China Worldbest gets an overhaul

By staff reporters Yuan Ling, Cheng Zhe and Lou Yi

, is learning the hard way that bigger isn’t always better, especially when it comes to rapid business expansion.

China’s Chengtong Group will spend 5 billion yuan (US＄ 617 million) to overhaul Worldbest in an effort to help the struggling SOE escape a credit crisis, a high-ranking Worldbest manager has told . The State-Owned Assets Supervision and Administration Commission (SASAC), which currently controls Worldbest and 189 other SOEs, will oversee the restructuring. Several banks have sued Worldbest in an attempt to recover their loans.

According to the deal, Chengtong would invest 2.5 billion yuan (US＄308.6 million) in Worldbest, which would in turn issue convertible bonds in the same amount back to Chengtong. After the restructuring, Chengtong would hold 50 percent of the restructured group. The China Development Bank (CDB) would act as Chengtong’s creditor.

With 49.5 billion yuan (US＄6.1 billion) in annual revenue in 2004, Worldbest ranked 29th on the list of China’s 1,000 largest companies last year. Its current total assets amount to 57.2 billion yuan (US＄7.06 billion). Launched in 1992 as a textile company, Worldbest has seen explosive growth over the past decade as it merged with nearly 90 other companies. Its founder and board chairman Zhou Yucheng has led the charge, taking a stake in everything from farm machinery to pharmaceuticals, which diverted its energies from the original textile business.

Before taking the helm at Worldbest, Zhou was the head of the policy and law section of the former Ministry of the Textiles Industry. A source close to Zhou said Zhou “hoped to shake up Worldbest through industrial mergers and serious restructuring.” But much of that shakeup was contingent on bank loans, which laid the foundation for a later credit crisis. Subsidiaries began to sustain losses; analysts say the state-owned conglomerate rushed too quickly to expand the scope of its business without streamlining the companies it acquired.

Recognizing the severity of the crisis, Worldbest submitted a restructuring plan to SASAC in February. It proposed that the arm of SASAC in Shanghai (where Worldbest is based) transfer its 30 percent holding in Shanghai Pharmaceutical Group (SPG) to Worldbest, which already holds 40 percent of SPG’s total stock. In return, SASACS and its holding companies would become Worldbest’s controlling shareholder.

But the plan went awry when a routine Ministry of Finance audit called into question the soundness of Worldbest’s financial practices.

'Bankers met in September and agreed that the situation might spiral out of control if they did not begin to recover some of their loans,' an insider told .

Zhou was out of the country at the time. The company is currently recruiting a new president, only adding to its creditors’ doubts. Sources told that Worldbest’s debts total an astonishing 25 billion yuan (US＄3 billion).

In May, SASAC changed its approach toward Worldbest’s restructuring, appointing Zhang Jie, also a former textile official, as president. Soon after the appointment, the CDB concluded a deal with SASAC to provide 50 billion yuan (US＄6.2 billion) for Chengtong and the State Development and Investment Corporation (SDIC). Chengtong’s share is 20 billion yuan (US＄2.5 billion), of which 5 billion (US＄617 million) is earmarked for Worldbest.

Chengtong and SDIC are the government’s pilot asset managers for restructuring problematic SOEs. SASAC director Li Rongrong said at a conference earlier this year that it is urgent to 'find a platform to facilitate the exit of some (problematic) enterprises.'

As part of its restructure, Worldbest also plans to introduce overseas investors. Three companies from the US, Singapore and Indonesia have expressed interest in such an arrangement. The group has designated an accounting firm to audit its assets. 'After the audit report comes out, we will hold formal negotiations with foreign investors to decide the amount of their investment and shareholding percentage,' said a SASAC official. 'It will be complete by the end of next year.'

Although they have an initial roadmap for the restructure, not all parties are well-prepared to take action. A SASAC official told that CDB is very interested in the restructuring plan, but an information officer from CDB said that the bank has not yet secured the 5 billion yuan (US＄617 million) in necessary loans.

One executive at another SASAC-controlled SOE told that SASAC plans to introduce a “state asset budget system,” under which the government would project earnings and expenditures for SOEs each year. SASAC would then be able to reallocate profits from core SOEs to others under its control; currently most of these companies keep profits to themselves.

The Ministry of Finance has been unenthusiastic about the proposed initiative, and it has final say on all budgetary matters. One official from the Ministry’s corporate management section told that it remains an issue of academic debate, and is not yet on the ministry’s official agenda.

One World Bank official in Beijing agreed that the plan was plausible. Although SASAC can require SOEs to turn over their profits, he said, budgeting state assets falls under the government’s fiscal responsibility, meaning that the National People’s Congress has the ultimate authority to approve it. If the budgeting of state assets were to become independent, he said, “things could go awry.”

SASAC is currently drafting regulations to hold accountable those responsible for the loss and depreciation of state assets.

English version by Xin Zhiming and Lauren Keane