurthermore, the company faces imminent pressures from maturing convertible bonds, raising concerns about its financial strategy and future sustainability.

The recent trend of frequent spin-offs has raised questions about the investment value of DAZ Laser itselfMarket analysts and investors increasingly wonder if such a strategy will lead to hollowing out the parent company, jeopardizing long-term growth potential and shareholder welfare.

In a further stride toward streamlining operations, DAZ Laser has undertaken this notable transaction, confirming that it has officially signed a sale agreement regarding its controlling stake in DAZ Siti.

According to the company’s announcement made on January 17, the sale of DAZ Siti is valued at an astonishing 1.6 billion yuan.

In detail, DAZ Laser has reached agreements with 16 investment entities, including Shiruquan and Zhuhai Chengrong, to transfer 65.375% of equity in DAZ Siti for 1.046 billion yuan

Additionally, Zhuhai Chengrong and Hengqin Industrial Fund agreed to infuse capital of 50 million yuan, backing DAZ Siti's 100% equity valuation at 1.6 billion yuan.

Following the completion of this transaction, DAZ Laser’s shareholding in DAZ Siti will plummet from approximately 70.06383% to just 4.54676%, relinquishing its control over this vital subsidiary and removing it from the consolidated financial statements.

The list of investors involved in this purchase is nothing short of impressiveIDG Capital, for instance, emerged as the largest shareholder, investing 200 million yuan for a 12.5% stake in DAZ SitiOther notable contributions come from firms such as Qianhai Red Earth and several pension funds, highlighting the keen industry interest.

Companies such as China Unicom and China Telecom, among the major telecommunications operators, are also significant players in this deal, further validating the strategic importance of DAZ Siti within the market.

The role of these telecom giants raises questions about how this influences China's technology landscape, particularly as they collaborate closely with emerging tech industries

Additionally, investment participation from major players like Alibaba and new-energy vehicle manufacturer NIO cannot be overlooked as they enter the laser technology sector.

DAZ Siti, established in 2017, has established itself as a frontrunner in the production of optical scanning galvanometer motors and related control systemsThe fact that it has achieved a leading position with significant market share underscores the value of this transaction.

In the first three quarters of 2023, DAZ Siti generated revenue of 114 million yuan, showing a net profit of 2.39 million yuan and possessing total assets worth 223 million yuanThe transaction’s valuation suggests a PE ratio of approximately 42, which is notably lower than the average of comparable listed companies at 53.26 times, indicating a relatively attractive investment proposition.

DAZ Laser asserts that this valuation lies within a reasonable range, aimed at ensuring that the interests of shareholders, especially minority investors, remain safeguarded.

Yet, this strategic decision likely emerges from the current financial pressures faced by DAZ Laser.

The company's controlling shareholder DAZ Holdings, as well as the actual controller Gao Yunfeng, are confronting mounting pledge pressures

Recent disclosures show that as of January 5, a staggering 206 million shares of DAZ Laser have been pledged, which represents nearly 80% of their total holdings.

In addition, DAZ Laser’s previously issued convertible bonds, dubbed "DAZ Convertible Bonds", are due in FebruaryGiven that most of these bonds are unlikely to convert, DAZ Laser will require substantial funds, amounting to around 2.4 billion yuan, to redeem these bonds upon maturity.

At the same time, the company has been experiencing declines in performance due to weakened industry demand, which exacerbates the challenges it faces.

In the previous year, DAZ Laser reported revenue of 14.96 billion yuan, representing an 8.4% decline compared to the year prior, along with a net profit of 1.21 billion yuan, which marked a 39.35% drop

The situation deteriorated further in 2023, when revenues sank to 9.39 billion yuan, and net profits fell to 633 million yuan, indicating a downward trend that has raised alarms among investors.

In the secondary market, DAZ Laser’s performance reflects mounting market apprehensionOnce boasting a market capital exceeding 50 billion yuan and reaching an all-time high share price of 57.91 yuan, the current share price has plummeted about 60% since late 2021, hovering near its lowest levels since 2016. Presently priced at 18.43 yuan per share, its market cap rests at 19.39 billion yuan.

