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Hengyang’s Growth Plans Boosted By MEGCIF5’s Capital Injection
Corporate Digest | 28 June 2013
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By: Nicholas Tan
Articles (71) Profile

A relatively under-covered stock on the secondary board, Hengyang Petrochemical Logistics has seen its share price increased more than 30 percent year till date, from $0.21 at the start of the year to a trading high of $0.33 on 19 June 2013. The surge in stock price marks a confidence by investors that the company might see a surge in revenue and net profit after securing the necessary financing for its strategic investment plans. Read on to find out more on Hengyang’s latest developments.

Hengyang Petrochemical Logistics, a Catalist-listed company specialising in providing logistics services to petrochemical and oil products, brought in an institutional investor, MEGCIF Investments 5 (MEGCIF5) to invest Rmb271.25 million in its growth expansion plans along the Yangtze River. Additionally, the funds secured will also be used to buy-back the remaining 40 percent equity stakes in two of Hengyang’s subsidiaries in Wuhan and Chongqing, which were offloaded back in FY12 and 1Q13 respectively to Jinqiao Chemical to reduce the group’s gearing ratio.

The subscription agreement entered into by the two parties gives MEGCIF5 an equity stake of 35 percent in Hengyang Holding, a wholly-owned subsidiary of Hengyang, for Rmb244.31 million and also comprises an advance of Rmb26.94 million under a convertible loan agreement. MEGCIF5, is a company owned by Macquarie Everbright Greater China Infrastructure Fund, which is managed by investment banking groups Macquarie and China Everbright. Among the other investments were a US$100 million stake in Zhejiang Wanna Environment Protection, a Chinese waste company, and an unidentified investment amount in a Shenyang-based water supply project, entered into back in 31 October 2012.

MEGCIF5’s investment covers about a third of the capital spending required to develop Hengyang’s inland business developments at Wuhan, Yueyang and Chongqing. The remaining two-thirds of capital will come from internal funding and bank loan borrowings. As such, following the timely investment, Hengyang’s debt financing will be significantly reduced and financing costs in the coming quarters can be expected to be lower, giving it some respite from the high borrowing cost in China, which is at 6 percent as at May 2013.

Additionally, FY12 gearing ratio adjusted for the funding exercise was also reduced to a reasonable level at 0.20 times, compared to the previous reported figure which it stood at 0.82 times, as at 31 December 2012. Following the capital injection, the group said that it has secured the required financing for its slated Phase 1 inland development plans and has no other intention to tap on other institutional investors in the short-term.

Expansion Plans
Under construction are new storage tanks and petrochemical jetties with an aggregate storage capacity of approximately 240,000 cubic metrics (m3). Inclusive of the expansion at its existing Jiangsu Deqiao storage facility, Hengyang’s overall storage capacity will increase significantly from 265,600m3 to approximately 962,600m3 in the next two years. The expansion projects at Wuhan and Yueyang are expected to complete by 1H14, while Chongqing’s development is scheduled for completion in the latter half of 2014.

Management revealed in a press conference that the breakeven point for these investments stands at 60 to 70 percent storage capacity utilisation, and they are confident that Hengyang will be able to achieve the breakeven point within a year of commencing operations. Notably, this can be demonstrated through Hengyang’s track record at Jiangsu Deqiao which managed to reach 70 percent capacity utilisation rate after commencing operations in November 2011.

Also in Hengyang’s future plans are the Phase 2 at Wuhan, Yueyang and Chongqing. However, any future investment to increase storage capacity in these cities is currently contingent on the performance of its Phase 1 developments. Furthermore, additional financing exercise may be required in the future to finance these potential growth plans. If undertaken, the aggregate storage capacity for Hengyang is expected to increase to 1,372,600m3 by 2016.

Hengyang’s Projects

Source: Company

Strategic Move
These expansion plans are part of Hengyang’s long-term strategic objectives to secure key strategic resources such as jetties and land close to the river so as to gain a first-mover advantage in the growing inland petrochemical market and also insulate itself from stiffening competition at the river mouth of the Yangtze.

For the Wuhan site, Hengyang has strategically secured approximately 60 percent of the port area, thereby limiting the entry on the number of competitors into the area, according to the company. While in Yueyang, another key puzzle to the group’s expansion upstream, Hengyang is the only third-party petrochemical storage provider there at the moment.

These facilities are all located within chemical industrial parks near the operations of its existing major customers such as BASF, British Petroleum, CNOOC, PetroChina, Royal Dutch Shell, and SINOPEC, among many others. Boasting such an impressive list of clients and few peers to rival it upstream, it is little wonder that Hengyang is modestly confident in its future performance.

Hengyang’s move towards inland also mirrors the “shifting growth dynamics” that is evolving in the China economy – growth in the Central and Western part of China has outpaced the coastal area, according to the National Bureau of Statistics of China. Confirming this trend observation are statistics from China’s Customs Administration which have shown that import growth in the Western regions has outpaced the others in 1Q13.

Financial Result And Valuation
For the first quarter ended 31 March 2013, Hengyang reported a 17.9 percent or Rmb5.7 million dip in revenue, as its storage services business decreased by Rmb7.5 million attributed to reduced storage volume from its clients as a result of an economic slowdown in the Mainland. Likewise, net profit was dragged lower and decreased 52.6 percent due to the weak turnover, less than proportionate decrease in cost of sales and higher administrative expenses due to higher manpower cost and land use tax.

According to UOB KayHian, Hengyang is trading at a forward 12-month price-to-equity ratio (PE) of 17.4 times, or a 19 percent discount to its tank terminal peers’ average of 21.5 times PE. In addition, the brokerage house view the transaction as positive as it may reflect the true market value of Hengyang’s net assets at approximately $100 million versus its market capitalisation of $67.1 million (based on a share price of $0.33).

Well trained in aspects of finance and business, Nicholas oversees the finance and manufacturing sectors at Shares Investment.

Please click here for more information about this author.

Hengyang Petrochemical Logistics  -- -- --   
Business: Petrochemical logistic svc provider engaged in the storage and tptn of liquid petrochemical pdts, operating in the Yangtze River Delta region.

Insight: Feb-19, FY18, Co did not record any revenue and gr... Read More


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