Jiutai’s valuation cut in half as Zaozhuang Coal Chemical’s olefin project takes precedence

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Jiutai’s valuation was cut in half; the Yanzhou Coal Industry project took precedence. Inner Mongolia Jiutai Energy Co., Ltd. (referred to as Inner Mongolia Jiutai), which had never given up on accessing capital markets, finally found a buyer – on June 14, Yanzhou Coal Industry announced that it would acquire 52% of Inner Mongolia Jiutai’s shares for 1.84 billion yuan, representing a 60% increase in value (with the overall valuation at around 3.54 billion yuan). In fact, Yanzhou Coal Industry also entered the scene quite suddenly. As early as the end of last year, Inner Mongolia Jutai and Yangquan Coal Chemical Industry announced that they intended to sign a cooperation framework agreement. Under this proposed agreement, Yangquan Coal Chemical Industry would acquire 25% of Inner Mongolia Jutai’s shares for 1 billion yuan in cash (with the overall value of those shares estimated at around 4 billion yuan). However, Yangmei Chemical Industry issued a statement on June 14 announcing the termination of the acquisition of Inner Mongolia Jiutai, citing disagreements over the \"evaluation methods and transaction price\". In response, executives from Yangmei Chemical and Yanzhou Coal Industry told reporters that they were unaware of each other’s announcements dated June 14. A senior executive at Yangmei Chemical said, “If they can’t reach an agreement on prices, they will look for another supplier.” ”Pan Shutian, the representative of Yanzhou Coal Industry, said, “Actually, we are grateful to Yangquan Coal Chemical; otherwise, we wouldn’t have been able to reduce the purchase price by so much.” Since Jiu Tai in Inner Mongolia began to interact with the capital market last August, its valuation has dropped from 4 billion yuan to 3.5 billion yuan; previously, Huadong CNC had even estimated its value at 6.6 billion yuan. In other words, the valuation has been cut almost in half within just one year. 　It is suspected that two companies were targeted simultaneously. On December 7 of last year, Yangmei Chemical announced its intention to sign a cooperation framework agreement with Inner Mongolia Jutai; the latter would invest 1 billion yuan in cash to acquire 25% of the shares in Jutai Energy. It was thought that Inner Mongolia Jutai would become an asset under Yangmei Chemical, but unexpectedly, Inner Mongolia Jutai did not follow the planned path. Half a year later, on June 14, Yanzhou Coal Industry issued a notice without any prior warning, stating that it would invest 1.84024 billion yuan to acquire 52% of the shares in Inner Mongolia Joutai. “We always thought it was a partnership with Yangmei; it wasn’t until the 13th, after the leaders signed the agreement with Yankuang, that we realized we had been acquired by Yankuang. ”A mid-level manager at Jiu Tai in Inner Mongolia told reporters that after Yangmei Coal Chemical expressed its intention to cooperate, \"there was no further news.\" Later, it was learned that the company was in talks with both Yangmei Coal Chemical and Yanzhou Coal Industry; it was only last night (note: the 13th) that it became clear who would acquire the company. Why, despite the intention to cooperate, wasn’t that cooperation framework agreement signed for half a year? A senior executive at Yangmei Chemical Industry said in an interview with reporters yesterday that \"the company believes there is no point in signing a framework agreement; if an agreement needs to be signed, it should be the final, substantive one, in order to achieve greater efficiency and speed.\" The intention is good, but it has been delayed for half a year now; the situation today is very different from that of last year. The executive mentioned that the purchase of 25% of the shares for 1 billion yuan was priced based on the circumstances at that time. “Later, it seemed that the market was not performing well, so the purchase price was reduced; it was reduced too much, and they decided to back out.” As for why the deal ultimately went to Yanzhou Coal Industry, the executive said that they were not aware beforehand that they were also in talks with Yanzhou Coal Industry. “It’s likely that while engaging with us, they were reaching out to various parties as well, and just worked with whoever was willing to cooperate.” In the view of Yanzhou Coal Industry, Yangmei Chemical’s price cuts have served as a great advantage for Inner Mongolia Jutai. Pan Shutian, the representative of Yanzhou Coal Industry, told reporters yesterday that he had not noticed any announcement from Yangquan Coal Chemical regarding the termination of the acquisition deal. However, he was aware that at the end of last year, Inner Mongolia Jiu Tai and Yangquan Coal Chemical had announced their intention to cooperate; “It seems they failed to reach an agreement, so they decided to work with us instead.” ”Pan Shutian went on to say, “We also need to thank Yangmei; otherwise, we wouldn’t be able to reduce the purchase price by so much.” 　