Thursday, September 26, 2013

Sichuan Hebang to construct 50,000t/a glyphosate production project

Sichuan Hebang Co. Ltd. (Sichuan Hebang), a listed chemical company in China with soda ash and ammonium chloride as its main products, claimed that it planned to construct a 50,000t/a glyphosate production project with a total budget of USD81.81 million (RMB501 million). Besides, at present Sichuan Hebang owns the production equipment and production technique which equals to 50,000t/a glyphosate production capacity. Notably, this project's start time is uncertain now due to the uncertainty to obtain the glyphosate production and operating license, according to Glyphosate China Monthly Report issued by CCM in September.
According to the investment announcement released by Sichuan Hebang on 10 Sept. 2013, Sichuan Hebang planned to construct the 50,000t/a glyphosate production project by self-finance, and the project construction time is planned to be one year. When this project is completed, Sichuan Hebang expects the total revenue and total profit of this project to reach USD326.60 million (RMB2 billion) and USD45.07 million (RMB276 million) respectively, according to the current glyphosate price in China.
The announcement also revealed that the goal of this project was to enrich Sichuan Hebang's product variety and create a circular economy industrial chain, which would lead to huge investment return. Sichuan Hebang's main products are soda ash and ammonium chloride, each of whose current capacity is 800,000t/a. The revenue from soda products makes up about 95% of the total in 2012 and 93% in H1 2013 respectively. 
In order to complete this project, Sichuan Hebang has purchased the production equipment and production technique which equals to 50,000t/a glyphosate production capacity from its joint stock company—Sichuan Shuncheng Chemical Co. Ltd. (Sichuan Shuncheng) with the price of USD12.97 million (RMB79.41 million) on 7 Sept. 2013. But the equipment hasn't been installed. The purpose of purchasing glyphosate related asset is to achieve benefit maximization. Mr. Mo, the board secretary of Sichuan Hebang, stated that Sichuan Hebang only owns 49% equity of Sichuan Shuncheng and does not hold controlling interest, which prevents Sichuan Hebang from achieving benefit maximization.

There are two main obstacles for Sichuan Hebang to accomplish its glyphosate project.
One is that Sichuan Hebang has no glyphosate production and operating license at present. Sichuan Hebang's business includes production and sales of soda ash, ammonium chloride, ammonia, calcium carbonate, etc., but not glyphosate. Whether Sichuan Hebang can obtain glyphosate production and operating license is uncertain now. Mo stated that Sichuan Hebang's glyphosate production project needs the approval from the National Development and Reform Commission, People's Republic of China and the Ministry of Environmental Protection, People's Republic of China, according to current glyphosate related policies and regulations. But whether Sichuan Hebang can obtain the approval from the above two departments is uncertain.
The other obstacle is fund shortage. According to 2013 semi-annual report of Sichuan Hebang, Sichuan Hebang has huge fund, with its cash and cash equivalents up to USD79.85 million (RMB489 million) in total by the end of H1 2013. Sichuan Hebang has been constructing three big projects, including 6 turn to be 9 project (namely the project of 600,000t/a soda co-production capacity transforms to 900,000t/a soda co-production capacity), phosphate development project and Wujun glass project, all of which are by self-finance. At present, these three projects have been invested a little more than 30% of total investment fund, which means that these three project still need the remaining total investment of about USD381.09 million (2.33 billion). Undoubtedly, according to its current fund situation, it's very hard for Sichuan Hebang to invest in the glyphosate project. 
However, Sichuan Hebang is still trying its best to solve the two main obstacles.
As for the glyphosate production and operating license, Mo stated that Sichuan Hebang will actively apply to the local related government departments. Furthermore, if Sichuan Hebang fails to apply for glyphosate production and operating license, it may purchase a small glyphosate manufacturer which has glyphosate production and operating license in Sichuan Province.
As for the fund shortage, Sichuan Hebang can solve it by many ways, such as equity pledge financing, bank loans, directional stock issuance financing, etc. According to the announcement released by Sichuan Hebang on 7 Sept. 2013, Sichuan Hebang Investment Group Co., Ltd. (Sichuan Hebang Investment), Sichuan Hebang's controlling shareholder, has made a deal with Hong Yuan Securities Co., Ltd. (Hong Yuan Securities) that Sichuan Hebang Investment pledges 39.1 million shares of Sichuan Hebang to Hong Yuan Securities for financing. Although Sichuan Hebang Investment didn't reveal the equity pledge financing amount, it may be more than USD81.65 million (RMB500 million). According to Sichuan Hebang's average stock price in H1 2013, the value of 39.1 million shares is about USD86.26 million (RMB528.25 million). It's estimated that the fund from Sichuan Hebang Investment's equity pledge financing will be invested in Sichuan Hebang's glyphosate project.

If the two main obstacles are solved successfully, Sichuan Hebang's glyphosate project is expected to be launched by the end of 2014 or at the beginning of 2015. Whether glyphosate market at that time is still thriving or not is uncertain, so glyphosate project will be a high risk investment project for Sichuan Hebang.
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