logo

Guanwei to invest $60 million in expansion despite falling orders

By: Steve Toloken By: Nina Ying Sun

May 19, 2014

Guanwei Recycling Corp. hasn’t announced it to its investors yet, but the company just signed off on an expansion project, despite a tanking stock price and poor first quarter results.

According to Fuzhou Daily, the government-owned newspaper of Fujian’s provincial capital, Guanwei signed an agreement on May 17 to invest $60 million to build up production and R&D at its headquarters in Fuqing, China.

Half of the $60 million total will be categorized as “foreign investment,” the report said, giving no other details.

Guanwei’s stock price on Nasdaq has dropped about 60 percent since mid-March.

Its first quarter sales shrank 20 percent year-on-year to $11.8 million and net profit contracted by two-thirds to $750,000.

The company put the blame on a worse-than-expected slump in demand, higher costs from the country’s “Green Fence” environmental crackdown and labor shortages.

 “Without question the biggest and most serious problem we had in the quarter, and something we have rarely encountered in our history, was the reduction in orders pretty much across the board in our fairly diversified client base,” said Chen Min, chairman and CEO, in a May 16 conference call with investors.

“The surprise wasn’t in the weakness of the economy, that was fairly clear as we began the year,” he said. “Really it was the severity of the situation with customers in nearly all industries, although most of all in consumer oriented businesses.”

He said the next six months are not likely to be significantly better, which seems to mark a change in tone from the company’s earlier projections that 2014 would have a positive growth outlook.

Guanwei said it has manufacturing capacity of 80,000 metric tons and is one of the few Chinese companies certified by German authorities to import recycled raw materials directly from that country, without brokers. It claims that gives it a cost advantage.

But that was apparently not enough to help its finances in the first part of the year. Sales volume fell 22 percent to 9,275 tonnes of LDPE in the period, part of what Chen labeled a “perfect storm” of trouble.

Company executives acknowledged that they were surprised in the first quarter by continued troubles from China’s “green fence” crackdown on pollution in the recycling industry and by the scope of labor shortages.

“When we ended 2013 we honestly thought and told you that while problems we experienced in the third quarter with expected new governmental environmental activism were not over, the worst seemed behind us,” he said. “It turns out this was not really the case.”

In particular, the company had higher costs in sorting of materials, a problem worsened by labor costs that rose 27 percent to $61 per ton. Raw material costs rose 13 percent to $866 per ton. It said it increased salaries last year but lost more workers than expected after the Chinese New Year holiday in February.

“We took steps in the form of increased wages and training to try to head off the problem in 2014 and also felt reasonably OK, but it turned out this was not enough,” he said. “Following the Spring Festival in February, what we thought might be a small bleed turned out to be more of a mini hemorrhage in terms of the return to work of our experienced workers.”

In the conference, the company declined to comment on a U.S. Securities and Exchange Commission announcement in early May that accused some of its former investors of involvement in a fraud scheme with Guanwei stock, other than to repeat previous statements.

SEC is suing its former investors for stock manipulation.