Liaoning Zhongwang Group Development difficulties were overcome by making remarkable turnaround twice

Xinhuanet Shenyang 2 November (Reporters: Wang Jun, Chen Mengyang): A manufacturer of construction aluminum extrusion products gave up its profit at a time when such products were in shortage, and decided to transform itself into a company engaged in the research, development and manufacture of industrial aluminum extrusion products within more than five years. Finally, it set itself apart from its peers. A virtually unknown family enterprise sprang to fame for launching in Hong Kong the world's largest IPO since the onset of the financial crisis in the middle of this year in an attempt to raise more than HK$10 billion.

With these two difficult but remarkable turnarounds , Liaoning Zhongwang Group Co. Ltd ( ) has developed into a manufacturing giant with an annual turnover of nearly RMB20 billion from a small local enterprise within 16 years. Liu Zhongtian, the founder of Zhongwang Group, once became the richest in China.

Recently, reporters of Xinhua News Agency visited this largest industrial aluminum extrusion manufacturer in Asia and the third largest in the world to find out how this private company created a legend in the market and to share Zhongwang s experience for enlightening other private enterprises the way to growth.

Only do what is desirable and capture the advantage position in the aluminum extrusion product manufacturing industry

It was getting chilly in LiaoyangCity in LiaoningProvince at the end of October. But in the production base of Zhongwang Group, the cold weather could not affect the hot atmosphere in the workshop, where the large extrusion presses roared round the clock and the container fleets waited outside the finished product workshop in long queue for transporting the manufactured industrial aluminum extrusion products to all over the world at the fastest speed.

The short supply of Zhongwang s products should be attributable to its successful upgrade and transformation six years ago, Lu Changqing, Executive Director and Vice President of China Zhongwang Holdings Limited, told reporters, Zhongwang Group spent more than five years on transforming its business from the production of construction aluminum extrusion products to that of industrial aluminum extrusion products.

Six years ago, the China's construction market was booming, and Zhongwang Group already ranked in the three major aluminum extrusion producers in China with the construction aluminum extrusion products well recognized by the industry. However, at the end of 2002, Chairman Liu Zhongtian suggested that their business should be changed to the manufacture of industrial aluminum extrusion products applicable to the transportation industry.

At that time, nobody understood why the enterprise should take such a high risk to transform when the production and business environment was so good. Lu Changqing said, In China, the development prospect of industrial aluminum extrusion products was not that clear at that time.

Due to Liu Zhongtian s insistence, Zhongwang has invested more than RMB2 billion since 2003 in the construction of new plants and the procurement of large extrusion presses, of which the 125MN dual action aluminum extrusion press is currently the world's largest oil-driven extrusion press and one of the most advanced extrusion presses in the world. The targeted markets of the manufactured aluminum extrusion products cover the air, land and sea transportation sectors. Previously, the domestic market basically relied on import in getting these accessories.

The long-lasting transformation process was a torment for the staff of Zhongwang. But without this adjustment of product structure, Zhongwang may have to struggle today in face of the increasingly diluted profit margin and overcapacity, just like what has been experienced by more than 600 domestic manufacturers of construction aluminum extrusion products.

The requirements of industrial aluminum extrusion products are evidently different from those of construction aluminum extrusion products. The alloy proportion, shape and scale vary in every order, so that the manufacturers must be equipped with advanced research and development capabilities. Therefore, in the initial stage of transformation, Zhongwang once employed 6 foreign experts of the industry and formed the largest research and development centre of this industry in which there are 253 research and development personnel at present. In 2008, after four and a half years of preparation including design, installation and commissioning, the world s largest 125MN oil-driven dual action extrusion press was duly put into operation. As such, Zhongwang has ranked among the world s top manufacturers in respect of large-section industrial aluminum extrusion products. Soon after, Zhongwang s major customer base has included China Northern Vehicle Group Changchun Passenger Carriage Plant ( ) and Southern Vehicle Group ( ), etc. Zhongwang s annual income from industrial aluminum extrusion products mounted up to RMB6.2 billion in 2008 from RMB1.6 billion in 2006. The company s income from industrial aluminum extrusion products achieved a significant growth of 53% and net profit increased 72% on a comparable basis.

Lu Changqing said, The usage of production capacity of Zhongwang s equipment has already reached 86%, which is an unimaginable figure in aluminum extrusion manufacture industry since the normal usage is just 60% or so. Currently, even if Zhongwang manufactures products in full force, it cannot satisfy the customers demands. So, the company no longer takes any order for goods less than 10 tons.

