Linklogis Inc. — M&A Activity 2024

Dec 16, 2024

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

Linklogis Inc.

聯易融科技集團

(A company controlled through weighted voting rights and incorporated in the Cayman Islands with limited liability)

(Stock Code: 9959)

SUPPLEMENTAL ANNOUNCEMENT

DISCLOSABLE TRANSACTION IN RELATION TO THE ACQUISITION OF EQUITY INTEREST IN THE TARGET COMPANY

Reference is made to the announcement of the Company dated October 29, 2024 in respect of the acquisition of approximately $29.3763\%$ of the equity interest in the Target Company, Shenzhen Bytter Technology Co., Ltd, (the "Acquisition") at a consideration of RMB47,498,541 (the "Announcement"). Unless otherwise defined, the terms used in this announcement shall have the same meaning as those defined in the Announcement. The Company would like to provide further information to the Shareholders and potential investors of the Company in respect of the Acquisition.

The Valuation

Valuation Approach

There are three generally accepted approaches to value a company, namely the market approach, the asset approach and the income approach. The market approach was adopted by the Valuer for the following reasons:

(i) The income approach is a valuation method based on the future profitability of the Target Company. The income approach was considered unsuitable as income projection is primarily adopted to value a business with a stable profit record and low projection uncertainty. Given that there has been significant changes in the Target Company's profitability in recent years (namely, it recorded a net loss of RMB56.6 million, and net profits of RMB11.9 million and RMB2.9 million between 2021 to 2023), the Valuer considered it difficult to reasonably project the Target Company's profitability and quantify the risk of future profitability and accordingly determined that the income approach would not be suitable.

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(ii) The market approach is a valuation method based on comparing the assets subject to the Valuation to similar assets or transactions in the market. As the market approach is based on data directly obtained from the market and reflects the market participants' assessments of the Target Company without material management assumptions on projections, the Valuer considered the market approach to be one of the suitable valuation methods.

(iii) The asset approach is a valuation method based on the value of assets and liabilities of the Target Company. As the Valuer was able to obtain sufficient information to conduct a comprehensive inventory and valuation of the assets and liabilities of the Target Company, the asset approach was considered as one of the suitable valuation methods.

(iv) The appraised value of the Target Company as at December 31, 2023 under the market approach and the asset approach is RMB205.5 million and RMB90.4 million, respectively. The difference in valuation conclusions between the asset approach and the market approach is primarily due to the difference in focus of each valuation approach. The market approach considers a company's operating conditions and overall market performance. In particular, the guideline public companies method under the market approach analyzes and compares operating and financial data of comparable companies in the same or similar industry(ies), which form the calculation basis of the multiples and financial indicators used to calculate the value of a company. The market approach does not only reflect the market value of a company, but also the market performance and growth potential of a company. On the other hand, the value derived through the asset approach is based on the cost of reproducing or replacing the asset and does not take into consideration the future economic benefits and growth potential of the asset.

The Target Company is in the software and information technology service industry. Due to its industry characteristics, the value of companies in such industry is not only reflected in the existing physical assets and identifiable intangible assets on the valuation date (which is the focus of the asset approach), but also in the technical knowledge and experience, market position, customer resources, team advantages of the company. For the reasons set out above, the Valuer considered the market approach to be more suitable than the asset approach for the valuation of the Target Company.

The Valuer considered two comparison methods under the market approach: (i) the guideline public companies method, which compares financial and operating data of listed companies that are in the same or similar industry(ies) as the Target Company, and (ii) the comparable transaction method, which compares transactions of listed companies in the same or similar industry(ies) as the Target Company.

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The comparable transaction method requires analysis and comparison of acquisition transactions of listed companies in the same or similar industry(ies) as the Target Company. There is a limited number of merger and acquisition transactions conducted by listed companies in the PRC software and information technology service industry and details regarding such transactions, including the consideration and other non-market factors which may influence the transaction, cannot be accessed based on information available in the public domain.

