SP Chemicals Ltd's Management Replies to Online Q&A Forum Dear
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SP CHEMICALS LTD. (Incorporated in the Republic of Singapore) Company Registration Number 199005499R SP Chemicals Ltd’s Management Replies To Online Q&A Forum Dear Investors, Thank you very much for your questions. We hope we have clarified your queries through this online exchange. Your questions will be reposted in Blue followed by our replies in Black. Regards, The Management Team SP Chemicals Ltd. Dear Ms Tan Swee Kheng, you wrote : 1. Is there any delay in VCM plant start up and what is the prospect of making good returns when the plant starts production? The construction of the VCM plant has completed, and we started trial operations of the equipment on 22 April 2007. Our intention is to go into commercial production by the fourth quarter of FY2007. The recent industry dynamics for the PVC and VCM sectors in the PRC have improved. The Group has been monitoring the situation closely. Please be assured that we will manage the startup of the VCM plant in a most cost efficient manner. However, VCM’s variable cost is always affected by ethylene prices, which we have no control over. 2. The Chinese government has lately kept increasing the bank loan interest rate, which will definitely affect the profit margin. On hind-sight, the Company could have borrowed more US$-based from foreign banks. What is your comment? On the contrary, the Group is quite comfortable with borrowings from PRC banks because the Group’s main assets and source of cash flow are denominated in RMB. In addition, there will be withholding tax on interest remitted back to Singapore. Presently, the withholding tax rate is 10% and may increase to 20% next year. 1 3. What is the extent of your corporate tax increase? Is there any tax holiday for new projects like PP5 expansion and the VCM plant? The Company is currently in the 15% tax bracket. This incentive will probably be extended to SP Chemicals for another 5 years (to be confirmed by the Chinese government). After which, the Company’s tax rate will be 25%. There will not be any tax holiday for Production Phase Five (“PP5”), because caustic soda is no longer an encouraged investment in China. 4. NaOH (caustic soda) is the star performer and profit from aniline is eroding and chemical price is cyclical. Is it possible for the Co to forward sell NaOH, and forward buy benzene to maximise profit? The Company does not normally enter into forward contracts on its sales and purchases of products and raw materials. 5. What is the percentage increase in buying electricity when the 120MW plant is fully utilised when VCM plant start-up? The designed capacity of the Co-gen Plant has been allocated for Production Phase Four (“PP4”) and the VCM plant. For the PP5 project, the Company will have to purchase all the electricity needed from the national grid. Regards, The Management Team SP Chemicals Ltd. Dear Lee Hai Seng, you wrote : 1. In the management Q & A 16th Aug 2006, the management stated that SP Chemicals is going to operate as the only standalone VCM plant in PRC. Is this a path for further downstream product? How big is the market for VCM and how did the management come to the conclusion that it is worthwhile to operate a standalone VCM plant? The VCM project forms one part of the three-pronged Medium-Term Strategic Business Plan unveiled by SP Chemicals in August 2004. 2 The venture into the VCM business is in line with SP Chemicals’ ongoing strategy of moving further into downstream products that will complement our existing product range. VCM is predominantly used as the main raw material for the manufacture of PVC (Polyvinyl Chloride), which is a versatile resin and one of the oldest established plastics. In the PRC, demand for PVC is expected to grow in industries such as construction (pipes, window and door frames, flooring tiles), packaging, consumer goods (foamed leather cloth, curtains, tarpaulins), automotive, and also for medical use (blood bags). Presently, some manufacturers of PVC do not produce all the VCM that they need and have to rely on imports to fulfill their requirements. These are our target customers. 