Guangzhou Case Study

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Guangzhou Gas Piped LPG Development Limited - An Assessment

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Executive Summary

The Company

Guangzhou Gouwei Piped LPG Development Limited (GG , which is 90 owned by Gouwei Holdings Company and the 10 by Guangzhou Municipal Construction Committee

Product and Market

GG supplies piped LPG gas to industrial and residential areas covering Guangzhou City but also include Hong Kong and key cities like

Shanghai and Wuhan with 3 existing subsidiaries that are supplying LPG in Shenzhen . They also supply cylinder LPG to areas without existing pipes for LPG . The company also markets LPG appliances like heaters and stoves

The company is also planning of utilizing natural gases

Opportunities and product viability

Consumers LPG compared with its competition like oil gases coal gases and electricity to reduce pollution which is supported by the government . Convenience of piped gas against it other competitors who distributes cylinder LPG is much by consumers since difference in cost is very minimal , RMB10 - RMB20 per month

Sales and profit summary

For the first 3 years of the company from 1994 up to 1996 , profit acquired through sales have been RMB 2 ,945 ,000 , RMB 2 ,923 ,000 and RMB12 ,583 ,000 respectively

Funding requirement

The new LPG vaporizing stations would require and estimated RMB 82 .65 million for acquisition of imported equipment

Analysis

Guangzhou Gouwei Piped LPG Development Limited 's profit as percentage of sales for 1996 was RMB 12 ,086 ,000 divided by RMB 1 ,454 ,000 or 12 Which is an increase from a -1 .52 in 1995 and 2 .5 in 1994

Increase in profitability was brought about by significant increase in sales revenue . For 1996 , sales revenue garnered was RMB 52 ,105 ,000 compared to RMB 17 ,084 ,000 in 1995 and RMB 18 ,983 ,000 in 1994 Significant increase in profit from sales for 1996 amounting to RMB 12 ,086 ,000 from RMB 2 ,414 ,000 in 1995 and RMB 2 ,945 ,000 in 1994

Acquisition of a tariff-free quota on importation of LPG and equipment was the major factor for the increase in sales for the year 1996 with a 5 expected increase in the next 3 years . This policy given to the company would be abolished in year 2000

At the end of year 1996 , the company had a and earned before interest but after tax RMB 4 ,483 ,000 , which represents a 6 .95 compared to -2 .6 earned in 1995

At end of 1996 , the company 's debt ratio was 52 .08 computed based on the 134 ,612 ,000 . This figure shows an increase compared with 49 .95 debt ratio in 1995 . This is due to the syndicated loan that the company borrowed to finance its LPG Vaporizing Station projects .Considering this , the same value since liabilities plus the equity

Pro forma statements

Assuming that expenses are at a fixed value of 1 .25 of the cost of goods (this is the ratio of sales expense over cost of good sold ) then pro forma statement for profit for sales in 1997 to 1999 would follow

(in thousands RMB ) 1997 1998 1999

Sales Revenue 61522 78298 99067

LPG 6032 17732 35317

Heater and stove 780 3120 3432

Existing operations 54710 57446 60318

Cost of Good Sold 45953 57368 70874

LPG 3795 11155 22218

Heater and stove 660 2640 2904

Existing operations 41498 43573 45752

Gross Profit 15569 20930 28193

LPG 2237 6577 13099

Heater and stove 120 480 528

Existing operations 13212 13873 14566

Less sales expenses 195 262 352

Profit from sales 15374 20668 27841 Assuming that Capital equity for 1997 up to 2001 is fixed as RMB 60000 then computations for equity would be as follows

(in thousands RMB ) 1997 1998 1999 2000 2001 Paid in capital 60000 60000 60000 60000 60000

Retained earnings 11880 18720 33552 13248 9000

Factors affecting company performance

GG had a considerable advantage over its competitor . In terms of providing facilities , the company is able to provide needed pipelines to cover 40 ,000 family consumers with only 3 .8 kilometers of pipelines while its competitor would require 16 kilometers to provide to the same number of household

The establishment of Guangzhou Economic and Technological Development District (GETDD ) provided the company with a steady customer . Most of the manufacturers in the region utilizes cylinder LPG for its daily production due to unavailability of piped LPG . Families in the area has an estimated increase rate of 5 annually and majority of them has a family income higher than that of Guangzhou 's average