By contrast, there are more listed companies in the same or similar industry(ies) as the Target Company. The guideline public companies method has better operability as the financial and operating data of such listed companies can be obtained through public sources and used to calculate the appropriate ratios for comparison. On basis of the above, the Valuer considered the guideline public companies method to be more appropriate.

Key Inputs

The key input and parameters adopted in the Valuation are as follows:

The Valuer selected the price-to-sales ratio (or P/S), price-to-earnings ratio (or P/E) and price-to-book ratio (or P/B) multiples as the quantitative reference for the Valuation to assess the correlation between the Target Company's equity value (price (P)) against its revenue (sales (S)), net profits (earnings (E)) and net assets (book value (B)), with adjustments made for the size and operation performance of the comparable companies, and the application of a lack of marketability discount.

The P/S ratio, P/E ratio and P/B ratio multiples are the three most commonly used benchmarks in valuing a company and reflect the value of a company's equity relative to the company's revenues, earnings and book value, which are therefore suitable for the purpose of the Valuation. Given that (i) the Target Company was profit making for the year ended December 31, 2023; (ii) the Target Company recorded relatively stable revenue for the years ended December 31, 2023 and 2022; and (iii) the Target Company was in a net asset position as at December 31, 2023, the Valuer considered the valuation methodologies using the P/S, P/E and P/B ratios to be more appropriate in valuing the Target Company than other multiples, such as the EV-to-EBITDA multiple which can be used when P/E is not applicable. In addition, the correlation analysis between the equity value of listed companies in the software development industry and the bases of the P/S ratio, P/E ratio and P/B ratio multiples, being operating income, net profit, and net assets, produced correlation coefficients of 0.9902, 0.8810 and 0.9371, respectively, which illustrate a strong correlation between the P/S ratio, P/E ratio and P/B ratio and the equity value of shareholders and the relevance of such ratio multiples for the purpose of the Valuation. As such, the Valuer considered the P/S ratio, P/E ratio and P/B ratio multiples to be appropriate for the Valuation, and was of the view that it was not necessary to consider other multiples.

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The Valuer applied a lack of marketability discount of 33.47% when arriving at the P/E, P/B and P/S ratios given the Target Company is only listed on the NEEQ (an over-the-counter exchange) as compared to other comparable companies which are listed on the Shenzhen/Shanghai/Beijing Stock Exchanges where the shares of such companies are more easily tradable and have higher liquidity. The lack of marketability discount of 33.47% was determined by referencing the difference between the average P/E ratios of listed and unlisted companies in the software and information technology sector (taking into account 77 unlisted companies with an average P/E ratio of 50.43 and 195 listed companies with an average P/E ratio of 75.8 in the software and information technology sector) gathered by the Valuer.

The valuation of the entire equity interest of the Target Company of RMB205.5 million was arrived by calculating the average value attributable to the shareholders of the parent company on an equally weighted basis (i.e. 1/3 each) for (i) the revenue of the Target Company multiplied by the P/S ratio of 2.66; (ii) the operating net profits of the Target Company multiplied by the P/E ratio of 30.87; and (iii) the operating net assets of the Target Company multiplied by the P/B ratio of 3.09, each of which was then adjusted by adding the surplus assets and non-operating net assets and liabilities (which are common adjustments made for valuation purposes) and deducting the minority shareholders interest to arrive at the relevant value attributable to the shareholders of the parent company.

The Valuer considered an equally weighted basis for (i) revenue, (ii) operating net profits and (iii) operating net assets of the Target Company to be appropriate as an equally weighted basis is a commonly used and accepted valuation basis in the market and removes the influence of the Valuer's subjective views which may put more or less weight on each of factors (i) to (iii) which can ensure an independent valuation.

The key valuation multiples (i.e. the P/S, P/E and P/B ratios) used for the valuation of the Target Company were then adopted with reference to those of four comparable companies.

The P/S, P/E and P/B ratios of the comparable companies were determined after applying the adjustment coefficients derived from the two adjustment factors, namely the operating condition adjustment factor and the company scale adjustment factor.