After launching the world's largest IPO during market downturn, the family enterprise has been transformed into a publicly listed company

2009 is an extraordinary year for the international capital market. With the impact of the global financial crisis increasingly intensified, no one can say for sure when the financial crisis that has been sweeping across the world will come to an end. At this time, Zhongwang sought the listing of its aluminum extrusion product business overseas. On 8 May this year, China Zhongwang Holdings Limited was successfully listed on the Hong Kong Stock Exchange, and became the largest IPO in the international capital market since September last year, and was also an IPO that boosted confidence amidst the global depression and recession.

"At the time when the international capital market in IPO almost came to a standstill, the large-scale IPO launched by Zhongwang had important historical implications in reviving the confidence of global investors. Global financial institutions and investors all paid close attention to whether the listing of Zhongwang would be successful." Lu Changqing, who has been involved in capital operation for numerous years, sighed when recalling the difficulties encountered in the road shows organized for the listing of Zhongwang. "At that time, it was not at all easy to convince investors to invest their money because they were still staying on the sidelines."

The road show team of Zhongwang conducted road shows in Hong Kong, Singapore, London, Boston and New York for about ten days and basically met with investors in at least ten sessions everyday. They had to tell investors "stories" continuously even at the dining table during the three meals. Lu Changqing said, "During the bull market, it doesn't matter if we talk more or less, but during the bear market, we must tell investors the investment value of the company in the most precise language within the shortest time, and we cannot skip even one sentence."

Yet, European and American institutional investors were crazy about Zhongwang. Finally, Zhongwang successfully raised a fund of HK$9.8 billion. The successful listing made Zhongwang become a publicly listed enterprise from a familial enterprise.

The company conducted a series of adjustments in its organizational structure in accordance with the requirements of listing companies. The company s management team is professional and comparatively young, and none of the relatives of Chairman Liu Zhongtian holds a post in the company, said Lu Changqing. Compared with Zhongwang of several years ago, Zhongwang now is a brand-new enterprise. Its healthy and perfect systems of management, finance, sales, etc. can ensure the sustainable development of Zhongwang in the future.

Can Zhongwang extend the growth legend during its "post-listing" era?

Lu Changqing told the reporters that in this year, Zhongwang's annual production capabilities can reach 600,000 tons. There are four or five competitors of industrial aluminum extrusion manufacturers in China, but their annual production capabilities of this kind of products are below 50,000 tons. Couple with the help of its successful listing in Hong Kong, Zhongwang has a clear leading advantage. However, it s worth noting how Zhongwang will use the proceeds from the market to further improve the production chain and maintain its leading status in the industry.

Generally speaking, after enterprises succeed in financing in the market, they will consolidate the operations of the upstream and downstream industries to form a more complete business chain for reducing the cost and risk and enhancing the profit margin. After the successful IPO of Zhongwang, some peers have predicted that Zhongwang will acquire some upstream aluminum ingot producers and even the business on the top of the upstream industry such as mine business. But Lu Changqing denied this.

It seems that cost will be lowered through the acquisition of upstream enterprises, however, the upstream industry of nonferrous metals is quite special. It has a clear market cycle, and its price is subject to rapid change and large fluctuation. If it cannot pass the cost on to others effectively, it will increase the enterprise risk once the acquisition takes place. Zhongwang adopts a pricing method of current price of aluminum ingot plus processing fee, in which the price of aluminum ingot follows the market rate. What Zhongwang earns is the processing fee. In addition, as the company s products are customized for customers, this pricing method can effectively evade the pressure arising from change in upstream aluminum ingot price, said Lu Changqing.

Lu Changqing also revealed that in the extension of production chain, Zhongwang had more interest in the downstream further aluminum extrusion processing industry. Currently, the major industrial aluminum extrusion orders of Zhongwang were derived from the fields of rail trucks, passenger carriages, metropolitan rails, automobiles, vessels, aviation, electricity, etc. As Zhongwang did not possess further processing capabilities, after buying Zhongwang's aluminum extrusion products, the customers assigned the further processing work to other producers that Zhongwang lost part of downstream high value-added profit.

Nevertheless, this awkward situation will be changed soon. Now Zhongwang is leveraging on the proceeds raised from the capital market to establish a new further processing plant zone. Equipment has been ordered and is expected to put into operation in 2011, and afterwards, the finished products required by the downstream customers can be produced in the plant.

In addition, more than 20 production lines of Zhongwang will commence the production by 2015. The tonnages of extrusion presses will range from 9,000 tons to over 20,000 tons, among which various sets of equipment will be the first ones in the world. With the establishment and operation of such production equipment, Zhongwang will become the real first-class manufacturing giant of industrial aluminum extrusion products in the world.