Thursday, September 3, 2009

Troubled Company: Zhonghui Holdings Ltd (Z04) 30 minute analysis

Company Info


Our core business is that of the provision of turnkey services involving the supply of entire domestic waste management systems comprising technical advisory services, design, supply, delivery, installation, commissioning and after sales support. We mainly undertake projects providing fully integrated solid waste management systems for municipalities.

IPO Detail:



New Shares Offered: 75 million
by Placement: 73 million
by Public Offer: 2 million
Offer Price per share: S$0.22
Commence Trading: 29 Oct 2004
Lead Manager/Underwriter: Daiwa Securities SMBC

Net IPO Proceeds: S$14.2 million
$6.2m to acquire land use rights and construct a factory and machinery
$4.1m to pursue expansion opportunities in BOT projects
$1.6m to expand marketing network
$1m to purchase and renovate offices
$0.4m for R&D
$0.4m to recruit personnel
$0.5m balance for working capital

No fixed dividend policy

Competitive Strength:

  • We possess specialised technology and know-how

    Our systems comprise of many components, each requiring different, varied and specialised precision engineering equipment to manufacture. We possess intellectual property rights over specialised technology used in our waste management systems and have been presented with a number of awards in respect of our technology. With our proprietary technical know-how, expertise and experience, and our patented technology, we are able to customise our systems and services to design innovative and value-added systems and processes to cater to the needs and requirements of our customers in terms of quality, efficiency, suitability and affordability. Our specialised technology constitutes one of our core strengths. Our specialised technology is best illustrated by our patents obtained for our High Water Content Waste Grinder and Integrated Waste Processor and our know-how relating to the incineration, de-odourisation and fermentation processes.
  • We are a comprehensive one-stop waste management solutions provider

    We provide a wide range of waste management services to our customers. We are able to undertake turnkey waste management projects and provide one-stop waste management solutions to our customers, ranging from consultancy and design services, supply of components and equipment installation to commissioning. In addition, we also provide after sales services for our waste management solutions.
  • Familiarity with the waste management industry and the business environment in the PRC

    We believe that, as compared to imported systems from overseas, our systems are more suited for the local market in terms of effectiveness and rate of waste recovery. We generally have a better understanding of the type and quality of solid waste in the PRC and the type of by-products that can be created for useful application by the agricultural industry and for infrastructure development. Unlike countries where domestic waste is easily segregated into recyclable and non-recyclable waste, the domestic waste in the PRC is generally not segregated. Imported systems are therefore generally not modified to efficiently process PRC domestic waste effectively. The
    wear and tear of our systems is also at a slower pace compared to those systems imported from overseas as our systems are capable of processing and handling the local waste better. The by-products generated from our systems are typically in the form of fertilisers and building materials that are suitable for PRC’s current economic needs for farming and infrastructure development. As such, we believe that our localised systems will help our customers achieve lower operating and maintenance costs.
  • We have established a reputation in the waste management industry in the PRC

    Even though the waste management industry is a relatively new industry in the PRC, we believe we have an in-depth understanding of PRC’s solid waste management industry. In a short span of three years, we have attracted specialists in the field of waste management to join our Group and we have managed to secure contracts relating to the provision of waste management systems in the cities of Lang Zhong , Ba Zhong , Xi’an and Jiao Zuo. The total contract value of these projects is in excess of RMB 100 million. As a result of having undertaken these projects, we believe that we have established a good reputation within the solid waste management industry.
  • Our participation in the CMEC Scheme

    The CMEC has set in place a scheme (the “CMEC Scheme”) under which the CMEC will act as the overall coordinator and main contractor for the overseas waste management projects. CMEC will appoint waste management system providers in the PRC as sub-contractors for such projects. Zhonghui China has been identified and appointed by the CMEC to participate in the CMEC Scheme. We believe we were selected by CMEC to participate in the CMEC Scheme because of our patented technology and our experience in the field of providing integrated waste management solutions for domestic waste.We believe that our participation in the CMEC Scheme will enable us to expand our network into markets outside the PRC. Our appointment under the CMEC Scheme will enhance our reputation and provide opportunities for us to establish our presence internationally. Currently, our Directors are not aware of any other corporation in the PRC which has been appointed as a waste management system provider under the CMEC Scheme.
  • Our strengths in R&D

