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Summary of Proposed Investment
This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.
ZIBO DONGYUE GROUP
All Other Chemical Product
Date SPI disclosed
November 28, 2006
Projected board date
January 5, 2007
Invested: April 13, 2007
Signed: March 26, 2007
Approved: March 8, 2007
View Environmental & Social Review Summary (ESRS),
Based in Zibo, Shandong Province, China, the Dongyue group of companies (Dongyue Group) commenced initial operations in 1987 with the production of small quantities of hydrogen fluoride anhydrous (AHF) and has since become one of the largest fluorine chemicals and polymers producers in the world. The Dongyue Group consists of three operating companies, namely, Shandong Dongyue Chemical Limited (Dongyue Chemicals), Shandong Dongyue Polymer Materials Co., Ltd (Dongyue Polymers), and Shandong Dongyue Fluorine-Silicon Material Co., Ltd (Dongyue F-S). The main products of Dongyue Group include various fluorine-based refrigerants with a production capacity of 120,000 tpy, PolyTetraFluoroEthylene (PTFE) with a production capacity of 20,000 tpy, and chloride methane products with a production capacity of 120,000 tpy. The group has an integrated value chain in the fluorine chemical industry, from intermediates to finished products. In 2005, the group ranked amongst the top 100 chemicals enterprises in China, according to a survey published by the Chinese Petroleum & Chemistry Industry Association.
The proposed project has two main components:
- undertake a corporate restructuring project (Corporate Restructuring) by setting up an offshore holding company (Dongyue Holding), which will own majority of the Dongyue Group and target a listing on the domestic or offshore stock market; and
- implement various capital expenditures including setting up a greenfield organic silicon project, expanding its existing R134a refrigerant production capacity, and implementing a clean development mechanism (CDM) project (collectively the Capital Expenditure Program).
Project sponsor and major shareholders of project company
Established in 1990 in Malaysia, Malaysia Macro Link Group Company Ltd. (Macro Link Malaysia or the Sponsor) owns a variety of business interests in Malaysia, Hong Kong and China. Mr. Fu Jun owns 40% of Macro Link Malaysia’s shares while the rest of the shares are owned 20% by Yang Yunhua,15% by Wu Xiangdong, 6% by Zeng Xianhui, 6% Zeng Xianguang, and 5% by Fang Mingli and Li Bingkun each. Macro Link Malaysia holds equity stakes in several Chinese companies, in such sectors as ceramic, real estate, catering, chemicals etc. Both Macro Link Malaysia and its China-based sister company Macro Link Holdings are controlled by Mr. Fu Jun and run by the same management group. An agreement signed between Macro Link Malaysia and Macro Link Holdings authorizes Macro Link Holdings to look after Macro Link Malaysia’s business interests in China.
With a view towards consolidating its ownership in the Dongyue Group, the Macro Link Group proposed establishing an off-shore special purpose vehicle (SPV) holding company, to which Macro Link Group would contribute all of its shares in Dongyue Chemicals, Dongyue Polymers, and Dongyue F-S. Accordingly, Macro Link Group, together with three individual investors in the three Dongyue Group, set up the SPV in the Cayman Islands under the legal name of Dongyue Group Company, Ltd. (Dongyue Holding). Dongyue Holding has a total issued capital of $20 million, which was contributed 64.5% by Macro Link Group, 14.68% by Dongyue Team Limited (BVI 1), a company wholly-owned by Mr. Zhang Jianhong and incorporated in the British Virgin Islands, 7.7% by Dongyue Wealth Limited (BVI 2), a company wholly-owned by Mr. Liu Chuanqi and incorporated in the British Virgin Islands, and 13.12% by Dongyue Initiator Limited (BVI 3), a company wholly-owned by Mr. Cui Tongzheng and incorporated in the British Virgin Islands.
Total project cost and amount and nature of IFC's investment
The total project cost is estimated at $129 million. The proposed IFC investment includes:
- IFC equity investment of up to $15.0 million to subscribe to new shares to be issued by Dongyue Holding;
- A loan of up to $40.0 million, for IFC’s own account, to the Dongyue Group to support the Capital Expenditure Program; and
- the purchase of up to 15% (approximately 7.5 million) of Dongyue Chemical's Certified Emission Reductions (CERs), to be generated during the years 2008 – 2012 by a HFC-23 decomposition project, which IFC will sell to compliance buyers of CERs with a partial delivery guarantee. In addition, Dongyue Group is seeking to raise an additional $25.0 million from private investors (other than IFC).
Parallel domestic loans and/or IFC B loans will also be raised to finance the project. Any shortfall in the financing plan will be funded by the company’s internally-generated cash flows.
IFC investment as approved by Board
85.5 million (USD)
IFC Investment (million USD)
* These investment figures are indicative
Location of project and description of site
The project is located in an industrial park in Huantai County, Zibo, Shandong Province. The industrial park is 27 km away from the Zibo Railway Station via Jiao-Ji Railway. A dedicated railway under development lies 3 km to the north of the industrial park. The trunk road of the industrial park crosses Shouguang-Jinan Highway. 7 km to the west of the industrial park is Binzhou-Lai Laiwu Expressway, 20 km to its south is Jinan-Qingdao Expressway, 90 km to its southwest is Jinan International Airport, and 280 km to its east is Qingdao Liuting Airport and Qingdao Port.