In response to the rapidly changing market dynamics, DAZ Laser stated that this transaction aims to optimize its industrial structure to effectively allocate resources, adapting to the changing macro-economic and industry landscapes.

The proceeds from this sale of DAZ Siti's controlling stake is expected to generate an investment return of about 900 million yuan, a significant boost beyond 50% of the company’s audited net profits in 2022. For the company, which struggles with declining operational performance, this measure is anticipated to help ease the pressure stemming from the impending redemption of the "DAZ Convertible Bonds".

In recent years, DAZ Laser has meticulously divested non-core subsidiaries while refining its resource allocation, with the goal of enhancing overall performance.

Starting from December 13, 2011, DAZ Laser began divesting various subsidiaries including Hainan Yihe, Fengsheng Dazhu, and others, amassing total assets worth approximately 964 million yuan

The goal was to streamline operations and offload non-mainstream business units, although the efficacy of these drastic actions has been met with mixed results.

Despite initial efforts to improve profitability through both divestment and reallocation, DAZ Laser's earnings continued to falter over timeConsequently, the company has sought new growth avenues through innovative capital market strategies.

Since the implementation of new spin-off listing regulations at the end of 2019, the company has rapidly commenced the spin-off processes for multiple subsidiaries.

On February 28, 2022, the spun-off subsidiary, DAZ CNC, successfully launched its IPO on the Growth Enterprise Market

Following this, another subsidiary, DAZ Testing, submitted its prospectus to the Shenzhen Stock Exchange and is currently in the process of responding to inquiries regarding its third round of auditsIn November, DAZ Laser disclosed plans to spin off Shanghai Fuchuang for a listing on the Growth Enterprise Market, although the IPO application materials have not yet been submitted.

If all the planned spin-offs proceed according to schedule, Gao Yunfeng, the actual controller of DAZ Laser, may soon oversee four listed companies under the "DAZ system".

Moreover, each spin-off generally creates significant opportunities for senior management to acquire equity stakes in the newly independent subsidiaries at markedly discounted prices, fueling market perceptions that these maneuvers serve as a vehicle for enriching the management team at the expense of broader investor interests.

For instance, prior to the spin-off announcement, the equity structure of Shanghai Fuchuang shifted to accommodate several executives who acquired stakes

Notably, original shareholders included DAZ Laser, Wen Jing, and Zeng Xiaokai, holding shares representing 70%, 26%, and 4% respectivelyThe management's strategic positioning prior to a public offering raises eyebrows and poses potential conflict of interests.

In September, DAZ Laser along with certain board members and key employees acquired 21.05% equity for 116 million yuan, at a time when Shanghai Fuchuang’s valuation stood at roughly 549 million yuanAfter the completion of this equity transfer in October, the number of shareholders in Shanghai Fuchuang rose to nine, with new stakeholders including DAZ Laser's vice chairman Zhang Jianqun and financial director Zhou Huiqiang.

Despite nominal premiums over prior valuations during stake transfers, the long-term prospects could yield even greater rewards for those involved in the deals.

The spin-off of DAZ CNC, during its pre-IPO phase, also executed an employee stock ownership plan, with an initial valuation pegged at 2.48 billion yuan

Even though the stock price faced setbacks post-IPO, its market cap has since surged by over six times compared to two years earlier.

Similarly, DAZ Testing exhibited accelerated shareholder entry pre-split, with strategic investment amounting to a total of 141 million yuanIn March, DAZ Laser's executives and core employees acquired 4.79% of the stock before the IPO, indicating a substantial total pre-valuation of 1 billion yuan, reflecting a more than sixfold premium from the net assets at the close of 2021.

It is essential to recognize the additional spin-off resources available under DAZ Laser, with at least five subsidiaries, including DAZ Siti being considered for future divestiture.

While DAZ Laser has successfully garnered substantial funding through the spin-offs, it now confronts the critical challenge of improving its operational efficacy and overall financial performance