    Being a high-tech waste management solutions provider, we place a strong emphasis on R&D activities and believe in focusing on developing our technology and technical skills. Our R&D team is headed by Mr Wang Yucai who is a renowned specialist in the field of waste management in the PRC.
    We also have close working relationships with the R&D teams from Northwest Sci-Tech University of Agriculture and Forestry and Xi’an University of Architecture & Technology, for the R&D of new processes and equipment. We believe that such collaboration arrangements together with our in-house research team which possess strong R&D
    capabilities will help us in maintaining a competitive edge and ensuring that our technology is continually improved and kept up-to-date with the latest advances.
  • Competitive Pricing

    Our waste management systems are competitively priced compared with those of foreign imports, although we believe that they are comparable in terms of technology. In addition, we believe our systems are competitively priced when compared to locally manufactured waste management systems.
  • We have an experienced management team

    Our Executive Directors, Mr Gao Bin, Mr Wang Yucai and Mr Hao Zhongwen, have approximately a total of 35 years’ experience amongst them in the management and research of environmental conservation in the PRC. Our Executive Directors, supported by our Executive Officers, have been instrumental in spearheading our growth. The industry knowledge, business experience and business contacts of our Executive Directors are valuable assets to our Group and essential to our growth.
  • We are committed to quality

    We are committed to quality and place a great emphasis on quality assurance in our operations as well as timely delivery of our systems and services. Since the commencement of our business in the domestic waste management industry, we have not received any material complaints from our customers nor have we encountered any material disputes with our customers relating to the quality of our systems and services. We believe that quality assurance is important to our existing and potential customers. Our commitment to quality is key to maintaining our reputation in our industry.


Competition:

  • Beijing Zhong Yi Huan Neng Environmental Technology Co., Ltd
  • Beijing China Union Engineering Co., Ltd
  • China Academy of Engineering Physics Environmental Conservation Engineering Research Centre
  • Shanghai Shengong Environment Corporation
  • Changshu Rixin Mechanism Co., Ltd


People:

  • Wong Hung Khim, Non-Executive Chairman & Independent Director, since 2004
    Directorship in 3 companies
    Previous Directorship in 27 companies and reasons for leaving unknown

  • Gao Bin, President and Executive Director, since 2004 joined 1999
    Directorship in 1 other company
    Previous Directorship and reasons for leaving unknown:
    Shaanxi Zhong Jian Property Development

  • Wang Yucai, Assistant General Manager and Executive Director, since 2004 joined 2004

  • Hao Zhongwen, Chief Engineer and Executive Director, since 2004 joined 1999

  • Liu Wei, Independent Director, since 2004

  • Ang Kheng Hui, Independent Director, since 2004
    Previous Directorship and reasons for leaving unknown:
    Mirage Production


Investment tips:

Why not?
  • Sensitive to technological changes to compete
  • Outcome of project cannot be estimated reliability
  • Unable to continually secure new projects since mostly one-off
  • Non-renewal of permits and business licences
  • Dependent on contract manufacturer and sub-contractors
  • Defense of IP troublesome and expensive
  • Subject to environmental laws and regulations
  • Rely on Executive Directors and the relationships
  • Difficult to evaluate because of short history (year 2000, IPO on 2004)
  • China accession into WTO may introduce competition
  • Undertake BOT projects which are capital intensive
  • Exposed to claims for defects or errors in the systems because no insurance yet
  • Around 100 other companies in PRC can treat and manage solid waste
  • Competitive pricing as a strength seems to indicate a low margin way of competing


Spent slightly longer than 30 minutes, so I have to be even faster somehow. I choose to always list competitive strengths in full wordy text because it is quite important and it what can differentiate companies. However, in future I should be ignoring R&D since that is what every listing companies claimed to excel in. Without looking at the current news of its trouble, the profit margins of the company @ 50+% look too impressive. I haven't analyze what led to its trouble and whether it can be foreseeable yet. However, after looking at KXD and now Zhonghui, I learn to ignore any results preceding their IPO. It just takes only a few years for a company to become zero although I have not investigate the causes yet. I plan to continue speed reading and extracting information from most companies before looking into certain companies in detailed.

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