(i) Operating condition adjustment: The adjustment is calculated on the basis of certain financial indicators, such as business scale (total assets, net assets, revenue and net profit), profitability (return on net assets, operating profit margin and cost-profit ratio), asset quality (total asset turnover and current asset turnover), operating growth (revenue growth rate and operating profit growth rate), and debt risk (asset-liability ratio and quick ratio).

(ii) Company scale adjustment: The adjustment is calculated on the basis of business scale financial indicators, i.e. total assets, net assets, revenue and net profit.

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For both adjustment factors, a score is assigned to the comparable companies on each indicator after comparing the indicator with that of the Target Company and companies in the same industry and subsequently an overall score of each company is calculated based on the average of the score for each indicator. The adjustment coefficient is then calculated by dividing the Target Company's overall score by the comparable company's overall score. To illustrate the calculation, a breakdown of the P/S, P/E and P/B ratio calculations of the comparable companies is set out below.

P/S

Company Name	Original P/S	Operating condition adjustment coefficient	Company scale adjustment coefficient	Adjusted P/S
Company A	3.32	0.9664	0.9082	2.92
Company B	1.77	0.9832	0.9175	1.59
Company C	3.85	1.0269	0.9175	3.62
Company D	2.60	0.9806	0.9780	2.50

P/E

Company Name	Original P/E	Operating condition adjustment coefficient	Company scale adjustment coefficient	Adjusted P/E
Company A	23.48	0.9664	0.9082	20.61
Company B	51.86	0.9832	0.9175	46.78
Company C	-28.47	1.0269	0.9175	-26.82
Company D	26.29	0.9806	0.9780	25.21

P/B

Company Name	Original P/B	Operating condition adjustment coefficient	Company scale adjustment coefficient	Adjusted P/B
Company A	3.56	0.9664	0.9082	3.12
Company B	1.47	0.9832	0.9175	1.32
Company C	5.11	1.0269	0.9175	4.82
Company D	17.09	0.9806	0.9780	16.39

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For the valuation of the Target Company, the Valuer adopted the average value for the adjusted P/S, P/E and P/B ratios from the comparable companies after exclusion of (i) the adjusted P/E ratio of Company C which was negative; and (ii) the adjusted P/B ratio of Company D which was regarded as an outlier. Accordingly, the valuation multiples used for the Valuation were 2.66 for the P/S ratio, 30.87 for the P/E ratio, and 3.09 for the P/B ratio.

Assumptions

The assumptions adopted in the Valuation were as follows:

General assumptions:

(i) Transaction assumption: assumes that the assets subject to the Valuation are already in the process of being transacted and that the Valuer has conducted the Valuation by simulating the market based on the transaction conditions in relation to the assets;

(ii) Open market assumption: assumes that the purchaser and the vendor are of free will and equal footing; both parties have the opportunity and time to obtain sufficient market information; and the transaction is being conducted under voluntary, rational conditions, non-coercive or unrestricted circumstances;

(iii) Continuing use assumption: assumes that the assets subject to the Valuation are, and will continue to be, in use;

(iv) Going concern assumption: assumes that the Target Company will continue to operate in accordance with the law and its business scope and that its business is sufficiently profitable to maintain ongoing operation.

Market approach assumptions:

(i) There will be no major adverse changes in the macroeconomic environment and multilateral economic and trade relations;

(ii) There will be no major adverse changes in the socio-economic environment, industry regulatory environment, upstream and downstream market environment, industry competitiveness, and tax policies;

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(iii) There will be no major changes in the national interest rate and exchange rate policies;

(iv) The Target Company’s business operations are conducted in compliance with relevant local laws and regulations;

(v) The basic and financial information about the Target Company provided to the Valuer are true, accurate and complete;

(vi) The management team of the Target Company will remain diligent in carrying out their duties and the operation of the Target Company, maintain its core composition and business structure and plans for its continuing operation;

(vii) There will be no major adverse changes in the business relationships between the Target Company and its customers, and the Target Company’s business can be carried out in an orderly manner according to the business plan formulated by the management;

(viii) The production and operation sites of the Target Company will continue to operate in the same manner as its operations before the Valuation Date;

(ix) The information of the comparable companies is true, accurate and complete;

(x) There has been no major change in the market environment during the period between the Valuation base date and the announcement of financial information by the comparable companies and no major change in the value measurement standards of market participants;

(xi) The scope and standards for comparison were selected based only on publicly disclosed information of comparable companies;

(xii) The stock exchanges on which the comparable companies are listed are fair and effective markets; and

(xiii) The internal structure, performance, quality, properties, and functions of all physical assets are in normal conditions and the assets subject to the Valuation are kept in accordance with legal or professional standards.

