The leading industrial gas supplier in China has had a series of dramatic changes this month. On December 2nd, the company announced that the new shares placing to Originwater was postponed, due to its failure to satisfy certain conditions. On December 14th, trading of its securities were halted. Former management of Yinde Gases and the non-executive directors, Mr. Zhongguo Sun and Mr. Trevor Raymond Strutt issued an open letter claiming that Originwater would be acting in concert with Mr. Zhao Xiangti, the new chairman of the company after reappointment. The open letter suggested that the combined shares by the two parties would be over 30%, which would trigger a general offer to the company’s shares. As the necessary general offer action is not forthcoming, Mr. Sun and Mr. Strutt suggested that the reappointment would be invalid. However, they are still open to any general offer reaching their target price or higher. SFC requires that a trigger happens when an acquisition will increase the shareholding to over 30% of the company. However, in this case, Originwater has acquired new shares, but not the existing 20% of shares. The shares holding was around 16.7% after the placing completes. Thus, the definition of this deal leaves room for further discussion. According to the explanation by Yingde Gases the next day, the company indicated that both its legal advisor and Hong Kong Exchange confirmed that the deal was appropriate without the issues mentioned in the open letter. We reckon that any further development will depend on how the majority shareholders decide the nature of the new placement and how strong Originwater’s will is to invest in the company. Yingde Gases is considering to restructure the proposed placing to Originwater in urgent need to use the proceeds from the placing to repay the bank loan in 2017. The deadline for the placement is six months from this month. As to the company’s further funding activities, we do not expect the company to conduct any other equity related financing in the short term. The company has been negotiating with HSBC and China Development Bank for its revolving loans. The CDB loans will mature in 2017. If the loans are not extended and injected equity capital is not received in time, the company will need to repay around RMB700 to RMB800mn in 2017 and Yingde has to use its own cash for repayment or borrow with higher costs. The HSBC loans will mature in 2019. The cash and operating cash flows at the end of 1H16 were RMB1,050mn and RMB980mn respectively. The company has also been working on deducting capital expenditures to save money for debts issues. At present, the dispute among Yingde’s top management hasn’t affected its normal operation. But if the previous management takes over, relationships with courter parties will be largely impaired since there was originally certain conflicts between the previous management and the company’s clients, which will further impact the receivables collection and its operation cash flow. Overall, combining the attitude of the board directors and the financial status of the company, we reckon that the event will have an impact on its liquidity, but not to a serious degree for the time. The major concern is still the US Dollar notes maturing in 2018, amounting to USD380mn. Though we didn’t foresee a high possibility, the worst case could be that if no further equity is injected, the company will suffer a serious shortage of cash after repaying the bank loans and have a high financing need in 2017. It is likely for the company to issue RMB bonds in the onshore market to avoid the impact of foreign exchange depreciation. The finance cost as at the end of 1H16 was 6.34%.
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