Friday, March 29, 2024
 
Columnist
Martin Hennecke
 
CHINA SANJIANG
HKEx Stock Code : 02198 
 
Corporate Profile
The principal activities of the Group are the manufacturing and supplying of ethylene oxide and surfactants and the provision of surfactants processing service.

Business Review - For the year ended December 31, 2012

2012 is definitely a milestone for our Group as we made a number of strategic decisions and grew rapidly throughout the year. During the year, we initiated a vertical integration to build an upstream production facility to produce ethylene, the core feedstock of EO, through the acquisition of a connected limited liability company established in the PRC namely Xingxing New Energy. Furthermore, we have planned to shift the focus of our Group's future growth after 2014 to propylene derivative products from ethylene derivative products. We had a new ramp-up of production facilities for EO – the 1st phase EO production facilities (the “1st phase EO production facilities of JV”) of Sanjiang Honam Chemical Co., Ltd. (三江湖 石化工有限公司) (“Sanjiang Honam”), a sino-foreign joint venture company which the Group established in 2010 on a 50:50 basis with Honam Petrochemical Corp (“Honam”), an independent third party, in October 2012. We had another new ramp-up of production facilities for EO – the 4th phase EO production facilities, in February 2013, which means that our aggregate designed annual production capacity of EO has achieved an increment of more than 80% as at the date of this announcement when comparing to our position a year earlier.

During the first half of 2012, we initiated the vertical integration for EO business for the purpose of securing the supply of ethylene on a long term basis at a relatively reasonable and controllable material cost and, in turn, supporting our EO production capacity expansion plan, through acquiring Xingxing New Energy, which controls the right to use MTO Technology i.e. Methanol-to-Olefin-based technology and related ancillary technologies. The MTO Technology enables us to build a MTO production facility to produce ethylene and propylene and we have commenced the construction of the production facility in October 2012 and expect the commercial operation will take place by the end of 2014. As at the date of this announcement, the Group holds 75% of the equity interest of Xingxing New Energy. We expect the major outputs of the MTO production facility on an annual basis will be approximately 300,000 MT for ethylene, approximately 400,000 MT for propylene, approximately 23,000 MT for C4 and approximately 26,000 MT for C5 while the major inputs during the production process on an annual basis will be the feedstock of approximately 1,800,000 MT for methanol and the processing costs including, among others, electricity expenses, nitrogen, steam costs and water expenses which are required approximately 175 kWh, 90 Nm3/h, 1.5 tone/h and 4 tone/h respectively for each MT of methanol processed.

In view of the enormous feedstock requirement of the MTO production facility (i.e. approximately 1,800,000 MT of methanol), we fully understand whether we can procure methanol in a supply-stable and cost-effective manner is very critical and we have been taking a number of initiatives to tackle this issue. We are planning to choose transportation by sea for both domestic and overseas procurement of methanol to fulfill the production requirement of the MTO production facility. There are a number of reasons behind: 1) The production base of MTO production facility is only a few miles away from the port area of Jiaxing City of Zhejiang Province, PRC – the Zhapu Port; 2) There will be a high level of procurement volume required and transportation by vessel is more easy and effective to manage than transportation by truck; 3) we expect high land transportation costs of methanol from inland areas where most of the domestic methanol producers locate; 4) we expect international methanol price will be in a downward trend due to shale gas advantage; and 5) we have been noticing a number of international methanol producers increasing their methanol production capacities substantially through new ramp-up or restart-up of production facilities due to increasing methanol demand in PRC. Furthermore, in view of the upcoming enormous import requirement of methanol, in February 2013, we took an initiative to acquire a local port runner – Zhejiang Zhapu Mei Fu Port & Storage Co. Ltd. (浙江乍浦美福碼頭倉儲有限公司) (“Mei Fu Port”), which owns the biggest port in Zhapu, for the purpose of ensuring the smooth and cost-effective import of methanol. The acquisition of Mei Fu Port is yet to complete pending the shareholder approval and any other requirements as required by the Rules Governing the Listing of Securities (the “Listing Rules”) on the Stock Exchange.

The aggregate capital expenditure of the MTO production facility is expected to be approximately RMB2.2 billion, around 2/3 of which will be funded by way of bank or debt financing and the remaining will be funded by way of internal resources of the Group. As at the date of this announcement, we have obtained a number of offers from various banks in respect of credit line of term loan available to the MTO production facility of an aggregate amount up to RMB1.6 billion with an average interest rate offered of around 8% per annum. We have a gearing guidance for the MTO production facility as well as the overall position for our Group. We will stick to a gearing ratio of not more than 66.7% on total interest-bearing borrowings to total assets basis, which we consider is a better measure when comparing to total interest-bearing borrowings to total equity basis as the Group will have rapid expansion of various production facilities in the coming years and there is a time lag of approximately 2 years between the construction period of production facilities and the profit and revenue generated from these facilities. Based on our assessment when comparing the current market prices of all the outputs and inputs after taking into account the expected processing costs and finance costs, we expect the MTO production facility can generate a ROE of around 20% on a yearly basis, which we believe can be maintained in long run, primarily due to our planned adoption of transportation by sea for the procurement of methanol and the expected downward trend of international methanol price due to shale gas advantage.

