Ocean Grand warns of partnership risk

Main-board listing candidate Ocean Grand Chemicals has warned investors of risks from its reliance on mainland partner Changzhou Chemical Research Institute.

The company, to be spun off from aluminium extrusion producer Ocean Grand Holdings on June 30, said in its listing prospectus that 81.8 per cent of its gross profit in the nine months to the end of last year, and 82.2 per cent in the year to March 31 last year, was dependent on subcontracting of palladium salt production to Changzhou.

Ocean Grand has been making gold salt in Hong Kong since 1991 and last January opened a factory in Zhuhai to produce silver, palladium and rhodium salt. The salts are precious metal chemicals used in industrial electroplating.

Ocean Grand Chemicals has a five-year subcontracting agreement with Changzhou, under which the latter makes palladium salt for Ocean Grand and takes 15 per cent of the fee paid to Ocean Grand by its customers, with Ocean Grand retaining the rest.

Under the arrangement, Ocean Grand booked a net profit of $12.47 million, $19.48 million and $23.19 million in the three financial years to March 31 last year and met main-board listing requirements.

When asked why Changzhou was willing to receive such a low fee for the subcontract work, assistant director William Kwan Man-wai said: 'We were lucky to be able to fix the subcontracting price.'

He said the deal was sealed amid the Asian financial crisis.

Ocean Grand plans to gradually move the subcontracted work to its Zhuhai plant, but said its annual capacity of 6,000 kilograms would not be sufficient to meet demand and a supplementary agreement was signed to extend the subcontracting relationship until May next year.

As part of its relationship with Ocean Grand, Changzhou transferred its technology to Ocean Grand in November 2001 for 12.2 million yuan (HK$11.5 million) on a non-exclusive basis, and last January granted Ocean Grand the right of first refusal to buy exclusive ownership of the technology for not more than 24.4 million yuan.

Changzhou was granted a 36.7-million-yuan contract to design and construct the Zhuhai plant for Ocean Grand.

Mr Kwan played down concerns that Changzhou would compete with Ocean Grand, saying metal salt making was not its core business.

Changzhou made 5,606kg of palladium salt for Ocean Grand in the nine months to March 31 last year.

The prospectus also warned of credit risk as Ocean Grand allows customers 12 months to pay.

PINCH OF SALT

The company derived 82 per cent of its gross profit from the production of palladium salt last year

This production is outsourced to partner Changzhou Chemical Research Institute