The Dilemma of the Two Giants in Potash Fertilizers_

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The Dilemma of the Two Leading Potash Fertilizer Producers _ Author/Source: China Fertilizer Network Date: 12-10-2019 Clicks: 40 Nestled in the vast Gobi Desert in western China lies a \"jewel\" – the Chaharhan Salt Lake. ““Qarhan” is a transliteration from Mongolian, meaning “world of salt”. The two leading potassium fertilizer companies that emerged from here – *ST Yanhu (000792.SZ) and Zangge Holding (000408.SZ) – account for half of China’s potassium chloride production capacity. 　　Today, both of these companies are facing difficulties. Among them, Zangge Holdings was punished by the Qinghai Securities Regulatory Bureau due to financial fraud and misappropriation of funds ； *ST Salt Lake, on the other hand, is under debt pressure; its assets worth tens of billions of yuan have been unsuccessfully auctioned twice. 　　Regarding the above issues, reporters from China Business News contacted *ST Yanhu and Zangge Holdings by phone and in writing, but have not received any response as of the time of publication. Li Jinmei, an analyst at Zhongyu Information, said in an interview with reporters that the financial problems and subsequent restructuring of *ST Yanhuo can be attributed primarily to its massive investments (in Yanhuo Magnesium Industry and Yanhuo Haina), which have strained its cash flow. Due to issues related to minerals and rectification efforts, as well as the impact of policies such as financial deleveraging, Zangge Holdings faced short-term liquidity difficulties; in addition, it was under pressure from financial and securities institutions to repay loans, replenish positions, and pay interest. 　　Fellow sufferers: On December 3rd, *ST Yanhu, which is undergoing reorganization procedures, held a second public auction on the Alibaba Auction platform for three assets: the shares and receivables of Yanhu Magnesium Industry, the shares and receivables of Haina Chemicals, and those of its chemical subsidiary. In total, these three auctions attracted over 200,000 views, but no one bid on them. 　　On the evening of December 2, Zangge Holdings issued a statement saying that it had received a \"Decision on Market Ban\" and a \"Decision on Administrative Penalty\" issued by the Qinghai Securities Regulatory Bureau. Due to issues with information disclosure, such as the inflating of operating revenue, accounts receivable, and prepayments by Zangge Holdings in 2017 and 2019, the company was ordered to make corrections, issued a warning, and fined 600,000 yuan ； Shao Yongming, the actual controller, was given a warning and fined 900,000 yuan, in addition to a 5-year ban from entering the market. 　　These two listed companies, which differ by 20 years in their establishment, and which are potassium fertilizer manufacturers that hold a dominant position in the Qarhan Salt Lake area, were hit almost at the same time. 　　*ST Salt Lake was founded in 1958 and listed on the Shenzhen Stock Exchange in 1997. The potash fertilizer production facility is designed with an annual capacity of 5 million tons, making it the largest potash fertilizer manufacturer in China and it is referred to as the \"King of Potash Fertilizers\" in the industry. In January 2016, Zangge Holdings became the second listed company in the potash industry by taking over Jinguyuan through a reverse merger. Its actual controller, Xiao Yongming, thereby rose to become the richest man in Qinghai. 　　*ST Yanhu, which has been operating in the potash fertilizer industry for many years and possesses scale advantages, is regarded by the industry as the \"leader\" in this sector. Nevertheless, *ST Salt Lake incurred its first loss since its establishment in 2017; in those two years, it lost 4.124 billion yuan and 3.353 billion yuan respectively. In the first three quarters of this year, *ST Yanhu suffered a loss of 513 million yuan. 　　In contrast, as a later entrant, Zangge Holdings had much better performance in the previous years; from 2016 to 2018, the company achieved operating revenues of nearly 9 billion yuan, with a net profit attributable to its owners amounting to 3.42 billion yuan. 　　Entering 2019, both *ST Yanhu and Zangge Holdings found themselves in trouble. 　　On August 15 of this year, Taishan Industry, which has had a long-term partnership with *ST Yanhu, applied to the court for the bankruptcy reorganization of *ST Yanhu, citing that it was unable to repay its outstanding debts amounting to approximately 4.39 million yuan and clearly lacked the capacity to do so. 　　*ST Salt Lake stated that the company is no longer able to generate sustainable and stable cash flows. Before entering reorganization, due to overdue debts, the company’s main bank accounts were frozen, preventing it from carrying out normal business operations and collecting payments as usual; as a result, it was no longer able to generate stable cash flows from its business activities. At the same time, due to the company’s existing debt crisis and its inability to obtain liquidity support through new financing or large-scale advance payments from customers, *ST Yanhu no longer has a sustainable cash flow to cover its existing debts and carry out normal operations. 　　