UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2017
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _______________ to _____________
Commission File No. 001-34546
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CHINA XD PLASTICS COMPANY LIMITED
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(Exact name of registrant as specified in its charter)
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Nevada
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04-3836208
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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No. 9 Dalian North Road, Haping Road Centralized Industrial Park,
Harbin Development Zone,
Heilongjiang Province, P. R. China
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150060
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(Address of principal executive offices)
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(Zip Code)
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Registrant's telephone number, including area code: (86) 451-8434-6600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange on which registered
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Common Stock, $0.0001
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NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
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No
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Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
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No
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Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
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No
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The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2017 was approximately $83,414,335.70.
As of March 9, 2018, there were
49,727,731
shares of common stock, par value US$0.0001 per share, outstanding.
Documents incorporated by reference: None.
CHINA XD PLASTICS COMPANY LIMITED
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
Table of Contents
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PART I
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2
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Item 1
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Business
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2
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Item 1A
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Risk Factors
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48
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Item 1B
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Unresolved Staff Comments
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62
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Item 2
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Properties
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62
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Item 3
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Legal Proceedings
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64
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Item 4
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Mine Safety Disclosures
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64
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PART II
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65
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Item 5
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Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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65
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Item 6
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Selected Financial Data
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67
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Item 7
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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68
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Item 7A
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Quantitative and Qualitative Disclosures About Market Risk
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87
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Item 8
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Financial Statements and Supplementary Data
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87
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Item 9
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Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
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87
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Item 9A
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Controls and Procedures
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88
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Item 9B
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Other Information
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90
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PART III
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91
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Item 10
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Directors, Executive Officers and Corporate Governance
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91
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Item 11
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Executive Compensation
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99
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Item 12
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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112
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Item 13
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Certain Relationships and Related Transactions and Director Independence
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114
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Item 14
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Principal Accountant Fees and Services
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115
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PART IV
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116
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Item 15
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Exhibits, Financial Statement Schedules
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116
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Financial Statements
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Index to Consolidated Financial Statements
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F-1
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Report of Independent Registered Public Accounting Firm
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F-2
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Consolidated Balance Sheets
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F-3
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Consolidated Statements of Comprehensive Income
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F-4
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Consolidated Statements of Changes in Equity
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F-5
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Consolidated Statements of Cash Flows
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F-6
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Notes to the Consolidated Financial Statements
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F-7
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PART I
ITEM 1. BUSINESS.
Our Business
China XD Plastics Company Limited ("China XD", "we", and the "Company", and "us" or "our" shall be interpreted accordingly) is one of the leading specialty chemical companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China and to a lesser extent, in Dubai, United Arab Emirates ("UAE"). Through our wholly-owned subsidiaries Heilongjiang Xinda Enterprise Group Company Limited ("HLJ Xinda Group"), Sichuan Xinda Enterprise Group Company Limited ("Sichuan Xinda"), and AL Composites Materials FZE ("Dubai Xinda"), we manufacture and sell polymer composite materials (a broader category including modified plastics), primarily for automotive applications. We develop our products using our proprietary technology through our wholly-owned research laboratory owned by HLJ Xinda Group and has 444 certifications from manufacturers in the automobile industry as of December 31, 2017. We are the only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang Province. Our research and development (the "R&D") team consists of 522 professionals and 11 consultants,
including one consultant who is an academician of Chinese Academy of Engineering.
As a result of the combination of our academic and technological expertise, we have a portfolio of 442 patents, 31 of which we have obtained the patent registration in China and the applications for the remaining 411 of which are pending in China as of December 31, 2017.
Modified plastics are produced by changing the physical and/or chemical characteristics of ordinary resin materials. In order for plastics to be used to produce automobile parts and components, they must satisfy certain physical criteria in terms of mechanical functionality, stability under light and heat, durability, flame resistance, and environmental friendliness. Our unique proprietary formulas and processing techniques enable us to produce low-cost high-quality modified plastic materials, which have been certified by many of the major domestic and international automobile manufacturers in China. In addition, we also provide specially engineered plastics and environment-friendly plastics for use in oil-field equipment, mining equipment, vessel-propulsion systems and power station equipment.
China XD's primary end-market is the Chinese automotive industry that has been rapidly growing for the past few years where our modified plastics are used by our customers to fabricate the following auto components: exteriors (automobile bumpers, rearview and sideview mirrors, license plate parts), interiors (door panels, dashboard, steering wheel, glove compartment and safety belt components), and functional components (air conditioner casing, heating and ventilation casing, engine covers, and air ducts). Our specialized plastics are utilized in more than 30 automobile brands manufactured in China, including leading brands such as
Audi, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, Volvo, Ford, Citroen, Jinbei and VW Passat, Golf, Jetta, etc.
