Would be good or bad for Zhejiang Jinfanda to transfer Hubei Taisheng 04-07-2016

After Zhejiang Jinfanda transferred Hubei Taisheng, the former had to compensate Hubei Xingfa due to Hubei Taisheng's lower-than-expected performance during 2014-2015. If in year 2016 Hubei Taisheng's net profit still isn't able to meet the expectations, then Zhejiang Jinfanda will be forced to provide constant compensation. Considering all this, is it actually good or bad for the company to transfer Hubei Taisheng?

 

Hubei Xingfa Chemicals Group Co., Ltd. (Hubei Xingfa) has just released, in March 2016, the 2015 financial report which shows that the performance of its glyphosate subsidiary Hubei Taisheng Chemical Co., Ltd. (Hubei Taisheng) was far worse than expected. Thus, as promised, Zhejiang Jinfanda Bio-Chemical Co., Ltd. (Zhejiang Jinfanda - former parent company of Hubei Taisheng) will need to compensate. 2015 was already the second year that Zhejiang Jinfanda had to compensate Hubei Xingfa and China's glyphosate market is predicted to remain in 2016 as depressed as it has been during the previous year. If Hubei Taisheng's net profit keeps resulting unsatisfactory, then Zhejiang Jinfanda will without a doubt be forced to further reduce the holdings in Hubei Xingfa. Now the question is, is it an advantage or a disadvantage for Zhejiang Jinfanda to transfer Hubei Taisheng?

 

Hubei Xingfa acquired, in 2014, Zhejiang Jinfanda's 51% of the holdings in Hubei Taisheng through share issuing. Both sides signed in Jan. 2014  a compensation agreement in which Zhejiang Jinfanda promised to compensate Hubei Xingfa if Hubei Taisheng's net profit (after deducting non-recurring gains and losses) amounts to less than USD40.67 million (RMB265.90 million), USD42.22 million (RMB276.08 million) and USD41.76 million (RMB273.02 million) in 2014, 2015 and 2016 respectively. According to the agreement, the compensation will be the difference in value between Hubei Taisheng's actual net profit and the expected one. For the compensation, Zhejiang Jinfanda is supposed to sell a corresponding quantity of shares to Hubei Xingfa for USD0.15 (RMB1), shares that will be later make void. Moreover, Zhejiang Jinfanda also committed that should there be any cash bonus during the compensation period (2014-2016), then said bonus for Zhejiang Jinfanda's actual compensation in shares (including profit compensation and impairment test) would be given as well to Hubei Xingfa.

 

Hubei Taisheng's profit realization rate was 97.58% during 2014 and Zhejiang Jinfanda compensated Hubei Xingfa for 752,388 shares. Moreover, Hubei Xingfa obtained the cash bonus of USD23,014 (RMB150,477.6) after which Zhejiang Jinfanda's holdings of Hubei Xingfa were reduced from 17.96% to 17.85%.

 

According to Hubei Xingfa's 2015 financial report, Hubei Taisheng only achieved 45.06% of profit realization rate in 2015. Hubei Taisheng ranked top in the industry for its production technology and cost of glyphosate based on Hubei Xingfa's recycling industrial chain in Yichang Industrial Park and through the technical transformation and energy consumption control  in this year, but its average price of glyphosateTC , though, recorded a drop of 30% when compared to the estimated USD4,282/t (RMB28,000/t, tax-included), being USD3,059/t (RMB20,000/t, tax-included) affected by the centralized capacity release and the weakened market demand. The YoY drop in gross profit margin of glyphosate led to a significant fall in its revenue and net profit. As a result, Zhejiang Jinfanda needed to compensate about 17,744,660 shares in Hubei Xingfa. In the end Zhejiang Jinfanda's holdings of Hubei Xingfa were further reduced.


When Hubei Xingfa acquired Hubei Taisheng in 2014, the former company issued 95,344,295 shares to Zhejiang Jinfanda. After Zhejiang Jinfanda made compensation in shares in year 2015, its holdings  on  Hubei Xingfa were reduced by 19.4%, being 76,847,247 shares (deducting the capital increase of Hubei Xingfa's other shareholders).

 

Although Zhejiang Jinfanda is losing its holdings in Hubei Xingfa, it is also undoubtedly avoiding the direct loss brought by Hubei Taisheng's slumping performance. In fact, regarding the current glyphosate market, Zhejiang Jinfanda is sharing the negative impact from the sharp fall of glyphosate profits with Hubei Xingfa. If Hubei Taisheng's performance meets the expectation in 2016, then Zhejiang Jinfanda will be able to enjoy the dividends of Hubei Xingfa thanks to the large quantity of holdings it now owns.

 

Hubei Taisheng's net profit in 2015, million USD

Item

2014

2015

2016

Promised net profit

40.67

42.22

41.76

Actual net profit (after deducting non-recurring gains and losses)

39.68

19.03

/

Difference

-0.98

-23.20

/

Profit realization rate

97.58%

45.06%

/

Source: Hubei Xingfa's 2015 financial report




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Tag: Zhejiang Jinfanda



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