Stock exchange probes Wanhua take over plan

Yantai, Shandong – Wanhua’s proposed take over of its controlling shareholder Wanhua Chemical Industry (WCI) is being scrutinised by the Shanghai Stock Exchange.

SSE is interested in the relationships between WCI, Wanhua and BorsodChem. BorsodChem like Wanhua is a subsidiary of WCI. On 21 May SSE sent a letter of enquiry to Wanhua.

WCI owns 100% of BorsodChem and the over 40% of shares in Wanhua, the rest of which are listed in Shanghai.

The SSE wants to ensure that Wanhua will pay a fair price for the BorsodChem assets it will acquire if the take over of WCI goes ahead.

Last year BorsodChem recorded $2 billion (€1.71 billion) revenue, up 52% from 2016. It had 46% gross margin, up 13% from 2016.

SSE asked Wanhua for more information, such as BorsodChem’s total takeover price, funding it obtained since Wanhua bought its first stake in 2010. SSE is also interested in the level of debt is involved, to determine whether the acquisition of WCI is priced at fair market value.

The letter requested reasons for the sharp rise in BorsodChem’s gross margin. It points out that in 2017 the listed arm was BorsodChem’s second largest supplier, accounting for 15% of its procurement bill. It asked Wanhua to provide prices offered to BorsodChem along with comparisons with other suppliers to decide if BorsodChem was getting advantageous deals.

SSE also questioned the disparity between BorsodChem’s revenue jump in 2017 and its negative net increase of cash and cash equivalents.

According to Wanhua’s response published on 2 June, a total of $302 million had been paid in three deals from 2010 to 2016 to fully acquire BorsodChem, which is valued at $1.6 billion in the proposed WCI takeover.

The response letter explains that in 2010 BorsodChem had $154m loss following two years in the red after the global financial crisis. In 2017 it recorded $463m net profit thanks to Wanhua’s help with its operation since the first deal. Wanhua group companies no longer hold debt resulting from the three deals.

Regarding the question on supply pricing, the response letter states that in 2017 the listed arm sold 65.4 kT diisocyanate feedstock aniline to BorsodChem, up 44% from 2016. Average prices in 2017 rose 23% to $1,144/tonne.

BorsodChem’s main aniline supplier, its Czech subsidiary BC-MCHZ, retrofitted its facilities in 2017, adding BorsodChem’s external demand to 65kT said the response. BC-MCHZ’s analine price during the year was $1,173/tonne, up 20% from 2016. This was due to the rising oil price, close to Wanhua’s price and growth rate.

BorsodChem also procured 24.5 kT MDI from Wanhua, almost nine times more than 2016. Wanhua explained that in 2017 BorsodChem had a one-month maintenance shutdown for various facilities. It built stocks ahead of this for its regular customers, while the listed arm upped its MDI capacity by nearly 400kT/year, able to make more supplies. Wanhua’s MDI price for BorsodChem averaged at $2,381/tonne. It said this was similar to its average MDI export price.

The response letter cites revived demand from downstream polyurethane sectors since late 2016 and suspended production at global diisocyanate facilities as the reasons for rising MDI and TDI prices, leading to the jump in BorsodChem’s growth margin.

The letter expects MDI and TDI prices to fall back to its historical average level in 2019 and pick up afterwards, pegging BorsodChem’s 2022 revenue at nearly $2 billion, close to its 2017 revenue.

On the disparity between BorsodChem’s 2017 revenue jump and its negative net increase of cash and cash equivalents, the letter states it’s caused by repaying earlier debt and other capital expenditures such as investment in technology upgrade projects.