HaiKe Chemical : Proposed Restructuring of the Group

HaiKe Chemical Group Ltd.



HaiKe Chemical Group Ltd

Proposed Restructuring of the Group

Introduction

HaiKe Chemical Group Limited (the "Company"), the AIM quoted (AIM: HAIK) petrochemical, specialty chemical and biochemical business based in Shandong Province of China, announces that certain Group companies have entered into two conditional sale and purchase agreements, the principal aim of which is to effect the divestment of the Group's historically unprofitable assets and a significant proportion of the Group's financial liabilities.  These agreements will result in the disposal of the Group's refinery assets, the large majority of the Group's debts and the Group's biochemical assets, in order to leave a smaller but more focused specialty chemical business (together as the "Restructuring"). 

The Company has previously announced that, as a result of the continuing structural difficulties in the Chinese refining industry, the Board was evaluating the feasibility of restructuring the Group in order to streamline the business and formulate a long-term and sustainable earnings model. This review has been completed and the Directors believe that it is in the best interests of Shareholders to carry out a restructuring. The Disposal is deemed to be a disposal resulting in a fundamental change of the business of the Company for the purpose of AIM Rule 15. By virtue of being deemed a fundamental change of business, the Disposal is conditional on the approval of Shareholders being given at a General Meeting of the Company.

A General Meeting of the Company will therefore  be convened for 10am (PRC time) on 15 May 2014 at the conference room of HaiKeChemical Group Ltd., 11th Floor, HaiKe Mansion, No. 726 Beiyi Road, Dongying City, China. , at which Shareholders will be asked to consider, and if thought fit, to approve the Resolution required under AIM Rule 15 in order to permit the Disposal. Details of the EGM are set out in the Notice which is set out at the end of the Circular.

A circular (the "Circular"), containing further details of the Restructuring and convening the EGM at which the Resolution will be considered, is expected to be posted to Shareholders today and will be available on the Company's websitewww.haikechemical.com.

Summary of the proposals:

·     Divestment of all of the Group's present assets and liabilities with the exception of HaiKe Trading and Spring Chemical

·     The Restructuring will give rise to a consideration of approximately RMB142 million payable by the On-going Group to the Disposal Group. This consideration, however, will only become payable in the event that the On-going Group sells or otherwise disposes of Spring Chemical and/or HaiKe Trading. Furthermore, the consideration will not become payable in the event that 100 per cent. of the On-going Group is sold or in the event of an offer for the On-going Group or pursuant to a change of control of the On-going Group. The Seller has undertaken that it, and any parties that may be considered to be related to it, will not seek to, or procure other parties to seek to, acquire Spring Chemical and/or HaiKe Trading.

·     The On-going Group will acquire the approximately 74.9 per cent. of Spring Chemical currently owned by Shandong Hi-tech and approximately 25.0 per cent. of Spring Chemical currently owned by HaiKe Holding and, as a result, will own approximately 99.9 per cent. of Spring Chemical.  The On-going Group will also acquire 100 per cent. of HaiKe Trading

·     Spring Chemical will, following the Restructuring, focus on producing high margin specialty chemicals, including DMC, pharmacy grade propylene glycol, cosmetic additives, blending agents and electronic grade chemical products

·     Following the Restructuring, the Company will continue to be admitted to trading on AIM

Mr. Xiaohong Yang, Executive Chairman, said:

"The Restructuring is an important step in our stated strategy of focusing on our higher margin, profitable specialty chemical business. The refinery and associated debt has held back the development of the business and there continues to be uncertainty over the price of refined products.  Therefore we believe the transaction will now allow us to focus solely on developing the operations of HaiKe Trading and Spring Chemical and fulfil our long term ambition to generate sustainable profitability."

Background to and reasons for the Restructuring

The Company has previously reported on-going structural difficulties in the Chinese refinery industry which resulted in severe profit margin erosion and a Group loss for the year ended 31 December 2012. As announced in the Trading Update, a further loss is expected for the year ended 31 December 2013.

Since the Company's admission to AIM on 14 February 2007, the Group's operations have remained overly weighted towards the refinery business which has been volatile and difficult to forecast. The refinery business has grown substantially over the last five years; this growth has largely been funded by debt. As at 30 June 2013, Group liabilities totalled approximately RMB9.6billion (£1.0 billion) of which approximately RMB6.6 billion (£694.7 million) was short term debt.

