SORBIC INTERNATIONAL PLC 1st September 2015
Dear Shareholders,
Following discussion with a number of shareholders, I thought that it would be helpful if I provide a background to the two main avenues for a potential resolution to our issues, namely the receipt of cash following a settlement with Mr Wang Yan Ting ("Wang") in respect of Linyi Van Science and Technique Co., Ltd ("LVST") or the regaining of control of LVST and the continued operation and expansion of the plant.
So that shareholders can understand more fully the options, I would like to expand on the second alternative. As for the first alternative, any decision will be largely determined by the quantum of cash receivable by all parties.
As summarised in the interim statement dated 20th June, 2015, the results for the first half of the year were:
Revenue for the period was £6.6 million (H1 2014: £7.5 million)
Gross profit margin of 6.9% for the period (H1 2014: 11.9%)
EBITDA for the period of £0.49 million (H1 2014: £0.554 million)
Net loss after tax of £0.46 million (H1 2014: loss of £0.08 million)
Net cash balance at the end of the period were £7.93 million (H1 2014: £6.61 million) Net assets of £11.30 million* as at 31 March 2015 (H1 2014: £9.95 million)
*Due to the events on 22nd April 2015, the Company has no control over LVST's assets. Further to that, shareholders should be aware that the significant improvement in the reported net assets was largely due to the changes in foreign exchange, which will continue to fluctuate.
As can be seen, LVST is currently operating on thin margins and there is a need to expand and upgrade to improve both capacity and production efficiency. As has been detailed in the past, LVST will need to relocate, both for operational purposes and also as a requirement from the Linyi industrial zone, as the current zone is becoming more residential and the authorities now wish manufacturing facilities to be re-sited. In particular, shareholders will be aware of the pollution concerns within China and specifically in respect of Linyi there has been a directive for businesses to upgrade their emission controls (as noted in a recent article detailed below). They are taking the issue of pollution more seriously.
Mr Wang has reported to the Board that he has had discussions with the authorities over the last two years about a proposed move, but the level of compensation on offer, has not been finalised. However with a new Mayor and Party Secretary within Linyi, together with the Beijing pollution imperative, there may be speeding up of the compensation discussions.
Once these discussions have been concluded, it is anticipated that it will take about 12 to 18 months for the factory to be moved and rebuild, whilst maintaining as much as possible a continued supply of product. The new plant was envisaged to double the current capacity (7,000 tonnes) and improve production efficiency by about 25%, thus the new factory's output, when fully up and running would be approximately 17,500 tonnes.
The gross margin should improve from the current level. However as noted in the interim accounts, the cost of power has increased due to the changeover to gas from coal and as impacted margins adversely. Accordingly, it is not possible to estimate at this stage the improvement in future margins.
LVST's products, sorbic acid (not be confused with ascorbic acid) and potassium sorbate remain in demand as both China and the US require the ingredients for the inhibition of mould in food and for the extension of product shelf-life. As demand has increased, the number of manufacturers has also increased with the building of new efficient plants, which can produce continuous high standard products that adhere to international food standards. LVST currently meets such standards; however recently, we understand that there have been lapses in the normal food quality standards.
It is anticipated that the funding for the move and expansion would be funded in part by the compensation received for the factory.
Given Mr Wang's stance over the last four months, Sorbic International plc ("Sorbic") will need to carry out significant due diligence to understand the decisions or actions which have been taken by Mr Wang and then determine a course of action. Furthermore, new management will be required to both manage the current plant and oversee the expansion; such managers would be both local and international and also have strong local connections.
As I have explained before, the interactions with Mr Wang are both delicate and complex and there are no easy answers: everybody's prime objective should be for the speedy resolution of the issue and therefore, if there are any questions, they should be directed to the Board rather than to others who may not have the complete understanding of all the issues.
It is worth emphasising that any final resolution to this case will have to take into account the interests of all stakeholders.
