A Comparative Study On The Motivation And Performance Of CRCC’s Domestic And Overseas Equity Carve-out

Equity carve-out,originated in the United States,is a common way of shrinking capital operation in western capital markets.It plays an active role in rationalizing the ownership of sectors,expanding financing channels,and obtaining valuation improvements.Since the 1990 s,the equity carve-out has been introduced into China,and has become well-known since Tongrentang successfully achieved the first case of equity carve-out in 2000.However,due to the immaturity of China’s capital market,the regulatory authorities have been cautious about further opening the scope of the equity carve-out for ages,so for a long time since 2000,A-share listed companies can only spin off their subsidiaries and list overseas.In December 2019,the CSRC issued the “Pilot Regulations On Listed Companies’ s Domestic Spin-off Listing Of Subsidiaries”,the route of domestic equity carve-out of A-share listed companies was officially opened.The company selected in this paper,China Railway Construction Corporation(i.e.CRCC),which split its subsidiaries,CRCC High-tech Equipment Corporation and CRCC Heavy Industry Corporation,to the Hong Kong Stock Exchange and the Science and Technology Innovation Board before and after the issuance of the new split policy,is the first A-share listed company to achieve the equity carve-out in overseas and domestic market,which is both representative and special.This paper makes a comparative study on the motivation,path and performance of CRCC’s two equity carve-out in order to provide reference value for regulatory authorities and listed companies with needs for equity carve-out.The research findings of this paper are mainly proposed in the following aspects.In terms of the reasons for the equity carve-out,CRCC’s two equity carve-out have the need to achieve strategic focus and improve the company’s valuation,but in terms of financing,the first equity carve-out shows a stronger financing demand than the second.As far as the path is concerned,CRCC chose the Hong Kong Stock Exchange as the destination for its first equity carve-out due to policy restrictions;In the second equity carve-out,considering the “dividend” of the new policy,the high valuation of the Science and Technology Innovation Board and the lower issuance costs of domestic listing,the Science and Technology Innovation Board was finally selected as the destination.In terms of the financial performance,after the first equity carve-out,in addition to the improvement of debt repayment ability,the profitability,operation and growth ability of CRCC High-tech Equipment have declined,which is caused by the slow progress of diversification,inefficient use of fund-raising,and insufficient investment in research and development.During the second carve-out,CRCC Heavy Industry made adjustments and improvements to these problems,and its financial performance was significantly improved compared with the previous one.In terms of the market performance,the first equity carve-out achieved a high excess return in the short term,but after the listing,the share price of CRCC High-tech Equipment fell by nearly 90% compared with the issue price,and the long-term performance was poor;Affected by the market performance of CRCC High-tech Equipment,the market is more cautious about the second equity carve-out than the first one in the short term;In terms of long-term performance,although the share price of CRCC Heavy Industry has declined to a certain extent since its listing,it still has an increase of more than30% compared with the issue price.Finally,based on the case study of the two equity carve-out,this paper puts forward the following suggestions: for CRCC,it can consider splitting other business modules for listing to make the company’s business context clearer;In the subsequent carve-out,CRCC should summarize the experience and lessons of the two cases,carefully evaluate the feasibility and necessity of the equity carve-out,and make adequate planning for the raised funds obtained from the listing,so as to better create value through the equity carve-out.For other listed companies with needs for equity carve-out,they can consider carve-out and list their subsidiaries on the Science and Technology Innovation Board or the Growth Enterprise Board with reference to the practices of CRCC when their subsidiaries grow to a certain scale and meet the listing conditions.For the regulatory authorities,they should pay attention to the problems that may infringe the interests of investors in the process of equity carve-out,prevent the policy arbitrage of some listed companies,and promote the healthy and orderly development of China’s capital market.