Starving for funds and eager to access capital markets? Jiutai Energy is primarily engaged in the downstream industries of coal chemistry, with an annual production capacity of 1 million tons of methanol and 100,000 tons of dimethyl ether. The audit report shows that as of September 30, 2015, Inner Mongolia Jiu Tai had revenue of 1.2 billion yuan, a net profit of 52 million yuan, total assets of 10.6 billion yuan, and net assets of 2.41 billion yuan. Since last August, Inner Mongolia JiuTai has been in contact with the capital market; initially, it planned to use a backdoor listing strategy by taking advantage of Huadong CNC. At that time, Huadong CNC intended to acquire 100% of Inner Mongolia JiuTai for 6.6 billion yuan, thereby taking control of the company. Subsequently, internal struggles for control rights at East China CNC led to the failure of the merger deal with Inner Mongolia Jutai, which had been strongly pursued by the original major shareholder. This is why Yangmei Chemical has a valuation of 4 billion yuan, and Yanzhou Coal Industry a valuation of 3.54 billion yuan; after these three rounds of adjustments, Jiutai Energy’s valuation has been almost halved. The persistent pursuit of a listing on capital markets despite being cut in half may stem from Inner Mongolia Jutai’s desire for funds. The reporter found that since the second half of 2013, Inner Mongolia Jiu Tai has frequently issued short-term financing bonds to raise funds on multiple occasions. A Credit Rating Report on JiuTai Energy Inner Mongolia Co., Ltd., dated November 27, 2014, indicates that the company faces risks such as pressure in terms of investment and financing, increasing debt burdens, an unreasonable debt maturity structure, and uncertain timing for the recovery of receivables. The reporter also noted that Inner Mongolia Jiu Tai’s debt-to-asset ratio was between 60% and 70%, rising to 75% as of September 30, 2015. The Yankuang olefins project may be delayed again; along with the methanol and dimethyl ether projects, it is also set to be sold as part of a package to Yanzhou Mining Industry, along with an olefins production facility with an annual capacity of 600,000 tons. According to the current announcements, the total investment in this project is 8.28 billion yuan, of which 2.615 billion yuan has been invested as of 2015. A person familiar with the matter told reporters that Jiu Tai in Inner Mongolia has “always been short of funds.” Huadong CNC had planned to raise funds to invest in its \"600,000-ton methanol-to-olefins project,\" \"but this project has been in planning for over 3 years now, and due to a lack of funding, no progress has been made.\" ”The source said that because the investment amount for this project is very large, and when the investment period exceeds expectations by a lot, \"the profitability will certainly be lower than what was anticipated initially. Moreover, there are already many methanol-to-olefins projects in the northwest region.\" Previously, Yankuang Rongxin Chemical, a subsidiary of Yanzhou Group, also had a 600,000-ton coal-to-olefins project under construction in Ordos, with an estimated investment of 19 billion yuan. According to the individuals close to the senior management of Yankuang mentioned above, only the methanol production capacity of this project has been put into operation at present, while the olefin production facility has not yet been constructed. However, he told reporters that after acquiring the Jutai Energy olefin project, which already involves significant investment, the olefin project of Yankuang Rongxin Chemical is expected to be delayed again. “In the previous few years, a large number of olefin projects were launched in a rush. However, such projects require substantial initial investments, and for four to five years after construction begins, they are in a phase where continuous funding is needed. At present, the capacity under construction alone in the Northwest region is already close to 6 million tons; it is unwise to invest heavily in olefin projects. ”The person said. At the same time, given that the chemical industry downstream in the northwest region is relatively weak and unable to absorb a production capacity of nearly 6 million tons of olefins per year, a localized surplus in coal-based olefin production is highly likely to occur.