More twists and turns in the ongoing fight for control of China Shanshui Cement
As the ugly fight for control of a major mainland cement maker drags out in public view, the auctioning of its assets by court order could become the new battleground
Li Heping was brimming with confidence before he boarded a plane in Hong Kong in December to fly to China Shanshui Cement’s (Shanshui) headquarters in Jinan, Shandong province, to face-off against the firm’s founder and his son in an attempt to wrest control from them.
“Old Zhang and young Zhang don’t want to give up their power … [my success] will happen very fast because according to the law, any lawful thing will happen quickly,” Li told the South China Morning Post at the time.
Five months on that confidence may have waned, even though Li assumed the role of chief executive of Shanshui, because there are no signs an end to the power struggle is in sight. Instead, the battle has moved from the boardroom to the field in what has become prolonged trench warfare.
Once China’s seventh largest cement maker, Hong Kong-listed Shanshui, vulnerable to takeovers due to its fragmented shareholding structure, was pounced on by rival Tianrui Group – parent of Hong Kong-listed China Tianrui Group Cement – which launched a hostile takeover in April last year.
It raised its stake in Shanshui from 10.5 per cent to 28.2 per cent within 10 days by snapping up shares on the open market at an average price of HK$5.52 each after the stock soared by a third in the previous month, becoming its largest shareholder.
Both Shanshui and Henan-based Tianrui sourced around a quarter of their revenue from northeast China. With Tianrui’s listed unit suffering a loss in the region last year, acquiring Shanshui would help cut price competition there and allow it to expand into Shandong.
“Shanshui’s being taken over is positive as it shows industry consolidation is making progress, but it turned out to be not only hostile but quite extreme,” said CLSA commodities sector analyst Daniel Meng.
The previous board, led by the Zhangs, attempted to liquidate the firm in a bid to fend off Tianrui’s move to take control of its assets, but it was dismissed by the grand court in Cayman Islands where the firm was incorporated, which cited its directors’ lack of authority to ask the court to wind their own firm up.
After multiple attempts, Tianrui in December succeeded in removing Zhang Caikui and his son Zhang Bin – both former chairman of Shanshui – as well as all other Shanshui directors.
It came after shareholders voted in favour of resolutions proposed by Tianrui, since substantial shareholders Asia Cement and China National Building Material (CNBM) boycotted the voting.
The two firms joined the Zhangs in resisting a Tianrui-dominated Shanshui. Soon after Tianrui sought to remove the Zhangs, Asia Cement and CNBM announced last July they were considering a joint offer to buy up all the Shanshui shares they did not already own.
But the offer never materialised, and the pair were forced to drop it this month under the “put up or shut up ruling” ordered by the Securities and Futures Commission.
While the new Shanshui board claimed the offer was never “bona fide,” Asia Cement and CNBM put their withdrawal partly down to a lack of access to information on Shanshui and the multitude of legal disputes it was involved in.
Tianrui in Decembergained control of Shanshui’s board, sidelining Taiwan-listed Asia Cement – parent of Hong Kong listed Asia Cement China, Hong Kong-listed state-backed cement and gypsum board maker CNBM, and China Shanshui Investment, in which the elder Zhang is a trustee holding shares on behalf of some 2,500 Shanshui employees as a result of a state asset privatisation over a decade ago.
Asia Cement accumulated a 20.9 per cent stake in Shanshui between May 2010 to late 2014, compared to 16.7 per cent amassed by CNBM in late 2014, and China Shanhui Investment’s 25.1 per cent stake.
Trading in Shanshui has been suspended for 13 months because Tianrui’s takeover meant only 9.2 per cent of the shares were owned by public shareholders, below the 25 per cent minimum required by listing rules.
The ousting of the Zhangs triggered a change of management control provision in a US$500 million offshore bond issued by Shanshui, which gave bondholders the right to demand that the firm redeem them.
Holders representing 97 per cent of the bond’s outstanding principal accepted the new board’s redemption offer in January ahead of the bond’s maturity in 2020. Tianrui has committed to help Shanshui find the money to complete the redemption. But a new completion date remains elusive after a March targeted date was missed.
Li Heping did not respond to emailed questions seeking comments on a redemption timeline and whether Tianrui is facing difficulty in helping China Shanshui raise funds.
Shanshui in late March revealed that Tianrui has pledged a 23.4 per cent stake in Shanshui to China Bohai Bank as collateral for a loan, without disclosing its usage.
Stephen Liu Yiu-keung, a Shanshui director, told the Post its new board and an unidentified financial adviser are studying ways to meet the public shareholding requirement, including a possible rights share offering.
Liu is managing director of transaction advisory services at EY’s Hong Kong office and is the court-appointed receiver for China Shanshui Investment following multiple law suits in Hong Kong last year between the Zhangs and Shanshui’s employees and former senior management shareholders in disputes over a China Shanshui Investment shares repurchase programme launched by the Zhangs.
After Tianrui gained control of Shanshui’s board, the Zhangs retreated to its Jinan headquarters where its main operating subsidiary Shandong Shanshui is located, although they have supposedly been fired by the new Shanshui board.
By “illegally” holding Shandong Shanshui’s corporate seal and amending its articles of association, the Zhangs have prevented the new Shanshui board from appointing new management to Shandong Shanshui, the new board claimed.
They also continued to operate Shandong Shanshui and used the seal to issue announcements about its debt defaults and creditors’ court actions and post them on its website and online bond information sites.
The new board in January obtained a Hong Kong High Court order demanding the Zhangs reverse the articles of association amendments, but failed to have it executed on the mainland as the ruling has not been upheld by any mainland court. This highlights the challenges facing offshore creditors and equity holders in exercising their rights over a Hong Kong-listed firm’s mainland-incorporated units and their assets.