. As of December 31, 2017, 444 of HLJ Xinda Group's automotive-specific modified plastic products have been certified by one or more of the automobile manufacturers in China and are in commercial production. As of December 31, 2017, 277 of our products were in the process of product certification by automobile manufacturers
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In addition, since the second quarter of 2016, the Company has resumed its presence in the Republic of Korea (the "ROK") by selling to the ROK customer primarily higher-end Plastic Alloy after the suspension of the sales to the ROK customer, which resumed our entry into the international market.
We operate three manufacturing bases in Harbin, Heilongjiang and one manufacturing base in Nanchong, Sichuan Province, in the People's Republic of China (the "PRC"). In addition, we completed and started the trial production in the plant in Dubai, UAE with additional 2,500 metric tons under 10 trial production lines targeting high-end products for the overseas markets. As of December 31, 2017, in domestic market, we had approximately 606,000 metric tons of production capacity across 134 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwanese conveyer systems. Prior to December 2012, we had approximately 255,000 metric tons of annual production capacity across 58 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems. In December 2012, we further expanded our third production base in Harbin with additional 135,000 metric tons of annual production capacity, bringing total installed production capacity in our three production bases to 390,000 metric tons with additional 30 new production lines. In
December 2013, we broke ground on the construction site of our fourth production plant in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total domestic installed production capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production plant. Sichuan Xinda has supplied to its customers since 2013, mainly backed by production capacity in our Harbin production plant in its inception. We installed 50 production lines with production capacity of 216,000 metric tons in the second half of 2016 in our Sichuan plant. As of December 31, 2017, there is still construction ongoing on the site of our Sichuan plant which is to be expected to be completed by the end of the second quarter of 2018. In order to meet the increasing demand from our customer in the ROK and to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total, including one leased 10,000 square meters, and two purchased 20,206 and 22,324 square meters on January 25, 2015, June 28, 2016 and September 21, 2016, respectively, from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, the Company is planning to complete installing 45 production lines with 12,000 metric tons of annual production capacity by end of April, 2018, and an additional 50 production lines with 13,000 metric tons of annual production capacity by end of 2018, bringing total installed production capacity in Dubai Xinda to 25,000 metric tons, targeting high-end products for the overseas market.
In July 2017, the HLJ Xinda Group launched new industrial
development project with the Management Committee of Harbin Economic - Technological Development Zone. It
includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastic resins, which we expect will be completed by the end of June 2018. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be completed by the end of July 2019.
Our History
China XD, formerly known as NB Payphones Ltd. and NB Telecom, Inc., was originally incorporated under the laws of the state of Pennsylvania on November 16, 1999. On December 27, 2005, we migrated to the state of Nevada.
On December 24, 2008, we acquired Favor Sea Limited ("Favor Sea (BVI)"), a British Virgin Islands corporation, which is the holding company for Harbin Xinda Macromolecule Material Co., Ltd. ("Harbin Xinda") and Harbin Xinda's wholly-owned subsidiary, Harbin Xinda Macromolecule Material Research Institute ("Research Institute"). Harbin Xinda is a high-tech manufacturer and developer of modified plastics, which was established in September 2004 under the laws of the PRC. In December 2010, our management determined that the Research Institute could not meet the Company's development needs, including meeting the criteria to be a National Enterprise Technology Center. As a result, the Research Institute was deregistered.
On October 14, 2010, Harbin Xinda established Heilongjiang Xinda Software Development Company Limited ("Xinda Software") to develop software applications that provide certain standard and programmable technical services remotely. Xinda Software was deregistered on December 5, 2016.
On March 31, 2011, Harbin Xinda established a wholly-owned subsidiary, Harbin Xinda Macromolecule Material Testing Technical Co., Ltd. ("Xinda Testing"), to develop a nationally recognized testing laboratory and provide testing services of macromolecule materials, engineering plastics and other products.
In response to our rapid business expansion and in order to be eligible for certain beneficial tax policies for certain regions in China, we undertook a group restructuring plan.
From August 2011 to December of 2012, Harbin Xinda established (i) Harbin Meiyuan Enterprise Management Service Company Limited ("Meiyuan Training") in Harbin to provide all year round training to both our existing and new employees, accommodate our customers and business partners as well as host industry conferences; and (ii) Heilongjiang Xinda Enterprise Group Technology Center Company Limited ("Xinda Group Technology Center") in Harbin to focus on long-term research and development projects. Meiyuan Training ceased business in the third quarter of 2016 and Xinda Group Technology Center was deregistered in 2016.
