A follow-up to my recent articles:
- CXDC Receives An Unfair Buyout Offer When It Is Over 80% Cheaper Than Comparable China-Listed Companies
- New Disclosures by China XD Plastics about its Sichuan Plant Expansion
China XD Plastics released 1Q results yesterday (LINK). As usual, first quarter results were depressed by the impact of the Lunar New Year holiday, but the company reiterated previous full year guidance for revenue and income. Key points:
- 1Q Revenue rose 11% yoy due to increased production capacity.
- 1Q Net Income fell 13% yoy due to higher depreciation expense from new capacity, increased staffing expense, and increased R&D expense.
- Net Working Capital (Current Assets – Current Liabilities) changed from +$239mm at 12/31/16 to -$180mm at 3/31/17 due to prepayment of capital expenditures for plant expansions.
- The “going private” transaction does not seem to have made any significant progress as the Special Committee has not yet retained legal and financial advisors.
Some recent company news has been covered in the Chinese media and articles were linked in the Koneko Research twitter feed:
- China XD Plastics wins industry awards (LINK)
- China XD Plastics sponsors industry symposium (LINK)
- Xinda shows new bio-plastics at industry exhibition (LINK)
Inferences and conclusions:
Funding requirement. CXDC has prepaid most of the cost of its Nanchong and Dubai plant expansions and believes that cash requirements over the next year can be met from operating profits plus available credit facilities , but the working capital position is obviously stretched. The company has blue chip banking partners and benefits from strong government support, but I believe that a domestic China equity fundraising by Heilongjiang Xinda Enterprise (described in my prior article) would provide capital that lowers corporate risk, enhances opportunity, is accretive to parent company valuation, and would be viewed extremely positively by parent company shareholders. Examples of appealing potential investors are 1) an employee shareholding plan, 2) key customers, 3) key suppliers, and 4) long-term financial partners. The request from Mr. Han and MSPEA to permit third party due diligence for their offer hints that they are already aware of investor interest.
Communications. The section of the 1Q17 press release containing Chairman Jie Han’s comments was 723 words long compared to 522 words for the 4Q16 release and 576 words for 3Q16 release. The Chairman’s comments noted that “We … continue to appreciate the support of our shareholders and all of our stakeholders“, a phrase that was not part of prior releases. The company provided an impressive roster of management participants for the conference call. Not surprisingly investor questions focused on the buyout offer rather than operational details, but the presence of so many managers suggests a willingness to share information. Typically companies communicate as little information and as little optimism as possible after receiving management buyout offers so this behavior seems slightly unusual and may hint that the management recognizes that the current offer is unlikely to proceed.
Disclosure: The author owns shares of China XD Plastics. The author believes that shareholders would benefit from rejection of what the author believes is an unfair buyout offer.