Apart from the aforesaid direct financial contribution to the Group by the MTO production facility, our Group will also be benefited from synergy effect through: 1) the sharing of infrastructure as we can get enormous amount of nitrogen from air separation facilities during the EO production process and we have no use for certain amount of nitrogen except for supplying to MTO production facility, the benefit of which is expected to be approximately RMB50 million per annum; and 2) the procurement cost saving in respect of the 2% import duty and transportation cost charged for every MT of ethylene imported from overseas into China as the MTO production facility will supply 300,000 MT of ethylene to our EO production facilities, the benefit of which is expected to be approximately RMB90 million per annum.

Our Group's EO capacity expansion plan will finish after the completion of the 5th phase EO/ EG production facilities by the end of 2014, details of which have been set out in separate paragraphs below, and we have planned to shift the focus of our Group's future growth after 2014 to propylene derivative products from ethylene derivative products. In view of the expected output of approximately 400,000 MT of propylene from the operation of the MTO production facility from 2015, we are planning to build propylene-downstream production facilities for the purpose of diversifying our product mix to support our Group's growth after 2014. Given that producing propylene derivative products is a new business line to our Group, we take a more conservative approach in this area and as a result, in February 2013, we took an initiative to acquire a local propylene and propylene derivative products producer – Zhejiang Mei Fu Petrochemical Co. Ltd. (浙江美福石油化工有限責任公司) (“Mei Fu Petrochemical”) for the purpose of equipping relevant know-how from a existing player. The acquisition of Mei Fu Petrochemical is yet to complete pending the shareholder approval and any other requirements as required by the Listing Rules.

During the year under review and up to the date of this announcement, we have two new rampups of EO production facilities. We finished the construction of the 1st phase EO production facilities of JV with effective EO contribution to the Group of 50,000 MT in a designed annual production capacity basis in September and the commercial operation has taken place on 18 October 2012. The 1st phase EO production facilities of JV contributed approximately 14,760 MT for EO production/sales during the year ended 31 December 2012 and we expect the 1st phase EO production facilities of JV will contribute approximately 55,000 MT for EO production/sales in 2013. We also finished the construction of the 4th phase EO production facilities with designed annual production capacity of approximately 100,000 MT of EO in January 2013 and the commercial operation has taken place on 24 February 2013. We expect the 4th phase EO production facilities will contribute approximately 92,000 MT for EO production/sales in 2013. Thereafter, together with the additional EO production capacity contributed by the 1st phase EO production facilities of JV, the Group's aggregate designed annual production capacity of EO has increased by approximately 83.3% from 180,000 MT to 330,000 MT in around one year's time and we expect the actual production/sales volume of EO (for both own production facilities and the 1st phase EO production facilities of JV) will increase by approximately 60.8% from approximately 217,000 MT in 2012 to approximately 349,000 MT in 2013. As at the date of this announcement, we have entered into new sales contracts either with existing customers or new customers for aggregate sales order of approximately 80,000 MT on a yearly basis in respect of additional EO outputs from the 4th phase EO production facilities.

Business Outlook - For the year ended December 31, 2012

After the ramp-up of the 4th phase EO production facilities, we have initiated the construction of our Group's last phase of EO capacity expansion – the 5th phase EO/EG production facilities. The Group is planning to use and purchase, for the 5th phase EO/EG production facilities, the production technology from Scientific Design Company Inc. (“SD Company”), which is the same supplier of the production technologies used for the 1st phase to the 4th phase EO production facilities, under which, EO is regarded as the main product while ethylene glycol (“EG”) is regarded as the by-product, representing the fact that the 1st phase to the 4th phase EO production facilities can only deliver industrial-grade EG, which is a secondary EG in terms of quality and market selling price when comparing with polyestergrade EG. Instead of adopting the same production technologies used for the 1st phase to the 4th phase EO production facilities, we have decided to use and purchase a more advanced production technology from SD Company for the 5th phase EO/EG production facilities, which allows shifting the production capacity in certain extent between the production of EO and the production of EG and, in turn, marking it more flexible for the Group to adjust the product mix in response to the market conditions of EO, EG and AEO surfactants. Furthermore, under the aforesaid production technology, both EO and EG are regarded as the main products and the output of EG will be at polyester-grade. The expected output of the 5th phase EO/EG production facilities on an annual production capacity basis will be in between: 1) EO output at a maximum level of 240,000 MT and EG output at a minimum level of 130,000 MT; and 2) EO output at a minimum level of 100,000 MT and EG output at a maximum level of 250,000 MT. Moreover, the 5th phase EO/EG production facilities is equipped with reprocessing function for EG and able to convert industrial-grade EG into polyester-grade EG and the Group expects it will be benefited by approximately RMB15.0 million additionally through the reprocessing of the industrial-grade EG expected to be delivered by the 1st phase to 4th phase EO production facilities. We expect the commercial operation of the 5th phase EO/EG production facilities will take place by the end of 2014. The aggregate capital expenditure of the 5th phase EO/EG production facilities is expected to be RMB1.3 billion, around 2/3 of which will be funded by way of bank or debt financing and the remaining will be funded by way of internal resources of the Group. As at the date of this announcement, we have obtained a number of offers from various banks in respect of credit line of term loan available to the 5th phase EO/EG production facilities of an aggregate amount up to RMB1 billion with an average interest rate offered of around 8% per annum.

Source: China Sanjiang (02198) Annual Results Announcement
Chairman GUAN Jianzhong Issued Capital (shares) 993M
Par Value HKD 0.1 Market Capitalisation (HKD) 3,903M
 
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