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China XD: Tighter Chinese credit hurts privatization push

Steve Toloken | PLASTICS NEWS CHINA

Tightening credit in China is complicating efforts by U.S.-listed compounder China XD Plastics Co. Ltd. to take itself private, as well as denting its sales growth, according to company executives.

The company, which has annual sales of about $1.3 billion, announced a plan in early 2017 by senior management and the investment bank Morgan Stanley to take the large Chinese materials firm off the Nasdaq stock exchange.

But some shareholders have complained about the pace and lack of clarity in those plans, and company officials said on an Aug. 9 earnings call that the tighter liquidity gripping China's finance sector is complicating their privatization plan.

"Right now in China there is a nationwide deleveraging effort. The banking sector is pulling liquidity out of the system," said Chief Financial Officer Taylor Zhang. "Many companies in China, small or large, are facing this new, unexpected situation."

The company reported in an Aug. 9 news release that second quarter sales were basically flat, up just 1.2 percent to $317.3 million, and net profit dropped 3.2 percent to $27.2 million.

"The recent nationwide deleveraging efforts in China ... has significant impact on activities of many companies in China, including merger and acquisition as well as privatization," said Chairman and CEO Jie Han, who added the company would work to improve its capital structure as part of its expansion strategy.

Shareholders pressed the company, which is one of China's largest makers of polymer compounds for the automotive industry, to explain delays in the privatization plan.

Speaking through an interpreter, Han said he had been working mostly with large state-owned banks in China to secure financing. Morgan Stanley, which invested $100 million in China XD in 2011, is part of the privatization effort, but Han said "the majority of the responsibility" for getting financing rests with him.

Matthew Larson, a financial adviser with Wells Fargo, urged the company to broaden its financing efforts.

"There's plenty of capital out there and with the valuation of your company, there must be many, many, many interested parties to supply that financing," he said. "You wouldn't have to go to the Chinese banks. You just go to any of the international private banks that are again, awash in capital."

Han said an investment company run by his son, Tiexin Han, agreed in July to put in $75.6 million into the company's domestic Chinese subsidiary, which covers most of its manufacturing operations.

That extra funding, from Changmu Investment (Beijing) Co. Ltd., will help XD secure better financing for its operations and expansions, Han said.

With the company's sizable expansion plans, including new factories in China's Sichuan Province and in Dubai about to come online, some of XD's minority shareholders have pointedly questioned whether the privatization offer to them was fair and properly valued future growth potential.

Han and Morgan Stanley currently jointly own 74 percent of the firm, with various smaller shareholders owning 26 percent.

Larson noted that the company's stock price has gone down since the privatization plan was announced in February 2017.

"I've never seen that happen," he said. "Usually it goes up near where the transaction offer is, instead it's lower. ... So you can understand the frustration of shareholders to be in a very great company, your company's done very well, you're well positioned in China, you've been expanding, and yet the stock goes down."

Han said he was also puzzled by the stock performance given the firm's underlying performance in recent years and noted again that "the lending conditions in China has become more and more challenging compared to the past."

Zhang also called the "dramatic" depreciation of China's currency, by 10 percent in the second quarter, a wild card that hurts planning.

 

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