The Collapse of Ferro China
11-14 18:06 Caijing Magazine
The plant of Changshu based Everbright Material Technology Co. Ltd. has been sealed by court since early October and the company’s 200,000 square meters plant area in the Changshu Riverside Industrial Park has been quiet.
By staff reporters Gong Jing, Chen Zhu and Zhao Hejuan
On October 8, 20 senior Taiwanese managers of Ferro China, the parent company of Changshu Everbright and a leading , were found to return to Taiwan. On the next day, Ferro China published a statement saying the company has suspended production and was unable to repay what could be 5.2 billion yuan in debts. Trading of Ferro China was halted in Singapore stock exchanges since October 10.
After five years' rapid growth, the sudden collapse of Ferro China has astonished the Yangtze River Delta, a region that has been shaken by a series of economic turmoil.
Started with Zero
According to a material presented by the Changshu government to Caijing, the incident has been described as "operation difficulties cased by capital shortage amid the global financial crisis and declining steel industry."
But, people closed to Ferro China and the company’s CEO and substantial shareholder She Chuntai said the result is expectable since the success of She and Ferro China came so fast and easily.
She Chuntai, a Taiwan native, started his career on the mainland in 2001 as a mid-level manager in Taiwan's steel conglomerate E-United Group.
In 2003, She quit his position in E-United Group and started his own business focusing on galvanized steel products. Although She didn't have much capital at the beginning, he relied on the local preference policies to foreign investors and hundreds million of U.S. dollars he raised from international market to establish Changshu Everbright.
A source familiar with She told Caijing that She understood very well about the business of galvanized steel.” He is very good at creating a beautiful business perspective to persuade investors, government officials and bankers, and he did believe the perspective would be realized," said the source.
Relied on various investments, Changshu Everbright finished production lines construction by 2007 with total investment of US$ 8.9 million.
At the same time, She was also the CEO of Ferro China. In May 2005, Ferro China listed in the Singapore stock exchanges and raised 212 million yuan. Half of Ferro China's stake was bought by institutional investors and She owns 14.15 percent of the company's stake.
With the supports from institutional investors, She later pushed Ferro China to acquire the Changshu Everbright in 2006. The merger made She's stake in Ferro China raised to a substantial 16.32 percent and also increased Ferro China's market value to more than 1 billion Singapore dollars. Ferro China's total assets surged from 2.99 billion yuan in 2006 to 12.9 billion yuan in 2007, in which at least 9 billion yuan was contributed by Changshu Everbright.
At the end of 2007, Changshu Everbright announced sales revenue of 6.7 billion yuan and forecasted that the 2008 revenue would reach 10 billion yuan. The encouraging news had helped Ferro China to lure more investors.
Growing Bubble
After Ferro China's collapse, industry experts started to question Changshu Everbright's actual asset value. According to a report from the tax bureau in Jiangsu Province, Changshu Everbright's registered capital was US$ 210 million, but only US$ 130 million was eventually reached. Ferro China has earlier said in its financial reports that about US$ 3.8 billion yuan of Changshu Everbright's asset was intangible asset.
From 2006 to 2007, as Changshu Everbright was merged into Ferro China, She started another round of business expansion relied on his deep relationship with government official, banks and other investors.
At that time, the global steel prices kept surging, but some experts have started to warn the oversupply and the emerging risks.
In June 2006, Changshu Everbright acquired Tianjin Yiyuan Steel Plate Company. And six months later, Ferro China paid US$ 8.5 million to buy Changshu Xinghai Xinxing Construction Material Co. and Changshu Xingyu Xinxing Construction Material Co.. Both Xinghai and Xingyu were established by She.
Following the takeover is a series of production expansion. In 2007, Ferro China built a new production line with 600,000 tons capacity in Tianjin, with investment of 510 billion yuan. At the same time, Xingyu and Xinghai also added up to 500,000 tons of new capacity respectively. Ferro China planned to acquire three more companies in Dongguan, Guangdong Province and Vietnam, but the plan has been postponed due to the lack of capital.
Even when the company's capital crisis emerged in 2008, Ferro China still remained fast pace of expansion. In an interview with the Singapore United Morning Post, She Chuntai said Ferro China's production capacity of galvanized steel would reach 3.5 million tons, and increase to 5 million tons by 2010, becoming the world largest galvanized steel producer. But, when the crisis broke out, the company's capacity was only 2 million tons.
A Taiwan businessmen closed to She said "he has expanded too fast. It only took five years to grow from zero to the world leading galvanized steel producer."
Behind the beautiful scene
An industry source who asked not to be named told Caijing that the major problem of Ferro China's operation is its high reliance on bank loans. When Ferro China acquired Changshu Everbright, it also took over 4 billion yuan bank loan. And the company's liability further expanded after that.
Source familiar with the galvanized steel industry said the industry is capital intensive but with small profit margin which is only about 10 percent to 15 percent. If the company relies too much on loan, it would be unable to remain healthy capital flow.
In early 2006, Citigroup offered US$ 160 million loan to Ferro China to help the company acquire Changshu Everbright and build new production lines.
In March that year, China Construction Bank (CCB) led several other domestic and overseas financial institutions provided Changshu Everbright 1.2 billion yuan Syndicated Loan.
After Ferro China’s crisis surfaced, the Changshu city court has received 48 cases concerning on domestic banks’ loan to the company. A source from the Jiangsu provincial banking regulatory commission told Caijing that no violation has yet been found in banks’ loan offering to Ferro China, since the company provided enough mortgage assets and represented promising business outlook.
However, the financial situation of Ferro China was not as beautiful as it showed in the financial reports. According to the company’s 2007 financial report, its asset liability ratio was 51 percent. But if take the company’s statement saying 3.8 billion yuan of its assets was intangible assets into account, the liability ratio of Ferro China’s actual assets was as high as 73 percent.
Crisis of Ferro China’s capital chain emerged in March, even earlier than the sudden decline of global steel industry in June.
In March, Citigroup International Ltd.’s US$ 60 million loan to Ferro China was due, but the company was unable to repay. The two parties finally agreed to prolong the contract and raise interest rate by 5 percentage points.
A source from the local branch of Industrial and Commercial Bank told Caijing that they have found Ferro China’s capital chain turn tighter since last year and the bank therefore started to call back loans.
“Even the overall market situation remains good, such a company will collapse sooner or later since it doesn’t have enough capital and only rely on loans to operation,” said the bank source.
