In-depth Analysis of the Trade Secret Crime Incident Involving a Subsidiary of Pacific Quartz (603688.SS)

Based on collected data and analysis, I will provide you with a comprehensive impact assessment of the trade secret crime incident involving a subsidiary of Pacific Quartz.

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According to a report from Eastmoney.com on January 5, 2025, Pacific Quartz (Jiangsu Pacific Quartz Co., Ltd.) and its holding subsidiary Lianyungang Qiangbang Quartz Products Co., Ltd. received a criminal judgment from the Intermediate People’s Court of Lianyungang City, Jiangsu Province.

[1].

• Perpetrator
  : Lianyungang Qiangbang Quartz Products Co., Ltd. (holding subsidiary of Pacific Quartz)
• Nature of Crime
  : Trade secret infringement
• Penalty Result
  : Fine of RMB 2.7 million
• Timeline
  : The criminal facts occurred
  before the company’s acquisition
• Legal Status
  : Pacific Quartz is the victimized entity
• Follow-up Actions
  : After the judgment takes effect, the company will pursue civil liability against relevant parties in accordance with the “Equity Transfer Agreement Regarding Lianyungang Qiangbang Quartz Products Co., Ltd.” signed with Duan Jingqiang, Duan Jingbang, and Qiangbang Company

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Impact Dimension	Analysis	Valuation Impact Degree
Direct Financial Loss	The RMB 2.7 million fine is small relative to the company’s size (accounting for approximately 0.1%-0.2% of annual net profit)	Limited
Reputational Impact	The subsidiary’s criminal offense may affect customer trust and brand image	Medium
Legal Risk Exposure	Civil recovery may bring potential benefits	Slightly positive
Compliance Cost	May increase internal compliance review and rectification investment	Medium

According to DCF valuation analysis [0], Pacific Quartz’s current valuation has significant upside potential:

Valuation Scenario	Intrinsic Value	Relative to Current Price ($37.35)
Conservative Scenario	$170.96	+357.7%
Base Scenario	$746.63	+1899.0%
Optimistic Scenario	-$138.07	-469.7%

• Current stock price of $36.58 is in a sideways consolidation range (support level $36.11, resistance level $37.05) [0]
• P/E ratio is as high as 129.17x, reflecting the market’s expectation of the company’s high growth [0]
• DCF valuation model shows that professional institutions remain optimistic about the company’s long-term value

Valuation adjustment factor = Base valuation × (1 - Reputational risk discount + Recovery gain expectation)

• Reputational risk discount: Expected 3%-5% (trade secret crime is a sensitive area in the specialty chemical industry)
• Recovery gain expectation: May receive compensation according to the terms of the equity transfer agreement
• Net impact: Slightly negative, but offset by the company’s overall growth momentum

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This incident exposes potential due diligence loopholes in Pacific Quartz’s acquisition of Lianyungang Qiangbang Quartz Products Co., Ltd.:

Investigation Area	Possible Deficiencies	Risk Level
Legal Compliance Review	Failed to detect trade secret infringement that existed before acquisition	High
Historical Behavior Traceability	Failed to conduct in-depth audit of the target company’s historical operations	High
Intellectual Property Verification	Insufficient review of the legitimacy of the source of trade secrets	High
Management Background Check	Failed to identify management’s business ethics risks	Medium
Industry Compliance Visits	Failed to understand the target company’s reputation from other industry enterprises	Medium

Evaluation Dimension	Score (1-10)	Explanation
Financial Due Diligence	7	Traditional financial data review is relatively complete
Legal Due Diligence	4	Failed to detect potential trade secret infringement before acquisition
Operational Due Diligence	6	Routine operational indicator review is in place
Technical Due Diligence	5	Insufficient review of core technology sources
Reputational Due Diligence	3	Weak investigation of industry reputation and historical behavior
Comprehensive Score	5.0	There is obvious room for improvement

• The equity transfer agreement includes clauses for pursuing civil liability against relevant parties
• Duan Jingqiang and Duan Jingbang, as equity transferors, bear corresponding responsibilities
• The company retains the right to recover, which helps reduce acquisition costs

• The clause design is relatively complete, providing a legal basis for subsequent recovery
• Reflects the acquirer’s awareness of risk prevention
• However, it failed to identify risks in advance, which is a post-event remedy

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##4. Industry Background and Risk Assessment

###4.1 Characteristics of Trade Secret Risks in the Specialty Chemical Industry

Pacific Quartz belongs to the

[0], and the trade secret risks in this industry have the following characteristics:

Risk Type	Industry Characteristics	Relevance to This Case
Technical Secrets	Production processes and formulas are core competitiveness	High
Customer Information	Supplier relationships and customer lists	Medium
Competitive Intelligence	Acquisition of competitors’ technology	High

###4.2 Market Reaction Monitoring

From the perspective of stock price performance [0]:

• 1-day performance
  : +2.10% (rose on the first day after the announcement)
• 5-day performance
  : +1.27%
• 3-month performance
  : -13.78% (market correction earlier than this incident)
• 1-year performance
  : +40.84%

: The market may have expected this incident, or believes that civil recovery can compensate for losses, so no significant negative reaction occurred in the short term.

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##5. Investment Recommendations and Risk Warnings

###5.1 Core Conclusions

1. Limited direct impact
   : The RMB2.7 million fine accounts for a minimal proportion of the company’s market value (USD20.13 billion), and its impact on financial conditions is negligible.

2. Deficiencies in due diligence
   : This incident exposes Pacific Quartz’s deficiencies in legal compliance review and reputation investigation during acquisition due diligence, requiring increased investment in related areas.

3. Long-term value not fundamentally damaged
   : The company’s fundamentals remain solid, DCF valuation shows significant upside potential, and technically it is in a sideways consolidation phase.

4. Civil recovery is a key variable
   : Whether subsequent recovery is successful and the amount recovered will affect the market’s assessment of the company’s governance capabilities.

###5.2 Risk Warnings

Risk Type	Description	Response Recommendations
Legal Risk	Potential subsequent civil litigation and compensation	Pay attention to company announcement disclosures
Reputational Risk	May affect customer trust and business cooperation	Track customer churn
Compliance Risk	Industry regulation may strengthen review	Pay attention to policy changes
Governance Risk	Internal control deficiencies need rectification	Pay attention to rectification measures

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[1] Eastmoney.com - “Pacific Quartz: Holding Subsidiary Fined RMB 2.7 Million for Trade Secret Infringement” (https://finance.eastmoney.com/a/202601053608843775.html)

[0] Jinling API Data - Company Overview, Real-time Quotes, DCF Valuation, Technical Analysis