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Feature I Hongbaoli's Struggle for Strategic Breakthrough
Updated: 2017-07-17 14:03 Source: PUWORLD Exclusive share:
Part I A Snake in the Grass

An Ideal Strategic Acquisition
In the evening of 23rd, December 2016, Nanjing Hongbaoli announced an investment plan of Rmb 640 million to acquire Dongguan Xionglin New Material Technoloqy Co.,Ltd. which holds 88% of stake in the company Xionglin New Material. The announcement caused big stirs in the market once known among the public.  Xionglin New Material is one of the largest TPU film and TPU hot melt suppliers in China and an industry leader of the segment of the market while Hongbaoli is the largest premixed polyether polyol supplier in China. Considering Hongbaoli’s sluggish growth in revenue and net profit over the last few years, this acquisition can be treated as a significant strategic step by the leading enterprise in one branch of the industry toward an integrated polymer tycoon. Its products thus can directly flow to the end market.  Therefore, the step can be a very important starting point of business transformation for Hongbaoli.  

With a complete industrial chain of “polyester/polyether polyols——TPU dice——TPU film products” on the horizon, Hongbaoli was confident and committed in this transaction. Hongbaoli would have achieved a gorgeous corporate transformation with 100% shares of Xionglin New Material in the pocket held directly or indirectly when the acquisition went thru.

In the Shadows of Doubt
However, as confident in the transaction as Hongbaoli was, the financial market did not share its sentiment about it and responded with a bucket of cold water.  Hongbaoli’s share price has been falling off since the announcement was made at the end of December.  The main reason lied in the market’s criticism on Xionglin New Material’s sales strategies; critisism amplified specially after the release of its financial and audit results which made the company’s hiden problems come to public exposure.

Xionglin New Material’s market share was as high as 13.1% but mostly gained through credit sales.   Its annual accounts receivable accounted for 32% and 39% of its revenues respectively in the year 2014 and 2015 while during the first three quarters of 2016 the proportion climbed to 62%, as stated in the financial statement.  Its revenue was growing at even slower rate than its accounts receivable, while its turnover rate was far lower than competitors in the industry.  In addition, Xionglin’s products did not have a good reputation.  Thus, it was reasonable to suspect that Xionglin’s market strategy was exchanging credit sales for market share and while seeking to be acquired.  

Hidden Crisis
Credit sale, commonly saw in market, is a double-edged swowrd. To buyeres, especially those who are dealing with producers, credit sale is a tempting term hard to refuse.  But to sellers, aside from the increasing market share, it can also bring the risks of bad debts and a ruptured capital chain.

On the positive side, Xionglin New Material gained a total of 13.1% market shares in the TPU film market, although its products did not receive good feedbacks. On the negative side, its financial statements are looking less than good.

Firstly, Xionglin’s major customers, Jinjiang Angsi and Shantou Angsi are controlled by the same person.  In the first three quarters of 2016, Xiongan’s sales to these two companies was Rmb 18.83 million, about Rmb 5million less than the accounts receivable of Rmb 23.82 million with them. Although there is no way to know about the aging of these AR, by a plus difference between AR and sales that is almost one third of the total sales is not looking good for Xionglin.  Xionglin’s risk of bad debts is high enough to arouse worries.
Secondly, Xionglin’s accounts receivable in the financial statement did not correspond to the revenues.  Authentity of the statement figures were suspicious.
Thirdly, per share prices in November 2016, Xionglin New Material’s 100% equity prices increased from 730 million to 881 million yuan within the month, which further eroded the credibility of Xionglin’s financial statements.

Stand Alone at the End
Following rounds of doubts in the market, on 2nd of March, Hongbaoli received a unilateral notice from Mr. He Jianxiong, the actual controller of Xionglin, terminating the agreement of acquisition. The thwarted transaction blew hard on Hongbaoli, as its stock was decreasing since January and is yet to return to the level before the acquisition.


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