Former Aluminum Highflyer Zhongwang Headed For Listed Company Scrapheap

Key Takeaways:

• Zhongwang will be de-listed from Hong Kong on April 13, following a 19-month suspension in trading of its shares
• The aluminum products maker was brought down by a combination of mismanagement and external factors, including U.S. protectionism and China’s property downturn

By Chen Ruzhen

Nearly 14 years after wowing investors with its solid growth story, a company that was once one of China’s leading private aluminum product makers has discovered it can no longer kick the can down the road. The end is nigh, at least as a publicly traded company, for China Zhongwang Holdings(1333.HK), as it prepares to be kicked off the Hong Kong Stock Exchange this week.

It wasn’t supposed to end this way. But Zhongwang was ultimately undermined over the years by a confluence of factors, some self-made and others external, including an overly ambitious acquisition binge, as well as U.S. protectionism and the recent chill in China’s property market. 

On May 8, 2009, Zhongwang’s stock debuted in Hong Kong in what was then the world’s biggest IPO since the 2008 global financial crisis, cementing founder Liu Zhongtian’s status as Asia’s “Aluminum King.” Fast forward to 2023, where a company that was once the world’s second-biggest aluminum products maker will end its rein as a publicly listed company in disgrace on Thursday.

Zhongwang hasn’t published financial results since 2021 as it became mired in financial difficulties. Its shares were trading at a fraction of the IPO price when they were officially frozen 19 months ago on Aug. 30, 2021, and the company’s main subsidiaries have been declared bankrupt since then.

It would be easy to blame Zhongwang’s downfall on three years of some of the world’s toughest pandemic controls that have hammered China’s economy. Beijing’s crackdown on real estate, which pounded demand for the aluminum rods, pipes and pallets that are some of Zhongwang’s main products, also played a role. But such factors, while debilitating, aren’t necessarily fatal for a well-run company.

Zhongwang is just the latest in a growing heap of collapsed former Chinese highflyers, including HNA Group, Anbang, and most recently, Evergrande. Like those, its story is one of a company brought down by corporate mismanagement, reckless acquisitions and financial imprudence, after finding itself in the wrong place at the wrong time as China’s economy slowed after years of rapid growth.   

Signs of trouble started appearing as early as Zhongwang’s 2020 annual report published in April 2021 – the last it is likely to ever issue.

The company’s revenue fell 13% year-on-year, its profit fell roughly 40%, while its cash and cash equivalents tumbled 60%. At the same time, Zhongwang’s short-term bank and other loans surged 62% from a year earlier, while its debt-to-equity ratio – a key measure of leverage – jumped to 1.83 from 1.19 three years earlier, much higher than the industry average of 0.22.

Zhongwang blamed its woes on “the sudden outbreak of the Covid-19 pandemic” that ravaged the global economy. But that doesn’t explain why the company has crashed and burned while many of its peers have survived and are already bouncing back from the pandemic.

Delayed Report

One of the first major trouble signs emerged on Aug. 30, 2021, when Zhongwang told shareholders that its 2021 interim report would not be published on time, resulting in a suspension of its shares. That was the last time the company published any financial reports, and no shares have changed hands since then.

Last September, a court in China’s northeastern Shenyang province approved an application by Zhongwang’s creditors to have the company declared bankrupt for failing to meet its financial obligations. Zhongwang’s main businesses then entered a consolidated restructuring as its subsidiaries faced “severe difficulties … due to major losses and business hardship.”

The latest blow came on March 24, when the Hong Kong stock exchange told Zhongwang that its listing would be canceled on April 13 due to the prolonged suspension in trading of its shares. The company said it wouldn’t contest the decision.

Zhongwang’s fall contrasts with a shinier outlook for some of its peers.

Hong Kong-listed Xingfa Aluminium Holdings (0098.HK) reported its revenue rose 10% last year, and added it expects demand for aluminum products to rise on a recovery in China’s property market. Shanghai-listed Shandong Nanshan Aluminum (600219.SH) reported a 30% jump in revenue during the first nine months of 2022, and a 13% profit gain over that time.

Part of Zhongwang’s failure was rooted in its overheated expansion. In 2016, the company launched a strategic transition aimed at becoming an integrated provider of lightweight products for sectors ranging from transportation to construction.

As part of the transformation, as well as its global ambitions, it made its first overseas acquisition in September 2017 with the purchase of Germany’s Aluminiumwerk Unna, a maker of seamless tubes used in aircraft. A month later, Zhongwang bought SilverYachts, an Australian superyacht builder, seeking to introduce its extruded aluminum products for use in high-end boat-building.

A Zhongwang affiliate also planned to buy U.S. aluminum maker Aleris for a generous premium, though the bid was ultimately dropped after U.S. politicians expressed concerns.

Meanwhile, Zhongwang financed its operations using a cohort of small financial institutions it controlled or backed, some of which ran into financial trouble. The company had controlling or sizable stakes in six lenders, one insurance company and at least one leasing firm. Zhongwang-controlled Liaoyang Rural Commercial Bank went bankrupt last year. Liaoyang Bank, in which Zhongwang was also a major shareholder, was merged into a new bank set up by the government after also facing significant financial risks.

Zhongwang had previously sought to generate additional funds from China’s domestic A-share stock market through a backdoor listing. But that plan never got the nod from China’s securities regulator, which expressed concerns about the deal’s financial risks, as well as an overseas lawsuit over alleged mislabeling of some of the company’s exports to avoid paying taxes.

In 2019, U.S. prosecutors accused six Southern California companies tied to the company’s founder Liu of evading $1.8 billion in import duties. Last April the six were ordered to pay $1.83 billion, even as Zhongwang continues to deny any wrongdoing.

Liu, who founded Zhongwang in the 1990s in the heart of Northeast China’s rustbelt, helped the company overcome difficulties before. Not long after the company’s Hong Kong IPO, which at one point made Liu the richest man in Northeast China, the company became the target of U.S. anti-dumping investigations, and was later subject to heavy import duties.

The resulting slump in exports prompted Liu to shift his company’s focus to the domestic market, while also expanding into higher-end businesses. Its plan appeared to be working when Zhongwang was visited by Chinese President Xi Jinping on Sept 17, 2018 – a hugely symbolic show of support – even as many private businesses were suffering under a Beijing structural reform plan for the aluminum industry that mostly benefited big state-owned companies.

Standing on the factory floor with Zhongwang’s name prominently displayed in the background, Xi assured management that the central government would unswervingly support the development of private businesses. But that pledge apparently doesn’t apply anymore to Zhongwang, which has mostly itself to blame for its huge reversal of fortune.