[Special Topic: Advanced Manufacturing] Practical Techniques for Legal Due Diligence in Investment and M&A of New Materials Enterprises

【Answer 1】 (Photograph of selected members of GuDu Equity’s Advanced Manufacturing Legal Team) Source: GuDu Equity — Advanced Manufacturing Legal Team Affiliation: Beijing Yingke (Shenzhen) Law Firm Follow our WeChat official account: GuDu Equity Full text: 3,900 characters; reading time: ~6 minutes No.1 Preface On January 4, 2012, the Ministry of Industry and Information Technology (MIIT) issued the ‘12th Five-Year Development Plan for the New Materials Industry’, stating: ‘China’s raw materials industry is enormous in scale; overcapacity plagues certain sectors; and constraints related to resources, energy, and the environment are intensifying. There is an urgent need to vigorously develop the new materials industry, accelerate the transformation and upgrading of the materials industry, and foster new growth drivers.’ The Plan also outlined ten major engineering initiatives, including: ① Special Project on Rare Earth and Rare Metal Functional Materials; ② Low-Cost Carbon Fiber and High-End Innovation Demonstration Project; ③ Special Project on High-Strength Lightweight Alloy Materials; ④ Special Project on High-Performance Steel Materials; ⑤ Special Project on High-Performance Membrane Materials; ⑥ Special Project on Advanced Battery Materials; ⑦ Demonstration Application Project for New Energy-Saving and Environmental Protection Building Materials; ⑧ Special Project on Electronic Information Functional Materials; ⑨ Special Project on Biomedical Materials; ⑩ Special Project on New Materials Innovation Capacity Building. To implement the national ‘13th Five-Year Plan’ Outline and ‘Made in China 2025’, and in accordance with the requirements set forth in the ‘Notice on Issuing the MIIT’s 13th Five-Year Plan System’ (MIIT General Office Regulation [2015] No. 24), the MIIT, jointly with the National Development and Reform Commission, the Ministry of Science and Technology, and the Ministry of Finance, formulated the ‘Guidelines for the Development of the New Materials Industry’ (MIIT Joint Regulation [2016] No. 454), officially released on January 24, 2017. The Guidelines emphasize strengthening the collaborative innovation system for the new materials industry, accelerating early-market cultivation for key new materials, and implementing the ‘Internet + New Materials Initiative’, among other strategic directives. When responding to industries encouraged by national policy, lawyers should proactively monitor such sectors, promptly identify associated legal issues, and contribute to refining relevant laws and regulations. No.2 Practical Key Points for Legal Due Diligence of New Materials Enterprises I. Principles of Communication In legal due diligence practice, communication with the target entity is the most direct—and most effective—means of acquiring corporate information. Only through full cooperation and assistance from the target can lawyers successfully complete due diligence. Achieving seamless collaboration from the target demands effective communication—thus its importance cannot be overstated. So how does one communicate effectively? (1) Identifying Common Ground to Build Trust Legal due diligence is a meticulous process requiring close coordination between lawyers and the target. When conducting due diligence on an unfamiliar enterprise, establishing trust is the first priority—this facilitates smooth progress throughout subsequent stages. It is essential to help the target understand both the purpose and rigor of due diligence. Once foundational trust is established, formal work may commence. However, enterprises often lack clarity about the objectives of due diligence—or even about how best to assist counsel—sometimes perceiving requests for documentation as redundant, leading to impatience or skepticism. In practice, lawyers may have already obtained certain corporate information via public sources (e.g., government websites or online databases), yet still request original documents for verification. Targets may find this puzzling. In such cases, lawyers should clearly explain the legal obligations of ‘diligence and prudence’ and ‘verifying authenticity of materials’, appealing both to reason and empathy.

Uncovering the Target’s True Value—A Methodology and Practical Insight into Commercial Due Diligence for M&A

【Answer 2】 Commercial Due Diligence (CDD) is precisely the critical tool designed to correct such misalignments. Its mission is not to verify the target’s past performance or current status—but rather to subject the investment thesis to systematic stress testing: Over the next three to five years, does the company’s growth logic truly hold? Is its moat genuinely robust? And are the claimed synergies quantifiably realizable? Strong commercial due diligence does not render the target’s past more precise—it renders its future more credible. II. What Layers Must a Rigorous Commercial Due Diligence Penetrate? Over years of serving PE/VC clients, Kedali Consulting has developed a systematic CDD framework. Its core logic is not exhaustive data collection, but focused attention on the few critical judgments that determine investment success or failure. The following five modules constitute Kedali Consulting’s mandatory penetration points across every engagement—they are mutually independent yet logically progressive: progressing from macro-industry trends, to on-the-ground customer realities, to the authenticity of competitive advantages, to the sustainability of growth, and finally to the degree of realizability of synergies. Long-Term Industry Assessment: Navigating the ‘Trap’ of Industrial Development Industry trend analysis is the first—and most prone to templated pitfalls—step in commercial due diligence. Conventional CDD often directly cites static metrics (e.g., market size, CAGR) from third-party research reports. Though seemingly comprehensive in data, such approaches offer little decision-making value: market size reflects only scale—not future industry health or quality of growth. For industrial and technology sectors, Kedali Consulting abandons rigid industry analysis frameworks. Instead, we adopt a bottom-up driver-based approach to assess long-term industry prospects (see ‘Escaping the Trap of Industrial Development’): grounded in a five-year forward-looking growth outlook, we systematically examine core variables—including technological evolution, market penetration rates, differentiated end-user demand, expansion of application scenarios, product pricing trends, and policy constraints—assessing each variable’s sustainability, marginal shifts, and latent risks. Crucially, our central question is: Can this industry navigate its developmental ‘trap’? Does the target possess corresponding technological advantages, leading solutions, and sufficient scale advantages? ▎ Case Example: Industry Assessment of a New Energy Materials Target A PE firm planned to invest in a cathode material manufacturer whose revenue had grown at a CAGR of 80% over the prior three years. The seller cited institutional research forecasting continued industry growth above 40% over the next five years. Kedali Consulting’s due diligence revealed rapid capacity expansion across the sector, limited product differentiation among cathode material suppliers, and concentration of most supply-chain profits within leading battery cell manufacturers. Consequently, the target lacked durable technological advantages and struggled to build lasting client stickiness through integrated solutions. We projected an industry downturn within 12–18 months—forecasting severe adverse impact on the target’s business. This assessment directly narrowed valuation negotiation room. Subsequent industry developments fully validated our prediction—successfully helping the investor avoid the core risk of overpaying at peak valuation.

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