Side | Songbai Strategic Investment in Aierchuang: Not all investors are called strategic investors

As a strategic investment that has attracted industry attention

Let's talk about this today:

Things other than investment valuation

On the evening of May 25, Guoci Materials (300285) issued the "Announcement on the Introduction of Strategic Investors and Signing of Relevant Agreements by Wholly-Owned Subsidiary of Shandong Guoci Functional Materials Co., Ltd." (hereinafter referred to as the "Announcement"), announcing that its wholly-owned subsidiary, Shenzhen Aierchuang Technology Co., Ltd. (hereinafter referred to as "Aierchuang"), has introduced strategic investors: Hillhouse Capital and Songbai Investment.

The announcement stated:

"Guocera Materials plans to transfer 8.89% of the equity of Shenzhen Aierchuang Technology to investors for a total consideration of RMB 200 million; at the same time, investors will arrange to provide Guoci Materials with a special development loan of RMB 500 million, and investors will obtain options to invest in Shenzhen Aierchuang Technology with a maximum of RMB 500 million. This loan will be specifically used for the business development of Shenzhen Aierchuang Technology and its subsidiaries, branches or any entities directly or indirectly controlled by it, and other subordinate institutions."

Image source: Compiled from publicly available information.

Founded in 2003, Aierchuang participated as a drafting unit in the national standard "Dentistry-Ceramic Materials" (GB 30367-2013) ten years later (2013). That same year, it prepared to enter the digital dentistry market, subsequently embarking on a new path from materials to cloud platforms. In 2018, it was acquired and became a wholly-owned subsidiary of Sinocera Materials, thus integrating into a larger ecosystem.

In 2020, Aierchuang exceeded its performance commitments, showing great potential to become the champion in the domestic market, and even became a topic of conversation in the industry. From "domestic product substitution" to "domestic product iteration", Aierchuang is like the neighbor's child, step by step climbing to a brand new podium.

Image source: Compiled from publicly available information.

The reason this strategic investment news is so eye-catching is not only because Aierchuang has won another "new award" and received congratulations from its peers, but also because of the support of two award presenters - Hillhouse Capital and Songbai Investment.

Hillhouse Capital: A subsidiary of Hillhouse Capital, an investment company focused on long-term structural value investing. Founded in 2005 by Zhang Lei, Hillhouse Capital has always positioned itself as a long-term investor with an independent investment perspective. It has invested in a large number of domestic and international companies in sectors such as consumer and retail, technological innovation, life sciences and healthcare, fintech, enterprise services, and advanced manufacturing, including Baidu, Tencent, JD.com, Aier Eye Hospital, BeiGene, WuXi AppTec, Gan & Lee Pharmaceuticals, Amcare Women's & Children's Hospital, and Huimei Medical.

Songbai Investment, established in March 2015, is an industry investor and builder focused on the global dental field. Through a comprehensive layout across the upstream, midstream, and downstream sectors including academic education, orthodontics, implantology, imaging, digital equipment, restorative materials, software, distribution services, medical services, and health consumer products, it is gradually realizing its vision of a dental industry group. As of October this year, Songbai has successively established partnerships with nearly 40 leading dental brands in China, including Angelalign, Carestream Dental, Huizhou Dental Hospital, Henglun Dental, Songbai Dental, Xinhuaguang Dental, Purgo, and Neoss. Furthermore, leveraging the network resources of its industry group, it has expanded internationally, collaborating with leading global brands such as the German BEGO implant system and the Korean Medit intraoral scanner.

Amidst the overwhelming flood of information, most people are more likely to focus on the capital on the table and the amount; but as a high-profile strategic investment, today we'll discuss things beyond the investment valuation.

Let's first clarify two concepts: strategic investment and financial investment.

The term "strategic investor" sounds more prestigious, especially in the business market where "strategy" is frequently discussed. This title seems more appealing. However, not all investors can be called "strategic investors."

Therefore, two sayings circulate in the investment and financing circle:

When entrepreneurs talk to financial investors, they say, "It doesn't matter whose money we get."

When entrepreneurs face strategic investors: "Whose money we take is very important."

Compared to financial investments that place more emphasis on calculating return on investment (IRR), a well-suited strategic investment typically requires, on the one hand, that the investee has the potential for long-term growth; and on the other hand, it also demands that the investor possess a long-term mindset and sustained patience.