Any formal shareholder communication will be to all shareholders as the Board is unable to prefer one shareholder group above another. Accordingly, may I remind shareholders that such communications will include Prime Mega International Limited ('PM") and of course Mr Wang.
The actions of Mr Wang cannot be condoned under any circumstances, but as previously explained the pressures which have been brought to bear on Mr Wang from us have been counterbalanced by local pressures on Mr Wang, which could possibly include physical harm.
John McLean
Non-excutive Chairman
1st September 2015
Can Linyi survive a pollution crackdown?
150,000 angry folk
In his efforts to tackle one of China's most difficult conundrums, the mayor of Linyi city in Shandong province might be advised to emulate the strategic ingenuity of its most famous resident. The coastal city claims Zhuge Liang was born there. According to the novel the Romance of the Three Kingdoms Zhuge was so in touch with nature, he could use it to ensure victory (famously in the Battle of Red Cliff he used a change in wind direction to destroy a rival fleet with boats he'd set on fire).
Modern day Linyi is one of the most polluted Chinese cities and its government faces the almost impossible task of trying to reduce emissions drastically while maintaining economic growth. But according to his critics, mayor Zhang Shuping paid little heed to the consequences of his actions when he obeyed the wishes of the newly empowered Ministry of Environmental Protection.
In late February a delegation from the ministry visited Linyi. In an interview the investigators urged Zhang to take tougher action on polluters. Three days later he simply shut down 57 factories and ordered a further 412 to cut production. Why such resolute action? Zhang's dressing-down was broadcast by state broadcaster CCTV in a popular show, making Linyi a bad example in front of a nationwide audience.
In a recent feature ThePaper.cn examines how Linyi has fared over the subsequent four months. One manager at a glass company tells the website his electricity was suddenly cut off when there was still 2,000 tonnes of molten glass and tin running through the furnaces. "If and when we resume production it will take us about four to five months to blast the cooled glass off," he complains.
Another mill owner claims his furnace has been permanently damaged to the tune of Rmb10 million ($1.6 million). ThePaper.cn says about 60,000 jobs have been lost as a result of the closures, and if dependents are also taken into account, the anti-pollutution drive has affected 150,000 citizens in a city of just over 10 million.
Zhang's actions have exposed him to immense pressure. Local police have reported the joblessness has increased robberies, while Linyi-based firms complain they have no idea if they will ever be able to resume production. Why? In their earlier haste to meet GDP targets former government officials had rushed through approvals. As a result many of the firms set up never underwent any environmental reviews. That means they do not have the necessary paperwork to reopen.
Southern Weekly says the pollution crackdown could also trigger a regional financial crisis since the 57 firms under 'enforced closure' account for about a third of Linyi's Rmb300 billion of outstanding loans. The city's largest private sector firm has already needed a Rmb70 million capital injection from the local government's investment arm in order to continue servicing its loans.
On the plus side, the government has scored a notable success meeting environmental targets, with Linyi's PM2.5 reading dropping by a quarter over the past few months. But there is a long way to go before it reaches the World Health Organisation maximum recommended limit of 25. More recently the reading has swung between 122 and 304.
The Ministry of Environmental Protection remains unrepentant. In a WeChat post it responded to ThePaper.cn with the following message, "Linyi is a microcosm of all the cities that sacrificed the environment in the process of economic transition and now it has to pay its historical debts to the environment."
The central government has also been taking public feedback on a new environmental protection tax, which proposes to set minimum tax thresholds for polluters on a national scale. All companies will have to install pollution-monitoring devices to measure their emissions.
Will it be as effective as Zhuge Liang's tricks for dealing with his enemies?
At Red Cliff he was said to have "borrowed the East Wind" to win the battle. Today summoning the East Wind is viewed as a metaphor for doing what is necessary to fulfill a critical undertaking.
In its current quandary, the Linyi government must wish it had the power to invoke a wind
- if only to blow its pollution out into the East China Sea.
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