The problems at Zangge Holdings came to light a bit earlier. On April 30, 2019, Zangge Holdings released its annual report for 2018; the company achieved revenue of 3.274 billion yuan that year, a 3.19% increase compared to the previous year ； The attributable net profit reached 1.299 billion yuan, a year-on-year increase of 6.98%. 　　Behind the impressive financial results, the auditors issued a modified audit opinion on the annual report, due to serious deficiencies in internal control at Zangge Holdings. 　　Subsequently, issues such as financial fraud, violations of information disclosure regulations, and the use of funds by the controlling shareholder by Zangge Holdings were exposed one after another. It was later found that from July 2017 to December 2018, Zangge Holdings inflated its profits by approximately 600 million yuan through fictitious trading activities. 　　Currently, *ST Yanhu, whose market value once reached 54.217 billion yuan, is undergoing restructuring procedures, and its market value is now only around 23 billion yuan. Zangge Holdings became the target of criticism due to issues such as financial fraud and violations in information disclosure; the wealth of its controlling shareholder, Xiao Yongming’s family, declined from 26.5 billion yuan to 14.5 billion yuan. 　　Clinging to an idea: “Suffering is not suffering, happiness is not happiness; it’s merely a temporary attachment.” Clinging to one thought will mean being trapped by it ； Let go of one thought, and freedom will reside in the heart. ” 　　*In addition to both being potassium fertilizer companies, another common trait of ST Salt Lake and Zangge Holdings is their obsession with certain things. *ST Salt Lake focuses on magnesium, while Zangge Holdings focuses on copper. 　　Starting in 2010, *ST Yanhu embarked on the \"integrated magnesium metal\" project, which was like a \"nightmare\" – the investment costs kept exceeding the budget, and the completion date kept being postponed. Over a period of 8 years, with an initial budget of 20 billion yuan and three revisions to that budget, *ST Yanhu’s investment in the integrated magnesium metal project has reached 38.645 billion yuan, which is 93.2% higher than the amount planned at the beginning. 　　Over 8 years, *ST Yanhu has pursued \"magnesium\" with relentless effort and invested heavily, yet the results achieved have not been satisfactory. 　　From 2017 to the first half of 2019, Yanhuhu Magnesium Industry incurred losses of nearly 10 billion yuan in a row due to various reasons. 　　*ST Salt Lake stated that the main reason for the company’s difficulties is that projects such as the integrated magnesium production facility failed to achieve the planned levels of production and profitability; instead, these projects eroded the profits the company generated from potash and lithium resources. 　　In order to achieve a separation of good and bad assets and to carry out cultivation outside the company, thereby preventing profits from being eroded by loss-making assets and safeguarding the company’s long-term development, *ST Yanhuo has decided to auction off some of its assets, including those belonging to Yanhuo Magnesium Industry. However, both auctions of the aforementioned assets ended in failures to find buyers. 　　It is reported that *ST Yanhu will conduct a third public auction of the aforementioned three assets on Taobao’s judicial auction platform from 9:00 on December 11th to 9:00 on December 12th, with the total price having dropped to around 8.7 billion yuan. 　　Unlike *ST Yanhu, Zangge Holdings is seeking relief through other means. 　　By repaying the funds occupied by Zangge Holdings, Xiao Yongming plans to transfer his 37% stake in Julong Copper Industry to Zangge Holdings for 2.59 billion yuan. 　　It is worth noting that prior to this, Xiao Yongming had attempted twice to merge Julong Copper Industry into a listed company. However, compared to the initial valuation of 28 billion yuan for a 100% stake in Giant Dragon Copper, the price for a 100% stake this time is only 7 billion yuan, which is one-fourth of the original estimate. 　　The two major potassium fertilizer producers facing difficulties at the same time has cast a shadow over the domestic potassium fertilizer market. 　　However, Li Jinmei analyzed that potassium fertilizer giants such as *ST Yanhu and Zangge Holdings are facing increased competitive pressure in terms of production and sales due to funding issues. However, for enterprises, potash fertilizer is a product that generates significant profits; the financial problems faced by these two companies are not primarily due to their potash fertilizer business. 　　Li Jinmei said that the operation of the potash fertilizer industry in 2019 fell within a normal range of fluctuations. Tangge Holdings faces difficulties in short-term liquidity of funds during the year, and the practice of using assets to settle debts also helps to enhance the company’s overall asset appreciation potential and profitability. In Li Jinmei’s view, the bankruptcy reorganization of *ST Yanhu may help to prevent the company from going bankrupt, and Qinghai’s capacity to produce potash fertilizers will continue to be maintained in the future.