Risk Mitigation Scheme for Business Overlap and Horizontal Competition with Enterprises Controlled by Relatives of Fuyin New Materials' Actual Controller

Based on the collected information about Fuyin New Materials, I will conduct a professional analysis of the business overlap issue with enterprises controlled by relatives of its actual controller from the perspective of corporate governance, and propose solutions for mitigating horizontal competition risks.

According to public information, there is business overlap between Anhui Fuyin New Materials Co., Ltd. (hereinafter referred to as “Fuyin New Materials”) and enterprises controlled by Deng Shaocheng, cousin of Xu Bing, the actual controller of Fuyin New Materials:

• Precision functional film materials: optical/non-optical release film, various protective films, explosion-proof films
• Functional adhesive materials: acrylic tape, high-end car box tape, special double-sided tape for high-speed rail carriage interiors

• 3C consumer electronics
• Automotive (high-end car boxes, high-speed rail carriage interiors)
• Home appliances
• Household products
• New energy
• Transportation

According to Article 148 of the Company Law, directors and senior managers shall not, without the consent of the shareholders’ meeting or the general meeting of shareholders, take advantage of their positions to seek business opportunities belonging to the company for themselves or others, nor operate on their own behalf or for others any business of the same type as that of the company they serve.

• Procurement-side Overlap
  : From 2022 to 2024, Fuyin New Materials purchased base materials and other products from Anhui Yueqi, with amounts of RMB 4,800, RMB 37,600, and RMB 22,000 respectively.
• Sales-side Overlap
  : From 2022 to 2023, Fuyin New Materials sold precision functional film materials to Anhui Yueqi, with amounts of RMB 286,000 and RMB 181,300 respectively.

The products of the associated enterprises and the company’s products are highly overlapping in downstream application fields, which may affect the business independence of the listed company and the rights and interests of minority shareholders.

• Fuyin New Materials acquires the equity of Anhui Yueqi and Jingjiang Yueqi held by Deng Shaocheng
• Incorporate them uniformly into the listed company to eliminate the root cause of horizontal competition
• It is necessary to evaluate the fairness of the acquisition pricing and go through the approval procedures for related party transactions

• The associated enterprises transfer the overlapping businesses to Fuyin New Materials
• The associated enterprises transform into non-competitive business areas
• It is necessary to clarify business boundaries and transfer consideration

• Xu Bing, the actual controller, issues a commitment letter to avoid horizontal competition
• Clarify the commitment period (permanent or until the associated enterprises no longer hold shares is recommended)
• The commitment content includes:
  • No new businesses of the same type as the listed company will be added
  • Existing overlapping businesses will be gradually reduced or transferred
  • No business opportunities will be obtained by using related party relationships

• Restrict the associated enterprises from expanding production or adding competitive production capacity
• Restrict the associated enterprises from accessing the existing customer and supplier channels of the listed company
• Restrict the associated enterprises from using enterprise names or trademarks that may cause confusion

• Independent directors issue special opinions on related party transactions and horizontal competition matters
• Establish a regular verification mechanism, and major related party transactions during the reporting period shall be subject to prior approval by independent directors

• For bills involving related party transactions, related shareholders shall abstain from voting
• Online voting channels shall be provided for major asset restructuring or equity acquisition

• Fully disclose the information of associated enterprises in the prospectus and periodic reports
• Disclose the specific content, amount, and trend changes of business overlap
• Explain the risk prevention and control measures that have been taken and their effectiveness

• Engage sponsors and lawyers to conduct special inspections
• Establish an investor communication mechanism to timely respond to market concerns
• Accept continuous supervision from regulatory authorities

1. Complete Due Diligence on Associated Enterprises
   • Audit the financial status of associated enterprises
   • Evaluate the asset value of overlapping businesses
   • Identify potential legal risks

2. Formulate a Rectification Timeline
   • Clarify rectification objectives and milestones for each stage
   • Set a final completion deadline (no more than 24 months is recommended)

1. Promote Equity Acquisition or Business Transfer
   • Select the optimal solution based on the due diligence results
   • Go through necessary internal decision-making and regulatory approval procedures

2. Establish a Long-term Mechanism
   • Amend the company’s articles of association to add clauses for preventing horizontal competition
   • Improve the management system for related party transactions
   • Establish a regular declaration mechanism for the actual controller and its related parties

1. Continuously Optimize the Business Structure
   • Strengthen the core competitive advantages of the listed company
   • Enhance technical barriers and customer stickiness

2. Strengthen the Construction of Compliance System
   • Conduct regular risk assessments of horizontal competition
   • Establish an early warning mechanism and emergency response plan

The business overlap issue between Fuyin New Materials and enterprises controlled by relatives of its actual controller needs to be resolved systematically from four dimensions: equity integration, business isolation, governance optimization, and information disclosure. It is recommended that the company adopt a strategy of “taking acquisition as the main measure and commitment as the supplementary measure” to effectively prevent and resolve horizontal competition risks while maintaining the independence of the listed company.

For Fuyin New Materials, which is applying for listing on the Beijing Stock Exchange, properly resolving the horizontal competition issue is not only a compliance matter required by regulators, but also an important measure to protect the interests of minority shareholders and improve the company’s governance level. During the review process, regulators will focus on whether the solutions to horizontal competition are effective and sustainable, and whether they have a material adverse impact on the continuous operation capability of the listed company.

[1] Jinzhengyan - Fuyin New Materials: The Deputy General Manager’s Former Employer May Be in the Same Industry Chain, and He Obtained Equity Incentives in the Second Year of Employment; Business Overlap Exists with Enterprises Controlled by Relatives of the Actual Controller (https://news.futunn.com/hk/post/67194167)

[2] Anhui Fuyin New Materials Co., Ltd. - Reply to the Second Round of Review Inquiry Letter for the Public Transfer and Listing Application Documents (http://file.finance.sina.com.cn/211.154.219.97:9494/MRGG/SBGG/2025/2025-1/2025-01-15/10710254.PDF)