Analysis of Strategic Impact of Huali Shares' Termination of Zhongke Huilian Acquisition and Adjustment to External Expansion

Huali Shares (603038.SH) signed an intentional agreement with shareholders of Beijing Zhongke Huilian Technology Co., Ltd. on October 30, 2025, intending to acquire 51% of its shares via cash [1]. However, after two months of due diligence and negotiations, since the parties failed to reach consensus on core terms, Zhongke Huilian’s shareholders sent a termination letter, and the company announced the termination of this acquisition on December 29 [1].

According to the announcement, this termination is a result of consensus among all parties, with no breach of contract or disputes, and no significant adverse impact on the company’s production operations and financial status [1]. Today’s stock price rose by 4.87%, closing at 16.59 yuan, and the market responded positively to this news [0].

Huali Shares has successfully transformed from a traditional

to a , forming a four-business-segment layout [3]:

• Home Building Materials Business
  : Operating revenue of 861 million yuan (accounting for 81.7% of main business), gross profit margin of 23.57%
  • Decorative Edge Strips: 534 million yuan, gross profit margin of 25.47%
  • Decorative Panels: 310 million yuan, gross profit margin of 18.74%

• Smart Water Business
  : Operating revenue of 160 million yuan (accounting for 15.2% of main business), gross profit margin of 41.27%
  • Water Treatment Equipment: 127 million yuan, gross profit margin of 37.08%
  • Software Development and Sales: 30 million yuan, gross profit margin of 60.14%

• Membrane Filtration Material Business
  : Newly integrated high-tech segment

• Industrial Digitalization Business
  : Smart city construction and enterprise digital transformation solutions

Huali Shares successfully completed two important acquisitions in 2024, demonstrating prudent and effective M&A capabilities [3]:

1. Guangdong Huali Digital Technology (70% Equity)
   : Transaction amount of 12.81 million yuan
   • Positioning: Industrial digitalization business platform
   • Business: Independent R&D of Panshi series systems and smart water management integrated cloud platform

2. Shangyuan Intelligence (51% Equity)
   : Transaction amount of 357.9078 million yuan
   • Positioning: Smart water and membrane filtration material fields
   • Performance: Became a new profit growth engine for the company

These two acquisitions helped the company achieve the strategic transformation from “traditional manufacturing to intelligent manufacturing, from single product to comprehensive solution” [3].

1. Business Synergy Evaluation
   : Zhongke Huilian focuses on artificial intelligence interaction, natural language processing (NLP), intelligent customer service, intelligent government affairs, etc. [2], which has certain synergy with Huali Shares’ existing smart water and industrial digitalization businesses, but is not a core complementary business.

2. Strategic Priority Adjustment
   : The company’s current strategic focus is to consolidate the 2024 M&A achievements, especially:
   • Promote the performance realization of Shangyuan Intelligence and Huali Digital Technology
   • Integrate the entire smart water industry chain
   • Deepen the layout of industrial digitalization business

3. Resource Optimization
   : After avoiding large-scale cash acquisition, the company can allocate more resources to:
   • Technology R&D and market expansion of existing businesses
   • Business integration of acquired subsidiaries
   • Capacity upgrading of main businesses

• Current market capitalization: 4.46 billion USD
• Healthy cash flow: Free cash flow reaches 217 million yuan [0]
• Financial risk rating: Low risk [0]
• Asset-liability ratio remains at a reasonable level

1. Goodwill impairment risk
   : Large-scale M&A often forms high goodwill; if the target company’s performance is lower than expected, it will face goodwill impairment risk
2. Integration risk
   : Cross-industry AI enterprise integration is difficult, with challenges in cultural integration, technology integration, personnel management, etc.
3. Capital pressure
   : As a new third board listed enterprise, Zhongke Huilian’s expected transaction price is not low, which may cause pressure on cash flow

Today’s stock price

, with trading volume reaching 1.563 billion shares, far higher than the average trading volume of 1.097 billion shares [0], indicating that the market holds a positive attitude towards the termination of the acquisition. Possible reasons include:

1. Preference for rational M&A
   : The market recognizes the company’s prudent M&A strategy and avoids blind expansion
2. Recognition of focusing on main business
   : Investors are more optimistic about the company’s strategy of deeply cultivating existing business segments
3. Risk avoidance
   : Avoid uncertainties brought by cross-border acquisition of AI enterprises

Based on the insights from this termination, Huali Shares’ future external expansion is expected to show the following characteristics:

