China Zhongwang’s First-Half Numbers Down

China Zhongwang’s First-Half Numbers Down

Chinese aluminium extruder China Zhongwang released results for the first half of the year late last week. Although the numbers were generally down year-on-year, some see this as the first rumblings of a budding crisis for China’s largest extruder. The firm showed revenue for the half of RMB7.3 billion, down from last year’s first-half revenue of RMB7.7 billion. Gross profit for the half also fell, from RMB2.8 billion last year to RMB2.4 billion this year. Zhongwang’s first-half EBITDA totaled RMB2.4 billion, down from last year’s first-half number of RMB2.5 billion.

Profit for the first half of the year came to RMB1.3 billion, down slightly from last year’s first-half profit of RMB1.4 billion. Zhongwang reported a sales volume in the first half of 284,561 metric tons, a drop year-on-year from last year’s first-half sales volume of 367,779 metric tons. Reports of the firm’s 23-percent erosion in sales from last year’s first half alarmed traders in China, sending the firm’s stock into a 12-percent tailspin. Though the sales figure was strong on paper, the sales failed to translate into profits.

It’s worth remembering that in 2008, immediately prior to Zhongwang’s IPO, the company’s portfolio transformed overnight, doubling its portfolio, massively increasing exports to the United States, and reporting an ambitious margin of US$2,000 per metric ton. However, little evidence exists that the sales to U.S. buyers were real – what they suspect is that the reported sales have been mere shuffling of aluminium products back and forth between proxy firms under the control of Liu, his family, and other associates. At the time, Zhongwang conducted an audit and said that no deficiencies in its sales transactions were found.

With the imposition of tariffs by the United States in 2011 (and a corresponding 30-percent loss in revenue), Liu’s tack changed. According to a Dupré Analytics report, Lu incorporated state-owned firms into the alleged shell game, eventually routing the metal to an out-of-the-way warehouse in Mexico. Zhongwang allegedly claimed an export price of US$4,000 per metric ton but declared an import price of US$1,800 per ton. Company representatives made a public announcement back in August 2015 “refuting the falsified allegations made in that report point by point.”

The stockpile drew the attention of industry media, allegedly leading to its disbursal to Vietnam in 2016. However, Vietnamese officials, already aware of the alleged scheme, initiated an investigation shortly after the stockpile’s arrival, ultimately resulting in denying the firm the right to mark Vietnam as the stockpile’s country of origin. As a result, exports of industrial extrusion from China to Vietnam dwindled in January 2017 – a fact which could explain Zhongwang’s recent announcement of a decrease in sales number by 23% in the first half of 2017. Contacted by Insider, a Zhongwang representative denied that any connection exists between these trade flows and the company. “[The] majority of our products are sold domestically to PRC clients. China Zhongwang’s total export accounted for about 15% of its total sales, and the amount exported to Malaysia was almost negligible. The Chinese manufacturer [responsible for the export of extrusions to Malaysia] has no relationship with us.” However, this does not preclude that Zhongwang-associated traders are responsible for the exports.

With such a complicated history of aluminium transshipments, Zhongwang earnings should be taken with a grain of salt. The weak results came at an inopportune time, as Zhongwang has been trying to acquire U.S. aluminium products maker Aleris for a reported $2.33 billion. It’s unclear at this point whether the acquisition will go through due to rumblings on Capitol Hill. Lawmakers have been pressuring the U.S. Treasury to block the sale, calling it a “strategic misstep”. The Committee on Foreign Investment in the United States (CFIUS) was investigating the deal, before the two companies withdrew their notice seeking approval of the transaction in early August.

The piece has been updated on September 1st to include comments from Zhongwang representatives.