Energy & Resources

New sibling

Is Chaori’s bailout bad for GCL-Poly?

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GCL-Poly’s Zhu in Chaori deal

It aspires to become the “Huawei of the photovoltaic industry” but so far, investors have given the thumbs down to GCL-Poly Energy’s restructuring plan.

The Hong Kong-listed group’s share price started tumbling in late September when news leaked that its parent firm Golden Concord (or GCL Group) was leading a consortium to take over China’s first domestic bond market defaulter, Chaori Solar Energy.

The stock then went into freefall on November 10 after management announced plans to sell GCL-Poly’s core solar wafer business to an “independent third party” – rumoured to be asset management firm Great Wall. Shares fell 17% that day, bringing overall losses to 31% in the past two months. The stock has yet to recover.

The final sale price will be subject to an independent valuation, but investors have flagged a series of concerns. Top of these is the likelihood that GCL-Poly’s chairman Zhu Gongshan, who also controls Golden Concord, will end up buying the wafer business. The company indicated this is a possibility too, as the third party “might or might not” sell the asset in question back to Zhu.

Wafer production accounts for about 40% of GCL-Poly’s profits and absorbs about 75% of its polysilicon output. The proposed transaction would turn GCL-Poly into a supplier of solar panel raw materials to potentially Zhu or Chaori. Some in vestors fear this could lead to unfair connected transactions.

In an interview with the South China Morning Post, GCL-Poly’s investor relations head dismissed the concerns, insisting that GCL-Poly and Chaori are both listed and polysilicon prices are very transparent.

But analysts have also warned that the wafer business may be sold off below fair value. In a teleconference Zhu insisted, “I will not harm minority shareholders interests. Even if we sell the wafer business, I’m confident GCL’s profit will still rise this year.”

Others see it as a non-issue since the sale would be classified as a “major transaction”. According to Hong Kong’s regulatory rules, Zhu cannot vote on it, enabling minority investors to overthrow the deal if they think it unacceptable.

So why is Zhu selling the wafer business and what persuaded him to buy Chaori in the first place?

Together all the different parts should form an integrated player across the photovoltaic value chain. GCL-Poly has a roughly 20% market share of the poly-silicon and wafer business globally, two important upstream products. It also owns 62% of Hong Kong-listed solar panel farm developer GCL New Energy, at the downstream end.

The acquisition of solar panel manufacturer Chaori adds the mid-stream segment of the industry chain. After bailing out Chaori, Zhu has pledged to make the struggling firm profitable again (trading of its shares has now resumed in Shenzhen). Zhu has also undertaken to make up any shortfall if Chaori makes less than Rmb600 million ($97.97 million) in profit during 2015 and less than Rmb800 million a year later. This will mark a significant turnaround, given that Chaori has reported a Rmb2.5 billion loss for the first half of 2014.

Minsheng Securities analyst Huang Tong tells Shanghai Securities News that he believes the more obvious route to achieving these targets is to take out GCL-Poly’s profitable wafer business and put it into Chaori.

This sounds financially sensible for GCL-Poly too, as the sale would free up capital and improve its balance sheet.

Pre-deal, GCL-Poly had a net debt to equity ratio of 146.5%, reports Shanghai Securities News. Raising new equity to cut debt has been difficult because of loan covenants which prevent Zhu’s stake dropping below 30%. Zhu and his family’s stake in GCL-Poly is around 32%.

Golden Concord (for more background on the firm, see WiC141) is likely to be happy about the Chaori deal, which adds an A-share fundraising vehicle to complement its two Hong Kong listings.

Shareholders of GCL-Poly, meanwhile, will be hoping that the dealings between their company and its new sister firm will enhance the company’s value, as Zhu promises.

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