• Priority acquisition direction
  : Focus on targets highly synergistic with existing business segments
  • Smart water industry chain extension (water treatment equipment, intelligent sensors, membrane technology)
  • Decorative composite material technology upgrading (new materials, new processes)
  • Industrial digitalization vertical applications (industrial internet, intelligent manufacturing)

• Learn from the experience of failing to reach consensus on core terms this time; in the future, it may be more flexible and practical in valuation methods, payment methods, performance commitments, etc.
• Avoid goodwill impairment risk caused by high-premium acquisition

• Refer to historical successful cases (Huali Digital Technology, Shangyuan Intelligence), may prefer small and medium-sized targets with lower integration difficulty
• Achieve business synergy through multiple small-scale M&As instead of a single large-scale M&A

1. Smart water field
   :
   • Water quality monitoring sensor enterprises
   • Intelligent water meters, intelligent valves and other hardware manufacturers
   • Water affairs information software companies

2. Decorative composite material field
   :
   • New environmental protection material R&D enterprises
   • Smart home integration solution providers
   • Customized home brands or channel providers

3. Membrane filtration material field
   :
   • Membrane material technology R&D enterprises
   • Special membrane application solution companies

1. AI+Manufacturing
   : Industrial AI visual inspection, intelligent scheduling optimization
2. Digital Twin
   : Smart water digital twin platform
3. Internet of Things
   : Intelligent transformation of home building materials

• Pure AI algorithm companies (like Zhongke Huilian in this termination)
• Popular concept enterprises with poor synergy with existing businesses

The company may pay more attention to the

in the future:

1. Endogenous growth focus
   :
   • Consolidate the market position of decorative edge strips and panels, increase market share
   • Promote the project implementation of smart water business nationwide
   • Increase R&D investment to enhance the technical barrier of membrane filtration materials
   • Optimize the functions of Hongwan Home Furnishing Industrial Internet Platform

2. External expansion positioning
   :
   • Supplement core technical capabilities
   • Quickly enter segmented markets
   • Acquire high-quality customer resources
   • Improve industrial chain layout

1. Strategic execution risk
   : Whether it can effectively integrate the acquired Shangyuan Intelligence and Huali Digital Technology to achieve performance commitments

2. Market competition risk
   : Intensified competition in the home building materials industry, increased competitors in the smart water field

3. Financial risk
   : If large-scale M&A continues, it may increase financial leverage

4. Technology iteration risk
   : New technologies such as AI and IoT develop rapidly, requiring continuous maintenance of technical leadership

• Successful strategic transformation of the company, clear layout of four business segments
• Outstanding performance in 2024, with revenue increasing by 33% year-on-year and net profit increasing by 24.24% [3]
• Sound financial status, low financial risk
• This termination reflects the company’s prudent M&A strategy

• 2025 performance integration of acquired companies
• Handheld orders and project progress of smart water business
• Selection and integration effect of new M&A targets

Huali Shares’ termination of Zhongke Huilian acquisition is

, with on the company’s business strategic layout, and is instead beneficial to the company:

1. Focus on core businesses
   : Concentrate resources to consolidate the 2024 strategic transformation achievements
2. Reduce M&A risks
   : Avoid integration risks and goodwill impairment risks brought by cross-border acquisition of AI enterprises
3. Optimize resource allocation
   : Allocate limited funds and energy to more synergistic M&A targets

Future external expansion plans are expected to be

, focusing on targets highly synergistic with smart water, decorative composite materials, and industrial digitalization businesses, adopting a “small steps, fast runs” strategy to achieve .

Although this acquisition termination means the company cannot quickly enter the AI industry through Zhongke Huilian in the short term, it also avoids the risk of blind expansion, reflecting the management’s

. For investors, pay attention to the performance integration of acquired companies in the short term, and the deepening layout of the company in the smart water and industrial digitalization fields in the medium and long term.

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[0] Jinling API Data - Real-time stock quotes, financial analysis, market price data

[1] Securities Times - “Huali Shares: Terminate Acquisition of 51% Equity in Zhongke Huilian” (https://www.stcn.com/article/detail/3562469.html)

[2] Zhongke Huilian Official Website - Company Introduction (https://www.huilan.com/eportal/ui?pageId=bac23a5f5d0f47fe8e8fcdc7461be355)

[3] Dongguan Huali Industrial Co., Ltd. 2024 Annual Report (https://www.dghuafuli.com/upload/soft/250917/1-25091G61215.pdf)