The industrial park has ample and quality ground water, and the government is planning to obtain water from the Yellow River to supply to the industrial park, so the industrial park will be guaranteed abundant water supply. The electricity supply comes from 110kV substation in Tangshan Township and 220kV substation in Huantai County, and the output voltage of both substations is 35kV. In addition, the public facilities such as gas, road, telecommunication, drainage, etc., have been made available in the industrial park and the auxiliary facilities such maintenance and comprehensive services are also complete.
Anticipated development impact of the project
The project will have a significant development impact with regard to employment generation and supporting the local economy as follows:
The Capital Expenditure Program will create employment opportunities. It is expected that the organic silicon project will employ 225 people on permanent basis. Also, Dongyue Chemicals will hire around 50 new staff to work in its expanded R134a plant and in its under-development CDM plant. In addition, significant local employment will also be generated on temporary basis during the construction period of the greenfield and expansion plants. Moreover, the Corporate Restructuring will significantly accelerate the growth of Dongyue Group, thus generating additional employment opportunities in various functions and various parts of the group.
The proposed project will contribute to the development of the local economy. First, Dongyue Group plans to rely exclusively on Chinese contractors and construction workers for the implementation of its Capital Expenditure Program. Second, Dongyue Group’s main raw material for its existing operations is fluorite, which is sourced from mines located within China. The increased demand on fluorite will stimulate investments in fluorite mines, some of which are located in the less developed Chinese provinces (e.g. Inner Mongolia). Similarly, the group’s proposed organic silicon plant will utilize silicon powder and methanol as the main raw materials, both of which are also sourced from Chinese producers. And being primarily an export-substitution project, the company expects to sell its entire production of organic silicon domestically, and in many cases in the form of intermediate products for further processing by other Chinese manufacturers, thus generating significant local investment opportunities.
The key development indicators that are proposed to be monitored during the life of the IFC investment are:
- direct employment levels,
- volume of silicon monomers further processed within China into final products, and
- value of construction contracts awarded to local firms.
IFC's expected development contribution
The project fits well with the most recent (2006-2010) World Bank Group Country Partnership Strategy (CPS, report No. 35435 discussed by the Board on May 23, 2006), which is organized around five main pillars that aim to help:
-integrate China into the world economy, by deepening its participation in multilateral economic institutions, reducing internal and external barriers to trade and investment, and contributing to its overseas development efforts (pillar 1);
- reduce poverty, inequality, and social exclusion, through promoting balanced urbanization, sustaining rural livelihoods, and expanding access to basic social and infrastructure services, particularly in the rural areas (pillar 2);
- manage resource scarcity and environmental challenges, through reducing air pollution, conserving water resources and optimizing energy use, improving land administration and management, and observing international environmental conventions (pillar 3);
- deepen financial intermediation, by expanding access to financial services (especially among SMEs), developing the capital markets, managing systemic risks, and maintaining financial stability (pillar 4); and
- improve public and market institutions, by improving firm competitiveness, reforming public sector units, and rationalizing intergovernmental relations (pillar 5).
Within the framework of the CPS, the World Bank Group’s private sector strategy emphasizes the following areas of involvement:
- improving the business environment and strengthening regulatory capacity;
- expanding access to markets;
- upgrading corporate practices;
- expanding access to finance and financial sector development;
- enhancing environmental sustainability and energy efficiency;
- promoting private participation in infrastructure and addressing regional imbalances.
The focus is on model transactions that are setting standards for private sector investments in corporate governance, international accounting, environmental technologies and practices, and efficiency of operations, with the aim of creating demonstration effects and helping Chinese companies become global and internationally competitive players.
IFC will make its contribution to the proposed project in the following ways:
- IFC will provide long-term funding for production capacity expansion of the Dongyue Group. Given the current lending climate in China, such long-term lending by domestic banks is generally not readily available to non-SOE majors for fixed-asset investments.
- IFC will work with the Sponsor to complete the Corporate Restructuring and introduce to the Dongyue Group international standards and best practices in corporate governance, environmental management and community development activities, thus improving the group’s transparency and preparing it for the eventual public offering.
- By supporting a Chinese enterprise majority-owned by private entities in its effort to restructure and optimize its corporate structure and build world-class production facilities, IFC will provide a demonstration effect to other similar projects in China.
- FC’s participation as an investor in the private placement will provide an important ‘signaling effect’ to other potential private investors, and hence, will stimulate interest in the private placement and public offering processes.
Environmental and social issues - Category B
IFC's early review of this investment has identified the following environmental, social, health and safety issues: air emission, wastewater treatment and discharge, solid and hazardous waste management, operation hazard and hazardous material management, employee health and safety, fire protection and emergency response, community health/safety, community relationship and development, and land acquisition process.
Performance standards that are expected to be applicable for this investment may therefore include:
- PS1: Social and Environmental Assessment and Management Systems
- PS2: Labor and Working Conditions
- PS3: Pollution Prevention and Abatement
- PS4: Community Health, Safety and Security
- PS5: Land Acquisition and Involuntary Resettlement
Based on this early review, it is anticipated that this investment will require 30 days disclosure by IFC prior to Board and has been provisionally categorized as B.
For inquiries about the project, contact:
Mr. Cui Tong Zheng, Vice President
Dongyue International Fluor-Silicon Material Industry Park
Zibo, Shandong Province, P.R. of China
For inquiries and comments about IFC, contact:
General IFC Inquiries
IFC Corporate Relations
2121 Pennsylvania Avenue, NW
Washington DC 20433
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