Hualian Sunshine to Be Regrouped     
Huge Loss in Speculating PTA Futures   

Due to the exhaustion of capital, Zhejiang Hualian Sunshine Petrochemical Co., Ltd. (Hualian Sunshine), the leading PTA (purified terephthalic acid) producer in China, announced to face difficulties in continual operation. Since it started the production of its first 600 000 t/a PTA line in 2005 (CCR2005 No. 11), the company has only spent three years in stepping into the position of bankruptcy.
   This PTA maker has all three 600 000 t/a PTA lines in Shaoxing county of Zhejiang province. It was announced on October 13th by the local government that a final regroup scheme to the company was basically settled. Huaxi Group, the current biggest shareholder of Hualian Sunshine, and Shaoxing County Binjiang Industrial Zone Development and Investment Co., Ltd. will jointly invest RMB1.5 billion (RMB1.0 billion sourcing from Huaxi Group) to rescue Hualian Sunshine. The scheme has not been signed between the two parties by October 15th.
   According to executives from Hualian Sunshine, the RMB1.5 billion cash will be enough to restore production in a short term.
   Due to the losses in operation for two consecutive years, along with a RMB270 million loss in speculating PTA futures domestically, Hualian Sunshine has now owed RMB10.5 billion, representing an asset-liability rate of over 90%. The company is at the brink of bankruptcy and can not keep normal operation.
   The company was set up in 2003 with a registered capital of RMB500 million. China Union Holdings Co., Ltd. (SZ: 000036) is one of its investors and creators by holding 51% equity. China Union Holdings Co., Ltd. had predicted a good prospect for the PTA business in 2003 but disclosed in the 2007 fiscal report that it decided to generally spin off PTA business and will shift into housing market. Hualian Sunshine has ever gained a profit of RMB110 million in 2005 from the eight months of operation on its first PTA line. The fat profit brought big greedy to the managing team, there came the second 600 000 t/a PTA production line in 2006 (CCR2006 No.30) and the third 600 000 t/a line in 2007.
   The good performance and high margin, however, did not last long. China's PTA margin started to go downhill from 2006 due to crazy expansion. And the high price of crude oil and the slackness of the textile sector have left a narrow space for the PTA manufacturing sector, particularly for Hualian Sunshine. Dislike PetroChina Liaoyang Petrochemical Company, another big PTA producer in China, Hualian Sunshine has no way to avoid the risk of high cost. So it selected to offset the spot loss in the PTA futures, but it stood in a mistake direction.
   China Union Holdings Co., Ltd. had given up increasing any investment for Hualian Sunshine, and let alone its equity in Hualian Sunshine dropped to 26.436% in August 2008 when other shareholders poured into new funds (CCR 2008 No.25), while Huaxi Group became the biggest shareholder of Hualian Sunshine through increasing an investment of RMB290 million.
  Huaxi Group will increase RMB1.0 billion investment again in the proposed regroup scheme, lifting the held equity to 47.3%. And China Union Holdings Co., Ltd will hold a 16.4% interest after this proposed regroup, a further reduction.
   Huaxi Group got involved in Hualian Sunshine in 2007 when Hualian Sunshine suffered a huge loss of RMB960 million. Why does Huaxi Group continued to increase investment in Hualian Sunshine when the PTA sector is softening? The answer is Hualian Sunshine is the most important raw material supplier for Huaxi Group - the famous chemical fiber maker.
   Hualian Sunshine has temporally discontinued the PTA production for half a month in May this year, causing a production reduction in the chemical fiber plant under Huaxi Group. More than 70% of PTA needed in the plant sources from Hualian Sunshine.
    Huaxi Group is a large township enterprise in China, headquartered at Huaxi Village, Jiangyin of Jiangsu province. Founded in 1994, the company has set up eight subsidiaries with 25 000 employees today. It engages in clothe materials, suits, chemical fibers, dyed knitwear etc to meet the needs in more than 40 countries and regions including Asia, Europe and America. In 1999 Huaxi Group promoted the IPO of its subsidiary - Jiangsu Huaxicun Co., Ltd. (SZ: 000936) and made it publicly listed in the Shenzhen Stock Exchange. Now Huaxi Group holds 41% equity in the listed arm.