Investment Opportunity: Project Nitrogen

Background

  • Inviting offers to invest in a convertible bond (“CB”) of the value of HK$320.44 million.

  • The Issuer of the CB, Company X (“Company or Issuer”) is listed on the Main Board of the HK Stock Exchange, with a total market capitalisation of over HKD250 million*. 

  • The Company is principally engaged in the research and development, manufacturing, marketing and distribution of chemical fertilizers and chemical products in mainland China. In the year ending FY 2023, the Company recorded a total revenue of RMB2,904.9 million, operating cash flows of RMB326.9 million and a net loss of 154.6 million.

  • Details of the CB being offered for investment are as follows:

    • Issued on 13 November 2014 for a total principal amount of HKD832 million** under a subscription agreement signed between the Company and an investor.

    • Interest: 7% per annum on the principal amount of the convertible bonds outstanding from time to time. Interest to be paid in RMB using a pre-determined fixed rate of exchange of RMB1.00 to HKD1.25 until maturity.

    • Tenor: 10 years | Date of Maturity: 12 November 2024.

    • Conversion: Can be converted into ordinary shares any time at a conversion price of HKD0.32, after the issue date, until the maturity date.

    • Redemption: If the CB has not been converted, to be redeemed at par on maturity in RMB using a predetermined fixed rate of exchange of RMB1.00 to HKD1.25.

    • Current Status: Due to the strained financial and liquidity position of the Company, the Annual Report for 2023 mentions that the bondholders for the outstanding CBs maturing in 2024 have agreed not to demand repayment of the relevant principal and interest in the forthcoming year.

Business Overview

  • The business has four manufacturing plants located in the Sichuan province with a product portfolio comprising largely of ammonia, urea, and methanol, amongst others.

  • For the six months (“H1 2024”) ended 30 June 2024, the total sales volume attained by the Company was approximately 539,000 tonnes (H1 2023 – 521,000 tonnes) with total sales volume in 2023 being 1,144,704 tonnes.

Financial Overview

  • The Company’s financial performance was affected in 2023 due to a weak macroeconomic environment and weak product pricing. Summarised financials are as follows:

  • The Company’s focus on cost cutting and increasing production efficiency has enabled it to maintain positive operating cash flows, despite a challenging market scenario.

  • As at 30 June 2024, the Company had outstanding debt of RMB904.5 million, of which 25.8% was on account of convertible debt. The Debt/Equity ratio of the Company was at 3.5x, which would improve on conversion of the CB to equity.

  • The Company has adequate cash flows from operations and cash & bank balances (approx. RMB52.7 million as at 30 June 2024), to fund future operations, capital expenditure and other capital requirements.

*Market capitalisation of HKD 277.3 million as of 24 September 2024

**Equivalent to approx. RMB665.6mn (as per Annual Report 2023); Outstanding amount of RMB 224.1mn as of 31 December 2023

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