The Group reported a net loss attributable to the owners of the Company of approximately RMB286.5 million (£30.2 million) over the first half of 2013. The majority of the loss was attributable to the disappointing performance of the refining division. Losses for the refining division, which contributed approximately 75.8 per cent. of Group turnover for the period, amounted to approximately RMB334.6 million (£35.2 million). As a result of fluctuations in oil prices and demand, the Group's refinery business remains difficult to forecast. Margins across the Group's refinery operations, inherently a high volume - low margin business, have come under further pressure due to the lack of control that the Company has over the price of refined products. The pricing for refined products is determined by the Chinese National Development and Reform Commission and does not always reflect changes in feedstock price which have been subject to substantial price increases in recent years. It should be noted, however, that there have been some reforms made to the market for refined products in China during the last twelve months which may alter the market. The near-term impact of these reforms on the Group is not yet clear.

The Restructuring should allow the On-going Group to operate free of the majority of the existing Group's debt burden and the uncertainties of the refinery business. Subsequent to the Restructuring, the Directors believe Spring Chemical will be well placed to pursue its strategy of focusing on the production of higher margin specialty chemical products, in contrast to the high volume - low margin refinery business where pricing is determined by the Chinese National Development and Reform Commission. The Board believes that the Restructuring is consistent with the Group's long-held ambition to achieve sustainable profitability through the strategic move towards speciality chemicals with an initial focus on the retention, within the listed vehicle, of the historically profitable Spring Chemical.

Information on the On-Going Group

Group revenue attributable to Spring Chemical and HaiKe Trading for the year to 31 December 2012 was approximately RMB969.2 million (£102.0 million). Upon completion of the Disposal and the Restructuring, it is anticipated that the On-going Group will have bank facilities in respect of approximately RMB100.0 million (£10.5 million) of loans (drawn and undrawn). In advance of the Restructuring, approximately RMB250.0 million (£26.3 million) of bank debt was repaid, approximately RMB200.0 million of which came through a cash advance extended by Jindayuan Group, a company based in Dongying, PRC, which has longstanding relationship with the Group. The Directors believe that this advance should allow the On-going Group sufficient working capital for at least the period to 31 December 2015. The cash advance will be repayable on 10 January 2016 and will be interest-free for the first year after which it will be subject to a market rate of interest, the level of which will be agreed between the two parties.The remaining approximately RMB50.0 million of bank debt was repaid with monies coming from the release of restricted cash.

·     Spring Chemical

Spring Chemical focuses on the production and sale of a number of speciality chemicals. The Directors believe that it is one of the leading producers of DMC and pharmacy grade propylene glycol in China. DMC is widely used in medical applications, agricultural pesticides and the manufacture of synthetic materials. DMC produced by the Group is sold primarily in the Guangdong and Jiangsu provinces of the PRC and exported to key markets in Europe. Propylene glycol is used in the medical industry as well as the food industry for flavourings and fragrances.  This production is largely for Chinese domestic consumption. Spring Chemical is the only enterprise in China that holds a pharmaceutical supplementary materials manufacturing licence and is capable of producing medical grade propylene glycol, as well as having an independent import / export licence.

Spring Chemical holds certificates including ISO9001, ISO14001, ISO18001 and an international Kosher Certificate. Its products are sold to a number of nations and regions in Europe, the USA, the Middle East and South America. Marketing is focused on customers in Northern China as well as in Europe.

Spring Chemical had sales of approximately RMB958.8million (£ 100.9 million) for the year ended 31 December 2012 and approximately RMB431.7million (£ 45.4 million) for the 6 months ended 30 June 2013. It achieved profits of approximately RMB19.3million (£ 2.0 million) for the year ended 31 December 2012 and approximately RMB4.4million (£ 0.5 million) for the 6 months ended 30 June 2013.

In addition to its existing products, Spring Chemical intends to extend its operations to upstream and downstream industries to take advantage of economies of scale. Spring Chemical intends to focus on the production of high-end products including cosmetic additives, blending agents and electronic grade chemical products.

·     HaiKe Trading

HaiKe Trading generated its first trading revenues in the final quarter of the year ended 31 December 2012. Material trading revenues, however, only commenced in the 2013 Group's financial year. Consequently, HaiKe Trading had nominal sales of approximately RMB10.5 million (£1.1 million) for the year ended 31 December 2012 and approximately RMB2.8billion (£294.7 million) for the 6 months ended 30 June 2013. HaiKe Trading had a negligible net loss for the year ended 31 December 2012 and achieved a net profit of approximately RMB40.3 million (£4.2 million) for the 6 months ended 30 June 2013.

