New Shanshui CEO confident of fighting off rivals in China’s cement war

Byszheng

Updated Tue, 22 Dec 2015 09:37:37 GMT

Preparing to board a plane for a showdown with the father-and-son duo who founded and, until recently, ran China’s seventh largest cement maker, Li Heping is confident of victory.

“Old Zhang and Young Zhang don’t want to give up their power...(my success) will happen very fast. Because according to the law, any lawful thing will happen quickly.”

As the newly appointed chief executive of Hong Kong-listed China Shanshui Cement Group, Li has helped spearhead an ugly seven-month-long shareholder brawl that led to a bond default, triggered an ongoing share suspension, and eventually resulted in 96 per cent support among voting shareholders to oust the entire board including chairman Zhang Bin, and to appoint a new one led by the largest shareholder, China Tianrui Group Cement. Zhang’s father, and company founder, Zhang Caikui, was removed by shareholders in October.

Talking to the South China Morning Post in his room at the J.W.Marriott hotel in Admiralty on Friday, Li said the newly installed board now controls 102 out of 109 Shanshui operations in China. The remaining seven are in Jinan, Shandong province, Zhang’s power base and the city to which Li was flying out to later that night.

Shandong Shanshui Cement is Shanshui’s main operating subsidiary. Shandong accounted for 67 per cent of its sales in the year’s first half.

“The factories we took over are running very well. Because we didn’t take over the factories in Jinan, we don’t know what is happening there,” said the 59-year-old Li wearing black loafers, dark blue chinos and a blue t-shirt with the Agnes B logo written across his chest. The portly Li would not comment on any potential drop in revenues or what the loss of control in Jinan means for Shanshui’s earnings.

What he does know is that the Zhangs have the Jinan companies’ chops – corporate seals vital for signing any company documents – and that they have allies in the local government.

An order by the municipal government of Jinan was posted on December 9 on China Shanshui’s website saying the government has sent a group of officials to monitor the firm’s operations. It added the government must be notified of “any major issues involving the firm’s stability and development” and any major decisions can only be implemented with its agreement.

The Zhangs look determined not to give up without a fight, given they have been alleged by the new Tianrui-led Shanshui board to have illegally changed the articles of association of Shanshui’s Shandong subsidiary mid-October to tighten their grip.

The new listco board removed them from Shandong Shanshui’s board and changed its articles of association early this month.But the move’s legality was disputed by Shandong Shanshui, whose operations appeared to be still under the control of the Zhangs.

Statements were uploaded on China Shanshui’s various websites and advertisements were placed in mainland newspapers, claiming the new Tianrui-led board’s moves were illegal and void. In response, the new Shanshui listco board said “such allegations” are “inaccurate and ought to be retracted”.

A former CEO at rival Hong Kong-listed cement maker China Tianrui Group Cement, Li was part of an aggressive takeover bid launched this year when Tianrui suddenly increased its stake in Shanshui from 10.5 per cent to 28.2 per cent in April, becoming its largest shareholder.

Taiwan-listed Asia Cement raised its stake in Shanshui to 20.9 per cent from 13.1 per cent a year ago. State-backed Hong Kong-listed China National Building Material bought a 16.7 per cent stake late last year.

After Tianrui’s stake increase, trading in Shanshui shares was suspended from mid-April since only 9.2 per cent of its shares were owned by other public shareholders, failing to meet the 25 per cent required by listing rules.

Lawsuits ensued, including one in Hong Kong by 2,426 employees of Shanshui against Zhang Caikui over ownership of shares in parent China Shanshui Investment. Zhang was the employees’ trustee in managing the affairs of the parent.

Matters came to a head in early December when shareholders ejected all eight directors and appointed nine new ones, including Li. He justified the fight saying the cement industry suffers from excess capacity and needs consolidation.

Sources close to major shareholders said they are unhappy with the new Tianrui-led board.

The Zhangs would not comment, but a source close to them said they were bitter about being ousted and doubted whether Tianrui was acting in the interest of all of Shanshui’s shareholders and bondholders.

The source highlighted media reports that detailed an earlier falling out between Tianrui and private equity giant KKR over a 2007 US$115 million investment by the US firm into Tianrui as evidence Tianrui was not a trustworthy partner. A KKR-appointed chief financial officer to Tianrui was beaten up on the street around the time.

Li dismissed the story as media speculation and said the street fight was unrelated to any corporate issues. He pulled out his phone to dial a former KKR executive to demonstrate a lasting friendship. The call went to voicemail.

A KKR spokesman declined to comment on the alleged dispute, saying KKR no longer had any stake in Tianrui.

In Jinan, Li plans to visit the Shanshui factories and meet local officials to negotiate a solution. “Until now we haven’t got an offer (from the Zhangs)” so we don’t know what they want, Li said.

Since the board change, the new directors have employed lawyers to investigate the Zhangs for “alleged unlawful course of conduct and breach of fiduciary duties,” a recent exchange filing revealed. Li would not comment on what the alleged breaches involved.

Li also reiterated earlier public comments that the firm was securing a US$500 million loan against yuan deposits in Chinese banks to pay off the firm’s increasingly skittish bondholders. The bonds touched around 60 cents at one point after the earlier Zhang-controlled board defaulted on the repayment of a 2 billion yuan (HK$2.42 billion) mainland bond.

“The next step will be to take over all the companies, repay the debt, and rebuild the business,” Li said.