New Disclosures by China XD Plastics about its Sichuan Plant Expansion

This article will review information released since March 9 about Xinda’s previously undisclosed Sichuan expansion plan (originally described here: CXDC Receives An Unfair Buyout Offer When It Is Over 80% Cheaper Than Comparable China-Listed Companies).

On December 12 2016 Xinda signed a contract with the Nanchong City government covering a major expansion of Xinda’s Nanchong production facility at a public ceremony that was extensively reported in Chinese media (see search results for “Nanchong Xinda” between 12/10/16 and 12/31/16).  Xinda included a translation of the agreement as an exhibit attached to its 10-K filed on 03/16/17 (LINK).  The terms of the agreement appear to match the details from December media coverage.

On January 3 2017 Xinda signed two contracts for purchase of RMB 1.44Bn of equipment for the Sichuan plant expansion.  Advance payments of 0.9Bn RMB were due within 10 days.  Xinda included translations of the contracts as exhibits attached to its 10-K filed on 03/16/17 (LINK and LINK).  The 10-K’s description of “subsequent events” refers to these contracts as “revocable” but I do not see that mentioned in the contracts themselves.  Perhaps Xinda could cancel the contracts under the “Force Majeure” provision.

In February 2017 construction began on the plant expansion according to an article in Nanchong Daily (LINK).  UPDATE June 28 2017: February construction start was confirmed by the company in this April wechat post

On February 16 2017 CXDC received a letter from Chairman Jie Han and Morgan Stanley Private Equity Asia offering to buy all publicly held shares at a price of $5.21/share (LINK).

On March 9 Konekoresearch.com published its article noting “The company has not disclosed a possibly significant expansion plan negotiated with the Nanchong government” and the same article was distributed by Seeking Alpha (LINK).

On March 16 CXDC announced its 2016 year-end financial results and made its first official disclosure of the Sichuan expansion plan (LINK):

“After initial approval by the Board of Directors and the Company’s major investor on December 8, 2016, Sichuan Xinda entered into a strategic investment agreement with Shunqing Government, Nanchong City, Sichuan Province, on December 12, 2016.  Due to the uncertainty of securing the necessary land use rights for the project, the Company waited until March 13, 2017 and entered into a “Land Use Right Transfer Agreement” with the government agency. The Company expects to sign the official and definitive investment agreement pertaining to the production of 300,000 metric tons of bio-composite materials and additive manufacturing used composites (3D printing materials) and 20,000 metric tons of functional masterbatch with Shunqing Government, Nanchong City, Sichuan Province on March 17, 2017.  The Company will make necessary and appropriate disclosure in accordance with required rules and regulations so that further details of the definitive investment agreement will be forthcoming.”

A translated copy of the Land Use Right Transfer Agreement (LINK) was attached as an exhibit to the 10-K filing on 3/16/17.  According to the agreement the “Nanchong Municipal Bureau of Land Resources, Shunqing District Branch” approved the transfer.

This sequence leaves two significant questions:

  1. Was there really any possibility that the Nanchong Municipal Bureau of Land would deny the transfer required for the agreement signed on 12/12/16 at a public ceremony by the “Shunqing Government, Nanchong City” and “Nanchong People’s Government”?  Or is “uncertainty” over land use rights just the only rationale the company can present for failing to make a more timely disclosure?
  2. Were Mr. Han and MSPEA holding material non-public information about a major corporate development (the Sichuan expansion) when they submitted their buyout offer in February?

A final note about disclosure, during the company’s 3/16 conference call (transcript link) investor Peter Siris shared that he had several private discussions with CFO Taylor Zhang about the Sichuan expansion:  How does that look?

Peter Siris quote

Disclosure: The author is a public shareholder of CXDC seeking the maximum possible return from his investment. Interested parties who wish to communicate privately about CXDC may contact the author at konekoresearch (at) gmail.com

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