HLJ Xinda Group, a wholly-owned subsidiary of Xinda HK Company Limited and the proposed direct parent company of all of our PRC-based operating subsidiaries after the group restructuring was established in December 2011. Harbin Xinda Plastics Material Research Center Company Limited ("Xinda Material Research Center") was established in December 2011 to focus on research and development of products close to commercialization phase.
Xinda Group Material Research was established in December 2012.
During the year ended December 31, 2013, following the overall reorganization plan, the Company completed the deregistration of Haikou New Materials, Haikou Technical Center and Haikou Software and merged Xinda Testing and Xinda Material Research Center into Heilongjiang Xinda Enterprise Group Macromolecule Material Research Center Co., Ltd. ("Xinda Group Material Research") in 2013, whose major functions included technical support for our production bases, research and development of modified plastic products for applications in areas such as automotive, high-speed rail, aircraft and others, customer post-sales support, and collaboration with industry leading universities and institutions. Xinda Group Material Research was deregistered in 2016 as a result of group restructuring.
On March 19, 2013, HLJ Xinda Group established Sichuan Xinda, which subsequently established Sichuan Xinda Enterprise Group Meiyuan Training Center Co., Ltd. ("Sichuan Meiyuan"), Sichuan Xinda Enterprise Group Software Development Co., Ltd. ("Sichuan Software"), and Sichuan Xinda Enterprise Group Sales Co., Ltd ("Sichuan Sales") in April 2013, in order to expand our business in Southwest China. In 2016, Sichuan Meiyuan and Sichuan Software were deregistered and Sichuan Sales merged into Sichuan Xinda as a result of group restructuring.
On April 23, 2013, Xinda Holding (HK) Co, Ltd. ("Xinda Holding (HK)"), formerly known as Hong Kong Engineering Plastics Co., Ltd., set up Xinda (HK) International Trading Company Ltd ("Xinda (HK) Int'l Trading") for import and export business through Hong Kong. In February 2015, Xinda (HK) Int'l Trading was deregistered.
Heilongjiang Xinda Composite Material Co., Ltd. ("Xinda Composite") was established on November 27, 2013.
On January 8, 2014, Xinda Holding (HK) set up AL Composites Materials FZE ("Dubai Xinda") for international expansion business.
On March 5, 2014, Xinda Holding (HK) set up Xinda (HK) Trade Co., Ltd ("Xinda (HK) Trading") for import and export business through Hong Kong.
On June 17, 2014, Xinda Holding (HK) set up Xinda (Heilongjiang) Investment Co., Ltd. ("Heilongjiang Investment") for its domestic investment activities in PRC. On October 19, 2016, Heilongjiang Investment was deregistered.
On August 1, 2014, Heilongjiang Investment set up Nanchong Xinda Composite Materials Co., Ltd ("Nanchong Composite Materials") in order to expand our business in Southwest China and other regions in its proximity. In July 2015, Nanchong Composite Materials merged into Sichuan Xinda as part of the efforts to streamline the Company's management in Sichuan.
On November 12, 2014, Heilongjiang Investment set up Heilongjiang Xinda Meiyuan Tennis Club Co., Ltd. ("Meiyuan Tennis Club") in order to replace the Meiyuan Training.
On October 16, 2015, Xinda Holding (HK) set up Xinda CI (Beijing) Investment Holding Co., Ltd. ("Xinda Beijing Investment") in order to manage domestic companies in mainland China. Pursuant to the agreement of shareholders of Xinda Beijing Investment signed on December 1, 2017, 100% equity of Xinda Beijing Investment was transferred to HLJ Xinda Group at the cost of RMB1.00 (equivalent to US$0.15). On December 27, 2017, Xinda Beijing Investment was renamed as Xinda CI (Beijing) Enterprise Management Co., Ltd. ("Xinda CI (Beijing)").
In 2016, as a result of group restructuring, Heilongjiang Investment and Meiyuan Tennis Club were dissolved.
On August 29, 2016, Xinda Holding US, a subsidiary of Xinda Holding (HK), was dissolved in New York.
Harbin Xinda Plastics New Materials Co., Ltd. ("Xinda Plastics New Materials") ceased business in the third quarter of 2016.
On September 5, 2016, Sichuan Xinda set up Chongqing Wanshengxiang Macromolecule Materials Co., Ltd. ("Chongqing Wanshengxiang") in order to engage in import and export business in the free-trade zone in Chongqing and to expand our business in Southwest China.
