Hengli Shares aims to acquire the industrial fiber giant Guxian Dao to accelerate integration across the entire value chain

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According to China Securities Network, on the evening of February 27, Hengli Co., Ltd. issued a announcement titled “Announcement by Hengli Petrochemical Co., Ltd. Regarding Its Subsidiaries’ Signing of Equity Acquisition Framework Agreements”. The announcement states that Hengli Chemical Fibers, a subsidiary of the listed company, intends to acquire 40% of the shares in Zhejiang Guxiandao Green Fiber Co., Ltd. (hereinafter referred to as “Green Fiber”) held by Zhejiang Guxiandao New Materials Co., Ltd. (hereinafter referred to as “Guxiandao New Materials”). The transaction price is tentatively set at RMB 1.5 billion. According to the information disclosed in the announcement, the assets that Hengli Shares intends to acquire this time include not only the green fiber assets of the target company, but also all polyester-related businesses and assets of Guxiandao New Materials, its parent company, which will be integrated under the green fiber business. The core assets of Guxiandao Polyester consist mainly of a polymerization capacity of 1 million tons, including 200,000 tons of capacity for consumer-grade silk, 400,000 tons of capacity for filament yarn, and 400,000 tons of capacity for industrial silk. 　　Polyester industrial yarn represents another important application area for polyester filaments. Unlike the civilian filament sector, which is used in textiles and clothing, industrial yarns are primarily employed in industrial, manufacturing, and defense applications. They possess technical characteristics such as high strength and thick diameters; for example, the four 40-centimeter-thick lifting straps used in China’s landmark project, the Hong Kong-Zhuhai-Macao Bridge, are made up of over 130,000 high-strength fiber industrial yarns. Currently, industrial fibers are being used in an increasingly wide range of sectors within the national economy, and their value added through high technology is also rising. A typical example of this is their use in components such as radial tires and seat belts in the modern automotive industry, where high standards for safety performance are required. In addition, some strategic emerging industries have also placed newer and higher demands on the use of industrial fibers as well as on corporate research and development efforts. For example, the project titled “Development of Key Technologies for Creep-Resistant Polyester Industrial Fibers and Their Composite Materials” undertaken by Hengli has passed provincial-level evaluation. The high-strength industrial fibers developed by Hengli are lighter than steel wires yet possess strength comparable to that of steel wires; they can significantly enhance the performance of polyester industrial fibers and related products in harsh marine environments, thereby contributing to the implementation of the strategy for building a strong maritime nation. 　　According to statistics at the end of 2017, the nominal production capacity of industrial silk in China is 2.08 million tons; after taking into account factors such as shutdowns, relocations, phase-outs, and liquidations resulting from strict environmental regulations and supply-side capacity reduction measures, the effective production capacity is approximately 1.91 million tons. Before this acquisition was completed, the CR4 figure in China’s polyester industrial filament industry – an indicator of the market share held by the top 4 companies – was already over 60%. Specifically, Guxian Dao accounted for 400,000 tons, Yufu Co., Ltd. for 300,000 tons, Hailide for 210,000 tons, and Hengli Co., Ltd. for 200,000 tons; thus, the domestic industrial filament market featured a typical pattern of oligopolistic competition. Upon the completion of this acquisition by Hengli Shares, the total production capacity held by the listed company in the industrial thread sector, including its direct ownership and significant shareholdings, will reach 600,000 tons. The combined production capacity of the \"Hengli-Gu Xian Dao\" partnership, led by Hengli, will account for nearly one-third of China’s total effective industrial thread production capacity, which will undoubtedly transform the competitive landscape of the domestic industrial thread market. Regarding the purpose of this acquisition, the listed company’s announcement also states that it aims to further consolidate its leading position in the field of industrial polyester filaments, make full use of the marketing network and R&D capabilities related to green fibers, thereby enhancing the company’s market position in differentiated polyester industrial filaments and quickly capturing market share. 　　In recent years, the domestic production of industrial silk has continued to increase year by year, rising from 570,000 tons in 2009 to 1.65 million tons in 2016, with a compound annual growth rate of 16%. Currently, the industry’s operating rate ranges between 80% and 85%, with supply and demand remaining in a tight balance. As oil prices and raw material costs reach their lows and begin to stabilize and rise, downstream demand continues to grow steadily, while the capacity for industrial fibers is also increasing at a moderate pace. It is expected that the supply-demand relationship in this industry will further improve in the future. After prices and price spreads for industrial silk reached their lows at the end of 2016, the industry’s prosperity began to improve starting from the first quarter of 2017; prices rose, price spreads widened significantly, and the profitability of related companies also increased gradually. The significant improvement in the overall profit margins of the industry also facilitates listed companies’ acquisition of assets, as well as subsequent strategic coordination and business integration, thereby further enhancing the comprehensive profitability of these companies.