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Shareholder pressure grows on China XD over privatization offer

Steve Toloken | PLASTICS NEWS

Nasdaq-listed China XD Plastics Co. Ltd., one of the country's main suppliers of automotive engineering polymer compounds, is coming under increasing pressure from some of its U.S. shareholders who question the fairness of plans to privatize the company.

In a March 15 earnings call, some shareholders said they were growing increasingly frustrated at both the slow pace and lack of clarity in plans to buy out the company by China XD Chairman Jie Han and an affiliate of private equity firm Morgan Stanley in Asia, which owns 24 percent of the firm.

Han and Morgan Stanley had unveiled a plan in February 2017 to buy the 26 percent of the company they do not already own for $91 million, which represented a premium of about 30 percent over the company's share price at the time.

But other shareholders said that offer remains much too low, and they said China XD, which is based in the city of Harbin, remains significantly undervalued compared with similarly situated plastics materials firms in China -- a point that XD management has agreed with in the past.

"It's one thing to get a low-ball offer," said Matthew Larson, a financial adviser with Wells Fargo, in the call. "It's another thing to be strung out for 13 months. At some point it's unethical."

Larson said several of his clients who are investors in China XD are so frustrated they have discussed placing advertisements in newspapers to bring their concerns more directly to top executives at Morgan Stanley, which invested $100 million in China XD in 2011 through its Morgan Stanley Private Equity Asia affiliate.

"I'm speaking about wealthy retired people and not institutions, who are angry at the process so far [and] have even suggested taking out an ad in the Asia Wall Street Journal and bringing this to the attention of senior management at Morgan Stanley and to the public in general," Larson said.

Larson suggested his clients feel that the buyout offer significantly undervalues their investment.

"They feel an offer at about a third of book value is not the sort of fair type of transaction that would ever occur here in the United States because there would be class action lawyers circling," he said. "I'll just leave it at that."

Jason Cooper with Stuyvesant Capital Management said the company appears to be "tremendously undervalued" and suggested that $400 million planned this year by the company for new and expanded factories in China and Dubai bolster arguments that the offer to go private should be higher.

Cooper said all shareholders should have equal access to a report being prepared for a special board committee of independent directors who are evaluating the offer to take the company private. Without access to that information, he said, other shareholders would be at a disadvantage in both evaluating the offer and "assessing if there is a conflict of interest in the take-private movement."

"I guess we're going to just continue to wait this thing out," Cooper said. "But I would advise all the institutional shareholders and minority shareholders to hold fast because we do have rights and there is a pretty significant institutional holding and we shouldn't settle for a low buyout offer."

China XD Chief Financial Officer Taylor Zhang said the company has not received that report but that the special committee would report its results to the board of directors once that report is received.

Zhang told Cooper that "I totally understand where you are coming from" and said the company would follow legal advice once the report is ready in how the information is disclosed.

"I think your points are well taken," Zhang said. "We trust the judgment to be made by our legal counsel and other advisers, once that decision is made we'll follow that advice accordingly."

Zhang said the company would be making "appropriate announcements once it's reached the stage of doing so" on the privatization offer.

Several other analysts on the call asked similar questions about the buyout offer. Those concerns came as company executives outlined their progress in implementing a large, previously announced expansion program.

Zhang said the company, which reported 2017 sales of $1.29 billion, expects to spend $400 million this year on expansions in both Harbin and Sichuan provinces in China, and on a project to open a compounding plant in Dubai.

The Sichuan plant would add 661 million pounds of annual capacity, giving the company a total capacity of 1.52 billion pounds within China. It also said it is in the midst of ramping up a facility in Dubai with capacity of 55.1 million pounds, which it expects to be online by the end of the year.

The company manufactures various grades of engineering plastics, including nylon, acetal, polyphenylene oxide and polylactic acid.


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