Zhenjiang Co., Ltd. Sells U.S. "Subsidiary" Behind the Scenes: U.S. Factory Construction Encounters "BIOSECURE" Act Dilemma

A transaction totaling $22.15 million was set up with a three-year performance guarantee of $10.7 million in profit; otherwise, the company would not receive the remaining $5.5 million. The deal was with an Indian company and paid in three installments. After the Shanghai Stock Exchange questioned the transaction, Zhenjiang Co., Ltd. (603507.SH) failed to respond on time.

On the evening of March 12, Zhenjiang announced that the company and its intermediaries needed further verification and improvement before replying to the exchange’s inquiry letter, requesting an extension.

On March 13, a reporter from Huaxia Times called Zhenjiang’s securities department to ask about the profit and loss of the deal. A staff member said, “If all three payments are completed, the company is expected to have a slight profit.” When asked why sell if the performance guarantee conditions could be met, the staff replied, “Actually, it’s due to the impact of the ‘Big and Beautiful’ Act; we have no choice but to sell.”

A deal that triggered exchange inquiries

On the evening of March 5, Zhenjiang announced it planned to sell 100% of its US subsidiary, Zhenjiang Xinneng (USA) Technology Co., Ltd., to Zetwerk for $22.15 million. The announcement stated, “Due to relevant US policies, the core customer of US Zhenjiang is adjusting order arrangements for 2026 to ensure compliance with tax incentives.” Zhenjiang said, “Considering the current operation of US Zhenjiang, the first-quarter 2026 performance expectations, and uncertainties in future revenue and cash flow, to optimize the overall asset structure, focus on core business development, and improve operational resilience, the company decided to sell its 100% stake in US Zhenjiang.”

Public information shows that Zhenjiang is a new energy company mainly engaged in wind power equipment, photovoltaic, and thermal equipment components. The US subsidiary is part of a fundraising project, the “US Photovoltaic Support Frame Components Production Line Construction,” launched in 2022 through a private placement, with a total investment of about 133 million yuan. In 2024 and 2025, it achieved revenues of approximately $15.38 million and $33.63 million, respectively, but recorded net losses of $3.18 million and $1.51 million. Revenue is growing, losses are decreasing, yet the company still plans to sell. This prompted the SSE to question the deal that night.

The inquiry focused on the reasons for the subsidiary’s ongoing losses and the rationality of selling the fundraising project. The SSE asked the company to list the main customers and suppliers of the target, compare with industry peers, explain the reasons for continued losses in 2024 and 2025, and justify the changes to the fundraising project and the sale, including opinions from the sponsor.

The inquiry also questioned Zetwerk’s ability to fulfill its obligations. The announcement disclosed that Zetwerk is an Indian company planning an IPO, mainly engaged in customized manufacturing of industrial parts, with a significant difference from the target’s main business. Zetwerk has also reported continuous losses in 2023–2024, with 2025 financials not yet disclosed. The deal involves three installments over three years: $4.5 million after closing, $12.15 million plus interest on the second anniversary or after Zetwerk’s IPO, and a remaining $5.5 million plus interest after performance targets are met. The SSE asked whether the company believes Zetwerk can perform given its continuous losses, why it chose to sell to Zetwerk, whether there are related-party relationships with the listed company or controlling shareholders, and whether the long payment period is justified, including necessary arrangements for performance guarantees and breach liabilities.

Additionally, the inquiry questioned the valuation and performance guarantee rationality. Before the deal, the subsidiary Hong Kong Zhenjiang planned to convert about $14.5 million of debt into equity in the target. Post-conversion, the asset-based valuation was about $23.7 million, with a 0.09% premium. Due to expected losses in Q1, the valuation was lowered to about $21.11 million, and the final transaction price will be adjusted based on debt at the settlement date. The deal includes a three-year performance guarantee, requiring the target to achieve a $10.7 million after-tax net profit over three years; otherwise, the company must compensate up to the remaining payment. The SSE asked for explanations on the necessity of debt-to-equity conversion, basis for valuation adjustments, and the reasonableness of the performance guarantee and its targets.

Disregarding the payment ability of the counterparty and the long payment cycle, the performance commitment itself is confusing: if US Zhenjiang can truly achieve $10.7 million in three-year after-tax net profit, why would Zhenjiang sell US Zhenjiang at a valuation close to its net assets?

Reluctantly selling due to the ‘Big and Beautiful’ Act

The reason for the sale was vaguely explained in Zhenjiang’s announcement: “Due to relevant US policies, US Zhenjiang’s core customer is adjusting order arrangements to ensure compliance with tax incentives for 2026.” This statement does not clearly reveal the true situation of US Zhenjiang. When asked in a phone interview, staff gave a more straightforward answer—“the ‘Big and Beautiful’ Act.”

Essentially, this transaction is Zhenjiang’s helpless move to cut losses under the pressure of the US Inflation Reduction Act (IRA), also known as the “Big and Beautiful” Act.

As one of the vehicles for raising funds through a private placement in 2022, US Zhenjiang was tasked with the “US Photovoltaic Support Frame Components Production Line Construction” project, intended to penetrate the US PV market. However, with the US government promoting domestic manufacturing and excluding certain foreign supply chains through the IRA, Chinese-background companies operating in the US faced a rapidly deteriorating environment. The law offers tax credits and incentives to encourage downstream developers to prioritize products from North America or “friendly countries,” effectively creating a “hidden barrier” against Chinese supply chains.

Even with production capacity and competitive technology and costs, entities like US Zhenjiang may be excluded from the supply chain due to their Chinese background, leading to idle capacity, order declines, and sunk investments. The core customer of US Zhenjiang is adjusting order arrangements to ensure project subsidies.

“Even if we persist, customers won’t give us orders. We can only keep losing money,” said the staff. The IRA directly cut off US Zhenjiang’s order sources, destroying its operational foundation. This explains why Zhenjiang still plans to sell US Zhenjiang under such confusing terms.

“For high-dependence on the US market in strategic industries like new energy, sudden policy barriers and geopolitical pressures can quickly destroy a project’s business model. This serves as a warning for Chinese companies’ overseas investments. In an era of global supply chain restructuring and rising geopolitical risks, overseas M&A is no longer just a business decision but a strategic choice under international political and economic patterns, requiring cautious risk assessment and diversified strategies,” said an unnamed senior executive of a new energy company.