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