In recent months, a notable trend has emerged in the A-share market where several listed companies are initiating capital increases and share expansions in their subsidiaries to attract more fundingAccording to incomplete statistics compiled by Securities Times reporters, over ten listed companies have announced plans related to their subsidiaries’ capital increases since November aloneThis phenomenon is primarily observed in various industries including electrical equipment, pharmaceuticals, and basic chemicals.

What stands out in these announcements is the prominence of strategic investors, many of whom belong to state-owned enterprisesIndustry experts interviewed by Securities Times suggest that this wave of seeking strategic investors is significantly influenced by restrictive policies surrounding initial public offerings (IPOs). Given the increased difficulty in spinning off subsidiaries for independent listings, many companies are opting to increase capital to bolster their financial positions and operational scalability.

A typical example of this trend can be seen with Tianma Technology, which recently disclosed plans for its subsidiary, Guangdong Fuma Feed Co., Ltd., to enhance its capital by approx

200 million yuan with the introduction of the Agricultural Supply-Side Structural Reform Fund as a new shareholderThis strategic move, wherein 175 million yuan will be added to Fuma’s registered capital, reflects the integral role of state-backed funds in stabilizing and advancing core business operations.

In total, over 50 listed corporations have issued similar announcements this year regarding capital increases in their subsidiaries, which include wholly-owned and controlling entitiesDuring the reported month of November, companies such as LeKai Film, Wenzhou Hongfeng, and Joyoung have joined the list of firms seeking external strategic partnership through capital expansion.

Particularly noteworthy is China Software’s plan via its subsidiary Qilin Software to raise up to an astounding 3 billion yuanIn this instance, China Software is set to contribute up to 2 billion yuan, while qualified external investors will be able to invest a maximum of 1 billion yuan

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This capital increase initiative is indicative of the market's growing interest in companies that demonstrate substantial growth potential.

When it comes to the application of the raised funds, many announcements indicate that the proceeds will primarily be used for enhancing operational liquidity, reducing debt-to-asset ratios, and supporting daily business activitiesThis influx of funds is expected to promote growth and augment technological integration within these subsidiaries.

The recurring trend of subsidiaries attracting strategic investors certainly correlates with the tightening IPO policies in placeAccording to Chen Shi, a fund manager at Mingze Investment, swift financing and the advancement of business operations in subsidiary companies are driving forces behind capital expansionGiven the increased resistance against spinning off distinct subsidiaries for independent listings, securing funding through capital boosts has become a pragmatic solution.

Moreover, the data reflects that many of the strategic investors entering these subsidiaries are state-owned investment institutions

For instance, on December 6, Lude Environment announced that its wholly-owned subsidiary would welcome Hubei Agricultural Development Feed Coas a strategic shareholderThis aligns with a broader pattern of local state-owned entities increasingly participating in these capital expansions.

On October 22, Zhejiang Data Culture also noted its plan to involve strategic investment from the Zhejiang Provincial Industrial Fund in its wholly-owned subsidiary, which will result in the fund acquiring a 20% equity stake post-capital increaseIt is essential to highlight that while several involved strategic investors are local state-owned entities, others outside of the region, such as those from Chengdu, Shandong, Hefei, and Shenzhen, are also engaging in this wave of capital infusion.

Furthermore, significant contributions have come from entities like the China National Building Material (Anhui) New Material Industry Investment Fund

The diversification in geographical representation of these state-backed investors reveals an intent to leverage local characteristics while maintaining broader operational capabilities.

Most of these state-backed investors are gravitating towards hard-tech enterprises' new businesses or core operationsAn investment analyst at a regional brokerage in South China shared insights on this trend, indicating that such enterprises align well with national strategic interests, making them attractive to state investorsAdditionally, since many of these subsidiaries inherently possess conditions suitable for public listing, the current tightening of IPO requirements only elevates the prospects of these investments.

Additionally, investment in subsidiaries is often perceived as less risky compared to placing capital in startups, primarily due to the established nature of these businesses and the potential for higher valuation levels

The presence of an intricate exit strategy coupled with diverse revenue channels generally offers more balanced risk and reward profiles.

Historically, the expectation for spin-off listings has led to a rush of capital towards these subsidiariesA prime example includes BYD Semiconductor, which enlisted over 30 strategic investors before its IPO aspirations were curtailed, prompting a withdrawal of its IPO application, leaving many investors unable to realize returns on their investments.

Given the current ambiguity surrounding spin-off policies, external investors, especially those from state-owned entities, must conduct thorough assessments before investing in subsidiariesChen Shi emphasized the necessity of reviewing multiple factors including regulatory policies, compliance, market changes, and the intrinsic risks associated with company operations and exit mechanisms.

Moreover, in the context of China’s recent bull market, the rising stock prices and market values of listed companies could potentially inflate subsidiary asset valuations, thus altering the bargaining power for investment institutions