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Selection of Comparable Companies

The Valuer selected four companies operating in the software and information technology industry (i) which have been listed in the PRC for no less than two years, (ii) engaged in a similar industry or business (based on the industry classification of the China Securities Regulatory Commission (the "CSRC")), and (iii) with similar business structures and operating models.

The Valuer initially identified 357 listed companies in the software development industry based on the CSRC classification. From these companies, the Valuer eliminated companies (i) which were identified as special treatment (ST) stocks (a stock marker attached by the CSRC to PRC listed companies with major issues, such as substandard financial data, for the purpose of alerting investors to the risks associated with investing such companies), and (ii) whose major business offerings or products did not include software development, software products, technical service funds, and financial technology, which resulted in 92 comparable companies remaining in the data set. From the 92 comparable companies, the Valuer further eliminated companies (i) which were listed for less than two years, and (ii) which did not fulfill the criteria as large-scale companies, i.e. total revenue reaching RMB100 million per year and number of employees reaching 300 (given the Target Company is in the large-scale company category with total revenue of approximately RMB114 million and 319 employees for 2023), and there were 65 comparable companies remaining in the data set. Thereafter, the Valuer selected companies which (i) have asset allocations comparable to that of the Target Company, (ii) are at similar growth stage as the Target Company (as indicated by similar fluctuations in the net profits attributable to the shareholders of the parent company after deducting the non-recurring items); and (iii) have similar industry and operating risk exposure (mainly attributable to the industry risk pertaining to the software development service market) as the Target Company.

(i) Comparable companies with similar asset allocations: The Valuer selected 46 comparable companies with fixed asset ratios that were between the fixed asset ratio of the Target Company of 0.79% and the upper quartile fixed asset ratio of 9.76%.

(ii) Comparable companies at a similar growth stage: The Valuer considered that companies at a similar growth stage have similar financial performances when faced with the same industry fluctuations. The Valuer compared (i) the growth rate of net profit attributable to the parent company's shareholders after deducting non-recurring items in 2023, and (ii) the compound growth rate of net profit attributable to the parent company's shareholders after deducting non-recurring items in 2023, of the Target Company (being -81.86% and 1.82%, respectively) and the comparable companies and selected 37 comparable companies with a negative growth rate for (i) and a positive compound growth rate for (ii).

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(iii) Comparable companies with similar operating and financial risk exposure: The primary operating risks of the Target Company are related to policies in the software development service industry and the primary financial risk is related to the asset liability ratio of the Target Company. Since the selected comparable companies are all in the software development service industry, they all face similar primary operating risks. In terms of financial risk, the Target Company's debt-to-asset ratio on the Valuation Date is 46.80%. The Valuer noted that as the Target Company is in software development service industry and is an asset light company, its asset liability ratio is higher than the lower quartile value in the industry and lower than the maximum value in the industry. Accordingly, the Valuer selected 31 comparable companies which have debt-to-asset ratios that are between the lower quartile value (being 15.67%) and the maximum value in the data set (being 101.99%).

Based on the selection criteria detailed above, the Valuer selected the final four comparable companies, which represents an exhaustive list, being companies whose software development business represents more than 70% of its business, have the same major product offering and provide services in the finance and banking areas, and have been listed on the Shenzhen Stock Exchange, the Shanghai Stock Exchange or the Beijing Stock Exchange.

Information about the Comparable Companies

Company A has been listed since 2016. Its principal business focuses on the development, sales and service of software products and its main products are software development and sales, technical services, and sales of hardware and consumables.