2. In 3 Apr 2007 announcement, SP Chemicals signed various Memorandums of Understanding ("MOUs") with the Phu Yen People's Committee of the Phu Yen Province, Vietnam for a construction of petrochemical complex. May I ask what kind of products SP Chemicals is looking at? On 10 August 2007, the Company announced that the Vietnamese Prime Minister’s Office has given its in-principle approval for the Group’s proposed petrochemical project in Vietnam. The petrochemical project proposal centres on the investment in and development of a modern and integrated industrial park of 1,300 hectares, to be dedicated to the petrochemical industry, in Hoa Tam, Phu Yen Province, Vietnam, as well as the investment in the construction, and operation, of a naphtha cracking complex with an estimated production capacity of 800,000 tonnes of ethylene per annum in the said industrial park. The proposed Project forms a part of the long-term growth strategy of SP Chemicals to expand upstream, so as to ensure a reliable supply of raw materials and to cater for future expansion of its core production of chlor-alkali products and related downstream products, in the PRC. It is important to note that the Company is very much in the exploratory stage. A project of this scale is long term and would require more than 15 years to implement. With the in-principle approval from the Vietnamese Prime Minister’s Office, the Company will now be able to take further steps to commence on a full feasibility study, so as to assess the suitability of the location and the viability of investing in the above-mentioned projects. The investment plan and structure, as well as the actual investment amount and construction schedule, are entirely subject to the outcome of the feasibility study, 3 and would have to be approved by the Board, and the relevant authorities in Vietnam. More information on this will be given, in due course. 3. In that same announcement, it stated that there is a possibility that SP Chemicals will invest US$1.2 billion. If it comes through, how SP Chemicals fund this expansion as US$1.2 billion is about 10X FY2006 shareholder equity and about 20X FY2006 cashflow. Beside that I believe going forward, huge Capex is required for PRC expansion as well. Please refer to our responses for question 2, and our announcement made on 10 August 2007. We will make further announcements on the matter, where appropriate. 4. In CIMB research report title "China Conference", it said that the management is planning for upstream expansion. Care to comment on this in term of when, Capex, competition environment and market size/potential. We are continually looking at strategic initiatives to deliver improved long-term value to shareholders. We will make the appropriate announcement(s) promptly via SGXNet, in the event of any material developments. 5. In management Q & A 16th Aug 2006, the management stated that they are fairly confident that SP Chemicals is the lowest chemical producer in Jiangsu province. May I ask how does the management quantify it and whether SP Chemicals put its sight to be the lowest chemical producer in PRC? SP Chemicals continues to strive to be the cost leader in the production and sale of chemical raw materials in the PRC. We aim to exceed the expectations of our customers in product and service quality, yet offering the lowest cost. Our confidence that SP Chemicals is the lowest chemical producer in Jiangsu province, stems from market information we have gathered, coupled with our general enquiry of other producers in Jiangsu province. 6. How is Anhui Huatai doing? I notice there is a RMB10 million loans to affiliate in 2Q2007. Anhui Huatai is doing reasonably well. 4 7. Concern on export rebate. What is the percentage of Anline, Caustic Soda and Chlorine production in PRC is being export? In your management views, is it still profitable, on average for chemical producers to export their products? How does it impact on the profitability of SP Chemicals export? We only export aniline and caustic soda. We do not provide a percentage breakdown of export sales by products. For 2Q FY2007, export sales contributed 26% to our total turnover of RMB464.3 million. With regards to the export rebates, it is too early to tell what impact the changes will have. We will continue to monitor the situation very closely. 8. What is the rational for distribution an interim dividend on FY2006 and not distributing one in FY2007? As far as I can see, SP Chemicals need to pour back all available cash for further expansion. We do not have a fixed dividend policy, although we are always striving to enhance shareholders’ value. We see dividends as being an integral part of capital management which we should balance with our need to grow the Group. 9. What is the main reason for the delay of obtaining the approval for Phase II of the Co-gen Plant? As stated in our latest “Update on the Co-Generation Plant Project” posted on SGXNet on 26 July 2007, the local and the provincial authorities are fully aware of the status of our Co-gen Plant, and are assisting SP Chemicals to obtain full approvals. We remain reasonably confident that full approvals will be obtained, in due course. Further announcements will be made, via SGXNet, as soon as there are new updates.