Compounder China XD Plastics Co. Ltd. said it has tentatively lined up a 2 billion yuan ($289 million) capital infusion from China Construction Bank as it faces a slowing Chinese auto market and continued criticism from investors over a stalled privatization plan.
The Harbin, China-based company, one of China's largest compounders for the automotive market, said the potential debt and equity investment from CCB would help it pay off loans, improve its capital structure and diversify. The company did not say when it expects to complete the agreement.
The possible capital injection comes as XD blamed slowing auto sales in China for a 4.6 percent drop in third quarter sales, to $297.2 million, and a 36 percent fall in net profit, to $9 million.
"Our third quarter 2018 results were consistent with the unanticipated severe downturn in the auto industry of China, the first year over year drop in 28 years," said Chairman and CEO Jie Han. The company is traded on the Nasdaq stock exchange.
XD said automotive sales and production in China both dropped about 1 percent in the first nine months of 2018, with a steep drop in the third quarter, as Chinese auto sales fell 4 percent, 3.8 percent and 11.6 percent in July, August and September, respectively.
Speaking through a translator on the company's third quarter earnings call, Han said vehicle sales are being hurt by trade friction between the U.S. and China and cautious car buyers in China, who are a "taking a pause" on spending.
"Looking forward, we think the trade war, we'll get more clarification on the trade war. We think a friendly resolution will be reached and then consumer confidence will come back," Han said. "So next year, we think the auto sales will come back up. That's our view."
The China Construction Bank investment, if it happens, would represent the latest in a series of shifting financing plans from the company.
Earlier this year, XD announced that an investment company controlled by Han's son, Tiexin Han, had agreed in July to put $75.6 million into the company's domestic Chinese subsidiary, which covers most of its manufacturing operations.
But now that agreement has been canceled, according to XD Chief Financial Officer Taylor Zhang.
"The parties, basically, they decided not to pursue a definitive agreement because of — they cannot reach consensus on the terms," Zhang said. "So that's why the company returned the capital injection to [Tiexin] Han."
One analyst on the call criticized the company for not disclosing the end of the potential deal with Tiexin Han's company before the earnings announcement and said the company has not provided information on its plans.
Zhang said the company did not disclose the end of the $75 million investment earlier because it had only been a tentative agreement. But he suggested XD could make a different decision next time.
"I think it's a judgment call. But I think in the future, we'll, even though it's not a requirement, but I think in the future, we will exercise better judgment and also create a news flow to the market," Zhang said.
The company has faced continued tensions with some of its smaller investors over a February 2017 proposal from Chairman Han and investment bank Morgan Stanley to take the company private. Han and Morgan Stanley together own 74 percent of the publicly traded firm.
But Han has said that the privatization deal has run into financing problems from China's tightening credit situation.
Han and XD officials declined to update on that privatization plan during the earnings call, but the plan has drawn repeated criticism from some smaller investors who say it undervalues their stakes.
In 2011, a unit of Morgan Stanley invested $100 million in China XD. In 2017, Han and Morgan Stanley together had offered $91 million to buy out the remaining 26 percent of the company.
