Corporate: Troubled Bio-Treat scores water project, but investor interest stays lukewarm
Leu Siew Ying
The Edge Singapore
December 20, 2010
Beleaguered water treatment company Bio-Treat Technology might still be struggling through a complicated debt restructuring plan, but that hasna t stopped it from taking on new contracts. On Dec 9, the company said it had secured a RMB500 million ($98 million) contract for a water treatment plant in China, its first project in nearly three years.
The water supply, wastewater treatment and recycled water project will be executed in phases, with the first phase involving a contract value of RMB80 million, says Paul Lim, acting CEO at Bio-Treat. a It is capital-intensive, so we will have to do it in phases,a he tells The Edge Singapore in a telephone interview. a We will finance this with onshore borrowing. Domestic banks are willing to lend us the money.a
The plant, in the Sanmenxia Industrial Zone in central Henan province, will have the daily capacity to treat 200,000 tonnes of water, 150,000 tonnes of wastewater and 100,000 tonnes of recycled water. Work on the facility is expected to begin in 1Q2011 after a feasibility study is completed. Henan, the most populous province in China, recently received a lot of media attention after Foxconn, the maker of iPhones and Hewlett-Packard computers, built a factory in Zhengzhou, the provincial capital, that will eventually employ 300,000 workers. Sanmenxia itself is well connected to the rest of the country by road and railway and is only 1½ hoursa drive from the airport in Zhengzhou, which is one of Chinaa s transportation hubs.
Lim says the companya s newly recruited president Chen Dawei had worked hard to secure the contract without waiting for the long-drawn-out debt restructuring to be completed. The last time Bio-Treat won a project was in March 2008. Chen is also the sole shareholder and director of Giant Delight Holdings, which that is in the process of becoming the controlling shareholder of Bio-Treat, following its debt restructuring. Giant Delight is also trying to get Mainboard-listed Boustead Singapore to join it in its rescue effort.
According to its independent auditors Moore Stephen, Bio-Treata s liabilities exceeded assets by RMB620 million as at end-June. It has defaulted on HK$239.4 million ($40.3 million) due to Precious Wise, a former shareholder, and HK$37.8 million due to Datasino, a related party of Precious Wise. In addition, it is in default of convertible bonds with a value of $169 million that have been marked down to $37 million in a negotiated settlement.
In the scheme reached last December to pay Bio-Treata s creditors, Giant Delight was set to buy 370 million new shares in Bio-Treat at four cents each, subscribe to HK$290 million worth of fresh convertible bonds, and take up 57.7 million free warrants, which were exercisable at 2.5 cents each. Meanwhile, holders of the marked-down bonds were to be issued 75.2 million free warrants, in consideration for the haircut on their investment. Precious Wise was to receive a cash payment of HK$140 million, subscribe to fresh convertible bonds worth HK$222 million that could be converted into 1.07 billion new shares, and pick up 31.6 million free warrants. Finally, Bio-Treat shareholders were to be offered 585 million new shares in a three-for-five rights issue, which has since been revised to 992 million new shares on a one-for-one basis at four cents each.
Many of the subscription agreements had lapsed because of the considerable amount of time it has taken to hammer out the whole restructuring plan. Now, with the rights issue scheduled for Dec 23, the restructuring negotiation may well get going again. But will the new contract that Bio-Treat has just announced prompt the various parties to speed things along? Or will it only lead to more disagreements about the value of the company and the various haircuts that some of the parties have had to bear?
Keith Chu, vice-president for corporate marketing and investor relations at Boustead, says the company is not viewing its possible investment in Bio-Treat in a new light. a We have not made our decision yet,a says Chu. a This particular project has no bearing on our future decision. We will be making our decision based on the information provided up to the point before this announcement came out. We have to look at the valuation of the company based on its cash flow first and foremost.a
Chu points out that Bio-Treata s past problems had been due to its inability to secure funds for the projects it won. a Now that they have secured a project, we still have to look at their cash flow based on the existing 13 projects,a he says. Boustead said in June it would invest some $40 million to buy a substantial part of the bonds that were to be issued to Giant Delight, which would give it a 20% stake in Bio-Treat when converted. As for Giant Delight, it already has a foothold in the company with Chen on its payroll. Acting CEO Lim says Chen is an employee, regardless of how the restructuring turns out.
In the meantime, Bio-Treat has completed building the first phases of all 13 projects in its portfolio. Six of the plants are in their first year of operation and began contributing to revenue in FY2010, allowing the company to report earnings of RMB4.3 million in 1QFY2011, versus a loss of RMB26.6 million in the same quarter the previous year (the company has a June 30 financial year-end). Chu acknowledges the turnaround and says the companya s rights issue should help meet its short-term cash requirements. If the rights issue is fully subscribed, Bio-Treat will raise $39 million, which it has said will be used to repay bondholders and as working capital.
Still, there are probably too many uncertainties on the horizon for potential investors like Boustead to throw caution to wind. For one thing, Bio-Treata s auditors have issued a disclaimer audit opinion on several substantial impairment allowances and transactions that the company included in its consolidated statement. Shares in Bio-Treat reached a year high of 10.6 cents on Jan 12, but have since fallen back to 5.5 cents.