Of course, the above judgment is still based on a two-way assessment by both the investor and the investee. Let's quantify it further—in fact, the new rules issued by the China Securities Regulatory Commission on February 14 last year, "Implementation Rules for Non-Public Issuance of Shares by Listed Companies," put forward three conditions for "strategic investors" of listed companies:

Possessing strategic resources (leading international and domestic technology resources, markets, brands, channels, etc.) and willing to transfer them to the listed company;

Willing to hold a significant number of shares for the long term;

They should actively participate in corporate governance and enhance the company's intrinsic value.

"Strategic investors refer to investors who possess significant strategic resources in the same or related industries, seek long-term common strategic interests with listed companies through coordination and complementarity, are willing to hold a large proportion of the listed company's shares for a long period, are willing and able to earnestly fulfill their corresponding responsibilities, appoint directors to participate in corporate governance, improve the listed company's governance level, help the listed company significantly improve its quality and intrinsic value, have a good credit record, and have not been subject to administrative penalties by the China Securities Regulatory Commission or criminal liability in the past three years."

—Detailed Rules for the Implementation of Non-Public Issuance of Shares by Listed Companies

Therefore, becoming a "strategic investor" of a listed company is not something that can be achieved simply by "claiming" it; it requires strict verification by the China Securities Regulatory Commission (CSRC).

In other words, among the strategic investments received by Aierchuang in this round, the "strategic resources" of the two strategic investors also need to be considered: especially Songbai Investment, an investment group in the oral health industry. Its holding company, AngelAge, according to the Hong Kong Stock Exchange, passed its listing hearing 10 days ago and is about to go public. With a star company's IPO imminent, and Songbai Investment participating in the strategic investment of Guoci Aierchuang, can it replicate its experience and create another champion in the industry?

It is understood that after this transaction, strategic investors such as Songbai Investment will provide long-term support in enhancing Aierchuang's product innovation and channel professionalism, and accelerating its globalization development.

Therefore, upon closer analysis of the resources that Songbai presented in the "Announcement," it becomes clear that they are indeed "quite valuable":

1 | Enhance product innovation capabilities

Leveraging Songbai Investment's network of collaborations with dental institutions both domestically and internationally, we will help Aierchuang arrange clinical research collaborations in the field of new materials with renowned overseas universities or clinical institutions.

Introduce collaboration opportunities to Aierchuang in dental fields such as skin whitening, intraoral scanning, imaging, orthodontics, materials, or software, thereby assisting Aierchuang in expanding its product portfolio and creating synergies;

2 | Enhance channel professionalism

Leveraging Songbai Investment's resources in the global dental industry, we introduced Aierchuang to international dental technician executives and clinical sales channel executives, assisting Aierchuang in strengthening its brand position and expanding its domestic and international dental technician and clinical sales channels;

Leveraging the dental service institutions under Songbai Investment, Aierchuang will be provided with opportunities to conduct large-scale training and product promotion collaborations.

Deepen the multi-dimensional cooperation between Aierchuang and Songbai Investment Holdings in hospitals, channel resources, and dental equipment, instruments, and consumables companies.

3 | Expanding Global Development

Recommend top international talent to Aierchuang as partners or consultants, and assist it in attracting global talent and expanding into international markets;

Introduce Aierchuang to investment opportunities in the overseas dental consumables sector and provide full guidance during Aierchuang's international mergers and acquisitions projects.

It's clear that, similar to its previous investments, Songbai Investment's value in this round of strategic investment stems from its increasingly abundant strategic resources and industrial synergy network. This wealth of resources has shaped Songbai Investment's unique approach to industrial development and its experience. This is perhaps also a key factor in Songbai Investment's ability to attract top project talent in recent years.

Therefore, it is probably difficult for anyone to discuss the landscape of China's oral health industry without mentioning Songbai Investment today.

Image source: Songbai Investment official website

• Postscript -

In fact, the topic of investing has always been related to imagination. However, in a strategic investment, many people tend to focus only on the investment amount and the company valuation.

If we ignore the underlying logic and systems when it comes to numbers and calculations, an industry news item will pass by quickly after the blessings, congratulations, and admiration, and we will miss out on a lot of industry and our own imagination.

Today we're taking a different approach to this strategic investment, based on a recent internal sharing session:

Use a historical perspective to ask why, and a future-oriented perspective to seek how.

May we all maintain our horizontal and vertical imagination.

Author: YOYO

Planning: TING | Editing: Ayao

Legal Counsel: Ouyang | Proofreader: CC

Producer: YUE