Company B has been listed since 2020. Its principal business focuses on the software development, professional testing and operation and maintenance services and its main products include technology development, technical services, consulting services and system integration business.

Company C has been listed since 2001. Its principal business focuses on the software and service business, enterprise Internet service, Internet financial service, etc and its main services are cloud service business, software business, and financial service business.

Company D has been listed since 2021. Its principal business focuses on the technical development and technical services of financial IT software products in the field of digitalization of financial institutions.

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In RMB (unless otherwise stated)	Target Company	Company A	Company B	Company C	Company D
Revenue	114,032,900	2,044,319,800	1,935,801,700	9,796,071,600	606,430,200
Net profits after tax	2,922,700	371,930,400	113,807,600	(933,238,700)	76,818,800
Total assets	149,885,000	4,295,413,300	4,037,096,700	25,521,040,800	928,321,500
Net assets	79,733,600	3,143,342,000	2,593,400,100	11,803,363,200	395,238,400
Annualized return on net assets (%)	3.83	13.95	4.79	(8.95)	18.92
Ratio of profits to cost and expense (%)	4.11	23.63	6.10	(8.30)	15.03
Operating profit to total revenue ratio (%)	3.97	19.41	5.84	(9.19)	13.33
Asset to liability ratio (%)	46.80	26.82	35.76	53.75	57.42
Quick ratio	1.14	3.39	5.43	1.08	0.83
Current asset turnover	1.02	0.82	0.66	0.77	0.94
Total asset turnover	0.81	0.54	0.54	0.40	0.74
Operating income year-on-year growth rate (%)	(10.00)	6.51	(2.01)	5.77	0.07
Operating profit year-on-year growth rate (%)	(65.20)	28.82	132.01	(458.39)	58.40

Director's Views

The Board considered the Valuation as appraised by the independent and qualified Valuer in the Valuation Report which forms the basis for the consideration for the Equity Transfer. After arm's length negotiations between the Vendor and the Purchaser, the parties were able to agree on a consideration which is lower than the Valuation as set out in the Valuation Report.

In addition, as set out in the section headed "Reasons for and Benefits of the Equity Transfer" of the Announcement, the Board is of the view that the Equity Transfer will facilitate the diversification and broadening of the Group's business portfolio by allowing the Group to tap into the treasury management market. By integrating technology strength and customer resources of the Group and the Target Company through close business cooperations, the Group would be able to better serve its anchor enterprise and financial institution customers, and provide customers with a full set of technology solutions, ranging from internal group treasury management system to supply chain finance system serving upstream and downstream enterprises in the industrial chain.

In view of the above, the Board considered the consideration of the Acquisition to be fair and reasonable and in the interests of the Company and the Shareholders.

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Performance Targets

As disclosed in the Announcement, the parties agree that if the Target Company meets certain operational performance targets (the “Performance Targets”) during the 182-day period from the date of the Equity Transfer Agreement, the Purchaser shall pay a bonus of RMB5 million (the “Bonus”) to the Vendor. The Performance Targets are met in the circumstances where the cash received by the Target Company (on a consolidated basis) from the sale of products and/or the provision of services during the aforementioned 182-day period is not less than RMB30 million. If the Performance Targets are met, the Purchaser shall pay the Bonus to the Vendor within 30 business days from the day on which the Purchaser and the Vendor confirm that the Performance Targets are met. If the Performance Targets are not met, the Company has no obligation to, and will not, pay the Bonus to the Vendor.

By Order of the Board
Linklogis Inc.
Song Qun
Chairman

Hong Kong, December 16, 2024

As at the date of this announcement, the Board of Directors of the Company comprises Mr. Song Qun as the Chairman and executive Director, Mr. Ji Kun and Ms. Chau Ka King as executive Directors, Mr. Lin Haifeng and Mr. Zhang Yuhan as non-executive Directors, and Mr. Gao Feng, Mr. Tan Huay Lim and Mr. Chen Wei as independent non-executive Directors.