SGX queries China Gaoxian on proposed divestment; yarn supplier asked to justify sale

YARN supplier China Gaoxian Fibre Fabric Holdings on Monday night responded to a long list of queries from the Singapore Exchange (SGX) relating to its proposed disposal of Huaxiang China Gaoxian International Holdings.

The SGX had asked China Gaoxian to explain why it was selling Huaxiang and all its new equipment immediately after it had reached full capacity, writing off 1.7 billion yuan of losses in the disposal and collecting only 10 million yuan in cash proceeds.

China Gaoxian was also asked to elaborate on how a significant loss on disposal of 1.78 billion yuan could be incurred over such a short period of time since the Huaxiang plant was newly constructed. It was only in 2014 that a small part of the Huaxiang plant began production, after various delays.

China Gaoxian had invested 2.67 billion yuan in Huaxiang as at Dec 31 last year, though the net book value of that investment has fallen to 1.43 billion yuan after accumulated impairments and depreciation for property, plant and equipment, it said.

The SGX also questioned the logic behind the proposed sale of Huaxiang, when the group’s other unit, Zhejiang Huagang, intends to upgrade its existing production facilities and ancillary machinery and equipment for the production and sale of new products due to an increased demand.

“If this is the case that the company will be expanding Huagang’s operational capacity, please explain why the company is selling Huaxiang and all its new equipment immediately after it has reached full capacity, writing off RMB1.7 billion of losses,” the SGX wrote.

China Gaoxian replied that the Huaxiang group had suffered net accumulated losses of about 1.90 billion yuan in 2017 and 1.97 billion yuan in the first half of 2018, owing to high finance costs from the loans granted by various banks and non-financial institutions.

China Gaoxian added that in contrast with the Huaxiang project, the Huagang project requires relatively lesser capital to upgrade its existing production plant and machinery for its production, based on management’s projections.

The shares closed unchanged at S$0.022 on Monday.