Complicating matters, the Jinan government sent a “working group” to monitor Shandong Shanshui’s operations and assert its “rights” to vet any major decisions, including key staff recruitments and dismissals.
Attempts by the new Shanshui board to appoint new directors to Shandong Shanshui failed since the city’s administration of industry and commerce requires application documents to be chopped by the original seal – which was allegedly “stolen” by the Zhangs – before it will sanction the appointments.
Frustration saw the new Shanshui board launch a rare law suit against the Jinan government, its mayor Yang Luyu and deputy mayor Su Shuwei in March in a Hong Kong court, alleging that they conspired with the Zhangs to install the working group, obstructed the new board from gaining access to the Jinan headquarters and concealed the company seal and litigation records.
Legal experts said taking mainland government officials to court in Hong Kong over actions and events across the border is difficult, unless cooperation from a mainland court is obtained.
Separately, Yang was put under investigation for graft by the Communist Party’s anti-corruption watchdog a month after the writ was filed against him.
“It is hard for outsiders to have an objective view of the full picture of the saga as some information is likely hidden from the public,” said China Galaxy International head of research Wong Chi-man.
What is clear is that as the fight for control drags on, Shanshui’s assets could be put up for auction on mainland court orders, and the auctions could become the new battleground. Sources close to Asia Cement and CNBM said they will consider bidding for the assets.
Meanwhile, events took a bizarre twist over the past two weeks, with the new China Shanshui board lambasting China Merchants Bank, the main underwriter of several bonds issued by Shandong Shanshui.
The board accused the underwriter of falsely identifying the Zhangs as “management” of Shandong Shanshui in an announcement telling the latter’s bondholders that the underwriter had met its duties by urging the Zhangs and the Tianrui-led Shanshui board to put aside their disputes and fulfil their regulatory obligations to make overdue disclosures on Shandong Shanshui’s financial results.
The new Shanshui board also alleged the bank told the board that the interest could not be distributed to the bondholders because the new board does not possess the official seal of Shandong Shanshui, a claim vehemently denied by the bank.
The bank said in a statement obtained by the Post that the interest has already been paid to the bondholders and there was no need for any document to be chopped with the seal before it can be paid.
According to an early April announcement by Zhang-controlled Shandong Shanshui, some 96 court claims have been filed by Shandong Shanshui’s creditors involving 4.94 billion yuan of unpaid debt.
Some of Shandong Shanshui’s bank accounts and assets have been frozen, and the courts may have to auction the assets because its tight cash position means it will unlikely be able to repay the debt, the announcements added.
Hong Kong-listed Shanshui’s net profit tumbled from 2.23 billion yuan in 2011 to 1.52 billion yuan in 2012, then to 1.02 billion yuan in 2013 and 308.6 million yuan in 2014. It booked a net loss of 6.69 billion yuan last year on a spike in administrative expense, falling demand and product prices, and asset write-downs on cement plants acquired.
With 223 million yuan of cash and 27 billion yuan of total assets at the end of last year, it has to repay 15.6 billion yuan of borrowings before year-end. Creditors had also demanded repayment of overdue loans, bonds and suppliers’ payables to the tune of 4.43 billion yuan, triggering a liquidity crisis that’s highlighted a desperate need to restructure its debt.
“It is hard to tell what portion of its financial troubles was caused by the macro-environment and how much was caused by the shareholders’ infighting, but before the control war it had the financial muscle to repay its debt,” CLSA’s Meng said.
“Combined with the economic slowdown and China’s economic transition from fixed asset investment-led growth to consumption-led growth, the prolonged infighting has resulted in an all-lose situation.”
According to a tally by SWS Research, China’s top 11 listed cement makers saw their combined net profit plummet 66 per cent last year to 4.95 billion yuan. They fell to a combined net loss of 347 million yuan in last year’s fourth quarter, and sank further into a loss of 625 million yuan in this year’s first quarter, as cement prices slid to a five year low since peaking mid-2011, despite a rebound in 2013.
A recovery appears to be taking shape, with prices rising in March amid a speeding up of fixed assets and property investments, resulting in a 24 per cent year-on-year surge in industry output in March, the fastest in just over 5 years.
Industry consolidation is not only happening among privately-controlled cement firms.
State-backed BBMG, the dominant cement producer in the Beijing-Tianjin-Hebei region and also one of the capital’s biggest property developers, last month inked a framework agreement to buy at least 51 per cent of Tangshan-based Jidong Development, and for BBMG to sell some of its cement and concrete business into Tangshan Jidong, one of the nation’s largest cement and building materials production line makers.
BBMG, which agreed to make a deposit of 3 billion yuan for the potential deal subject to further negotiations and a final agreement, said it is an answer to Beijing’s call for “supply-side structural reforms … for the purpose of resolving excess production capacity and optimising industrial structure” so that corporate profit, efficiency and competitiveness can be enhanced.
This came three months after CNBM Group, parent of Hong Kong-listed CNBM, announced that it was “contemplating a strategic reorganisation” with another major cement producer Sinoma Group, parent of Hong Kong and Shanghai-listed China National Materials Group (Sinoma), as part of Beijing’s six pilot schemes for central government-owned enterprises reform.
Meng said while the cement sector can be expected to fare “relatively alright” in this year’s second and third quarters given that fixed asset investment and property construction activities have picked up from last year’s slump on the back of Beijing’s economic support policies, it would be difficult for the recovery to be sustained into the fourth quarter as China has passed its cement consumption peak.