Datang Group takes control of subsidiary’s loss-making coal and chemical assets

After losing billions of yuan for years, heavily indebted industrial businesses bought for a token 1 yuan

PUBLISHED : Friday, 01 July, 2016, 3:36pm
UPDATED : Friday, 01 July, 2016, 3:36pm

Datang International Power Generation, the flagship listed unit of one of the nation’s five state-backed power generation majors China Datang Group, has agreed to sell its hugely loss-making portfolio of coal, chemical and other heavy industrial businesses to its parent, for a token 1 yuan.

The transfer of ownership’s main purpose is for Datang International to avoid further losses and financial burden from the troubled projects, so it can shift its focus back to its core business of power generation.

During the early 2000s, the company diversified into coal mining and later further ventured into riskier projects that turn coal into chemicals and natural gas – businesses whose commercial viability had not been proven at the time.

In order to convince its parent to take on the troubled assets, Datang International was forced to agree to a token selling price of only 1 yuan and has to agreed to waive up to 10 billion yuan of loans owed by the troubled businesses to it.

The portfolio of projects has been bleeding cash for years.

They were first developed by Datang International during the coal boom almost a decade ago, and their offload means the company will be able to devote its efforts to its core business of power generation, it said in a filing to the Hong Kong stock exchange late on Thursday.

“The operating loss of its coal-to-chemical business segment has been increasing annually and the operating conditions continue to deteriorate,” it said.

“The overall transfer of [the segment] will terminate the impact ... on the company.”

Under the change in ownership, to be complete by August 31 after shareholder approval, the parent said it will release Datang International from its obligations on 18.5 billion yuan of loan guarantees it had provided the troubled businesses.

The move comes three months after a preliminary agreement to sell them to the central government-owned China Reform was scrapped, following a breakdown in two-year negotiations over how the assets would be transferred.

The portfolio’s biggest loss-maker has been a plant in Duolun in the Inner Mongolia autonomous region, which has an annual capacity to turn locally-mined low-grade coal into 460,000 tonnes of the base chemicals traditionally produced from crude oil.

Despite being considered a pioneer project of its type in terms of its commercial scale, the plant suffered years of construction delays and has been hampered by technical problems which have hurt output. Last year it lost 2.81 billion yuan after losing 4.6 billion yuan in 2014.

Overall, the portfolio covers 19 projects and includes two others that turn coal into natural gas, in Liaoning province and Inner Mongolia. The latter made a net profit of 47 million yuan last year, but the former lost Datang 1.3 billion yuan.

Other assets now being taken on by the parent include a fertiliser plant, three hydropower developers, one early-stage coal-fired power project developer, and a coal miner that lost 745 million yuan last year.

Datang International said an independent valuer it hired had estimated the projects to have a combined net liability of 9.36 billion yuan. The assets had a value of 6.54 billion yuan in its last set of accounts.

In the statement, officials claimed the 1-yuan selling price was based on 8.34 billion yuan of negative appraised value apportioned to the firm based on its stakes in them, combined with the waiver of loans.

Datang International said it expects to book 8.04 billion yuan worth of asset losses on its balance sheet as a result of the ownership change, and around 10 billion yuan will be shaved from its income statement from the loans waiver.