Zhejiang Glass plant faces delay

This follows the delay of its 1.5 billion yuan maiden A-share offering after mainland authorities put the brakes on fresh issues in an effort to help domestic bourses absorb substantial quantities of nontradable stocks.``The A-share offering, which was originally to be completed by the third quarter this year, is unlikely to go ahead this year,'' Zhejiang Glass chairman Feng Guangcheng told Hong Kong news media during a plant visit organized by the company.Still, the privately owned glassmaker said other investments, including a three billion yuan Qinghai soda ash plant and an extra ultra-thin glass production line will go ahead regardless of the A-share sale.Feng said the company will finance the investment through bank loans and internal cash flow.He did not rule out other means, including the issue of H shares or short-term debt, but that depends on developments in the mainland stock market.

``Bank borrowings will increase by at least one billion yuan if the A-share offering is turned down, and gearing ratio will definitely increase with the huge capital expenditure (1.5 billion yuan this year and one billion yuan next year), though the earnings derived from new production facilities will cover the interest expenditure,'' he said.

The company's capital expenditure last year was 1.2 billion yuan, and its bank borrowings increased from 689 million yuan to 1.65 billion yuan, with a net gearing ratio of 67 percent, at the end of December.

``Net gearing ratio will jump to about 120 percent by third quarter this year,'' said chief financial officer John Chung.

``However, our soda ash production line will start production soon and taking in the flat-glass business, net cash inflow from operations will increase to 800-900 million yuan next year,'' he said.

The firm began a trial run of its first soda ash production line in Delingha city, Qinghai province, last Friday. It is expected to start commercial production by the end of next month.

The new plant, covering 120 hectares, will eventually house two production lines, each capable of producing 900,000 tonnes of soda ash a year with a total investment of three billion yuan. Work on the second line is scheduled to start next year.

When the two production lines come on stream, Zhejiang Glass will be the country's second-largest manufacturer of soda ash, a key ingredient in glass making, supplying more than 10 percent of the mainland's demand.

``The market price for soda ash has been on the high side - 1,500 to 1,600 yuan per tonne since the end of 2004 and is expected to remain strong this year,'' said Feng. He expects the company could generate 500 yuan gross profit per tonne at this level because of relatively low production costs.

``It not only lowers our flat-glass production cost by 10 percent, but also expands our income sources,'' he said, adding the soda ash business will contribute profit of about 100 million yuan this year although planned production volume is only 200,000 to 250,000 tonnes.

He is optimistic the business will have a return on investment of more than 15 percent a year and achieve a shorter payback period as it has a much higher profit margin than flat glass, which is about 23 percent. The margin for soda ash is about 50 percent.

``Soda ash is a standard raw material for glass, chemical, electronic and metals industries. We only need to price a bit lower to capture the market,'' he said.

With five flat-glass lines in production and three more under construction, Zhejiang Glass is expected to use 250,000 tonnes of soda ash next year, or almost 30 percent of the plant's soda ash output. The balance will sell to other glassmakers and industries.