HaiKe Trading trades feedstock on behalf of the Group for both the refinery and the chemical businesses, including Spring Chemical. All business between HaiKe Trading and the Disposal Group following completion of the Restructuring will be conducted on an arm's length basis, subject to the Relationship Agreement and commercial agreement between the two parties and under normal market conditions.

Details of the Disposal

The Restructuring will be effected in two stages.  First, the current shareholding structure of the two Group companies to be retained (Spring Chemical and HaiKe Trading) will be streamlined in preparation for the divestment of the Disposal Group at the second stage. This entails the completion of the following steps: (i) the Company has established BVI 1; (ii) HaiKe Trading will establish a wholly owned WFOE; (iii) Shandong Hi-tech will transfer the approximately 74.9 per cent. of Spring Chemical it currently holds to this WFOE; and (iv) HaiKe Holding will transfer approximately 25.0 per cent. in Spring Chemical it currently holds to HaiKe Trading.  This will leave HaiKe Trading directly and indirectly (through the WFOE) holding approximately 99.9 per cent. of Spring Chemical.  HaiKe Holding will transfer 100 per cent. of the shares in HaiKe Trading to BVI 1 which has been established by the Company solely for this purpose.

The second stage comprises the transfer of the Group's assets, other than the newly streamlined HaiKe Trading and Spring Chemical, out of the Group.  This entails the completion of the following steps: (i) the Company's majority shareholder, HaiKe Investment (BVI), has established BVI 2; (ii) BVI 2 will establish a wholly owned subsidiary, New HaiKe Holding; and (iii) the Company will dispose of 100 per cent. of the share capital in HaiKe Holding to New HaiKe Holding. This will leave the Company with only the assets held by BVI 1, the WFOE, Spring Chemical and HaiKe Trading.

The second stage is planned to complete immediately following the first stage. In the very unlikely event that the two stages do not complete in immediate succession the buyer under the first stage (being BVI 1) is entitled to rescind SPA 1, thereby effectively undoing the first stage. It is the Company's intention that it would in fact do so.

The Restructuring is conditional, inter alia , upon the approval of Shareholders. Further details on the SPAs are set out in the Circular. 

AIM Related Party Transaction

The Disposal is deemed to be a related party transaction under AIM Rule 13 by virtue of HaiKe Investment (BVI),  the ultimate holding company of the acquirer New HaiKe Holding, being a substantial shareholder of the Company. Accordingly, the Independent Directors are required to consult with the Company's nominated adviser and state that they believe that the terms of such related party transaction are fair and reasonable insofar as the Company's Shareholders are concerned. The Independent Directors, having duly consulted with Westhouse, the Company's nominated adviser, believe the terms of the Disposal to be fair and reasonable insofar as the Shareholders are concerned.

Recommendations

For the reasons set out above, the Directors believe that it would be in the best interests of the Company and Shareholders as a whole if the Disposal is approved and the Restructuring takes place. This conclusion has been arrived at having taken into account the following considerations:

(a)  the ongoing structural difficulties in the Chinese refinery industry;

(b)  the need to formulate a long term and sustainable earnings model;

(c)  the objective of generating substantial shareholder value; and

(d)  the potentially negative consequences for the Company if the Disposal and Restructuring do not proceed.

Accordingly, the Directors unanimously recommend Shareholders to vote in favour of the Resolution as the Directors intend to do in respect of their own beneficial shareholdings amounting to 230,725 Ordinary Shares representing approximately 0.61 per cent. of the issued Ordinary Shares. In addition, the Company has received notice from its largest shareholder, HaiKe Investment (BVI) in respect of its holding of 21,219,042 shares representing 55.33 per cent. of the issued Ordinary Shares , of its intention to vote in favour of the Resolution. Mr. Xiaohong Yang and Mr. Zaizhong Zhang, Executive Chairmanand Chief Executive Officer of the Company are sole directors of, and substantial shareholders in, HaiKe Investment (BVI).

Capitalised terms used in this announcement have the same meaning given to them in the Circular unless otherwise defined.

For further information please contact:

HaiKe Chemical Group	George Zeng, Chief Financial Officer [e-mail]	[phone]
Westhouse Securities	Martin Davison Richard Johnson	[phone]
Cardew Group	Shan Shan Willenbrock / Tom Horsman [e-mail]	[phone]

This information is provided by RNS

The company news service from the London Stock Exchange

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