Government policies were also favorable to the company . The GETDD government gave permission for GG to build a large scale vaporizing LPG station located in different locations to supply LPG . With these stations LPG is stored in temporary storage tanks . The government also encouraged the used of piped gas rather than any other type of fuel

Banks and financial institutions provided assistance in financial loans for the development of the needed LPG vaporizing stations with a syndicated loan program

However , one of the major contributors for the decrease in the company 's profitability performance would be the end of the Tariff-free policy by year 2000 . With the addition of 33 tax on the company 's expenses , revenue expected would also decease considerably

Cash inflow for the company is based on importation of LPG and equipments to subsidiaries , consumers and piped gas customers . Another source is the deposits for installation of pipelines . Each subscription for a piped LPG would be required to deposit RMB 3500 for the construction of the Vaporizing station , common pipelines and installation of pipelines on consumers home . These pipelines are considered as the company 's assets while in-house types are owned by the homeowner

For manufacturers subscribing to a piped subscription , deposit amount is based on the required quantity based on the standard household usage . Classification of these Deposits in the company 's financial records are quite unclear since a portion of these deposits are tagged as fixed assets of the company which is dependent on the installation of common pipelines and as well as the construction of the new Vaporizing stations . The other portion is recorded as retained earnings if the deposits are made after the construction of the vaporizing station

It might prove quite confusing in establishing actual income generated since it is dependent if the payment was made after the construction of the Vaporizing Stations . Cash flow is determined by the number of newly acquired household to come up with the the projection would prove accurate then by year 2001 there would be no additional household and revenue would fall drastically

If we are going to check the forecasted sales for 1997 to 2001 , it can be viewed that the targeted number of household would be stagnant after year 2000 . A contingency for population growth should be considered also in the forecast

Debt payment assessment

For the proposed loan of RMB 82 .65 million with a 15 year loan program and 9 .18 annual interest rate

Using the traditional cash flow method in assessing , we would come up with the following values as of 1996 financial statements

(in RMB

Net income 12 ,086 ,000

plus

G A expenses 4 ,489 ,000

Depreciation 3 ,823 ,000

Amortization 231 ,000

Earnings before interest and Amortization 20 ,629 ,000

Existing current portion of long term debt 14 ,713 ,000

Proposed current portion of long term debt 5 ,510 ,000

Interest of existing lines of credit 505 ,818Debt service coverage 0 .99 x

Using the traditional cash flow method of checking a company 's ability to repay a debt program , the above table would definitely show that a 15 year repayment scheme would not be approved since Debt service is higher than expected earnings

Below is a computation for a 20 years debt payment program based on the company 's 1996 financial statements

(in RMB

Net income 12 ,086 ,000

plus

G A expenses 4 ,489 ,000

Depreciation 3 ,823 ,000

Amortization 231 ,000

Earnings before interest and Amortization 20 ,629 ,000

Existing current portion of long term debt 14 ,713 ,000

Proposed current portion of long term debt 4 ,132 ,500

Interest of existing lines of credit 379 ,364Debt service coverage . 1 .07 x

With this computation a 20 year or more program of payment scheme would be advisable for the company loan . Though ratio is not high if earnings is compared with the debt service it would be clear that what the company needs is a loan program with a duration of more than 20 years if this would be based on their 1996 financial status

References

MACROBUTTON NoMacro [Insert Reference List here]

Loanuniverse 1998 Internet Available from : HYPERLINK "http /www .loanuniverse .com " http /www .loanuniverse .com

[Accessed 11 January 2007]

Hydrocarbons - Technology n .d Internet Available from

HYPERLINK "http /www .hydrocarbons-technology .com http /www .hydrocarbons-technology .com / [Accessed 11 January2007]

Investorwords 1996 [Internet ] . Annandale , Virginia . Available from

HYPERLINK "http /www .investorwords .com http /www .investorwords .com / [Accessed 11 January 2007]

Writing an Executive Summary 1999 ( Internet ) Available from HYPERLINK "http /www .bplans .com " http /www .bplans .com

[Accessed 11 January 2007]

Appendices

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Author Note

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Footnotes

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