On February 16, 2017, the Board has received a preliminary nonbinding proposal letter from the Chairman and Chief Executive Officer, Mr. Jie Han ("Mr. Han"), XD Engineering Plastics Company Limited ("XD Engineering"), a company incorporated in the British Virgin Islands and wholly owned by Mr. Han, and MSPEA Modified Plastics Holding Limited, an affiliate of Morgan Stanley Private Equity Asia III, Inc. (collectively, the "Buyer Consortium"), to acquire all of the outstanding shares of common stock of the Company not already beneficially owned by the Buyer Consortium in a "going-private" transaction (the "Transaction") for US$5.21 per share of common stock in cash. The proposal letter states that the Buyer Consortium expects that the Board will appoint a special committee of independent directors to consider the proposal and make a recommendation to the Board. The proposal letter also states that the Buyer Consortium will not move forward with the proposed Transaction unless it is approved by such a special committee, and the proposed Transaction will be subject to a nonwaivable condition requiring approval by majority shareholder vote of shareholders other than the Buyer Consortium members. The Buyer Consortium currently beneficially owns approximately 74% of the issued and outstanding shares of common stock of the Company on a fully diluted and as-converted basis. The Board has established a special committee (the "Special Committee") of disinterested directors to consider the proposal The Special Committee is composed of the following independent directors of the Company: Mr. Lawrence W. Leighton (Mr. Lawrence W. Leighton resigned on May 15, 2017), Mr. Feng Li, and Mr. Linyuan Zha, with Mr. Li serving as chairperson of the Special Committee. The Special Committee will be responsible for evaluating, negotiating and recommending to the Board any proposals involving a strategic transaction by the Company with one or more third parties. The Special Committee intends to retain advisors, including an independent financial advisor, to assist in the evaluation of the proposal and any additional proposals that may be made by the Buyer Consortium.
In June 2017, HLJ Xinda Group set up Xinda (Hong Kong) Macromolecule Material Ltd. (HK Macromolecule) and Xinda Deluxe Faith Ltd. (Xinda Faith) in order to expand the international business in Hong Kong.
In December 2017, HLJ Xinda Group set up (i) Heilongjiang Xinda Enterprise Group Shanghai New Materials Sales Co., Ltd. ("Shanghai Sales"); (ii) Heilongjiang Xinda Enterprise Group (Shanghai) New Materials Research and Development Co., Ltd. ("Shanghai New Materials R&D"); (iii) Heilongjiang Xinda Enterprise Group (Daqing) New Materials Industry and Trade Co., Ltd. ("Daqing New Materials); and (iv) Sichuan Xinda Composite Materials Co., Ltd. ("Sichuan Composite Materials"), in order to promote sales, engage in & research & development in new materials such as biological composite materials, ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical devices.
C
orporate Structure
The corporate structure of the Company as of December 31, 2017 was as follows:
Our Industry
According to a research report prepared exclusively for the Company and issued by Frost & Sullivan in 2017, China is estimated to have consumed approximately 22.7 million Metric Tons ("MT") of modified plastic products in 2017, representing an increase of 9.7% compared to 2016. With China being the world's leading manufacturing center and with rising domestic individual consumption, we believe that demand for modified plastics from China will continue to increase in the foreseeable future. As shown in Figure 1, the market demand for modified plastics will reach 30.7 million MT in 2021, representing compound annual growth rates ("CAGR") of 7.8% and 7.5% by sales volume and revenues from 2017 to 2021. Currently, demand for our products is primarily driven by the Chinese automotive industry. In order for plastics to be used in automobile parts and components, they must satisfy specific physical criteria in terms of mechanical functionality, stability under light and heat, durability, flame resistance, and environmental friendliness. Modified plastics are usually found in interior materials, door panels, dashboards, mud flaps, chassis, bumpers, oil tanks, gas valves, grilles, unit heater shells, air conditioner shells, heat dissipating grids, wheel covers, and other components.
Figure 1:
Analysis of Chinese Modified Plastics Market: Sales Volume and Revenue, China 2011-2021E
According to Frost & Sullivan's report, stimulated by the development of China's automotive industry, the Chinese automotive modified plastics market experienced significant expansion from 2011 to 2016, with a CAGR of 16.2% in sales volume and 16.0% in sales revenue during this period. Due to the drop of crude oil price since the latter half of 2014, market price of modified plastics has experienced an obvious decrease, which undulates sales revenue of the market in 2015. However the overall revenue of Chinese modified plastics has kept stable increase as the fast growing sales volume in different downstream application fields. The production capacity is expected to reach 8.2 million MT in 2021, with a growth of 58.4% from 5.2 million MT in 2016. As illustrated in Figure 2, the Chinese automotive modified plastics market is
expected to maintain the decent increase, with CAGR of 12.2% in both sales volume and sales revenue from 2017 to 2021, respectively. In terms of different manufacturer types, domestic manufacturers expanded their production more rapidly than non-local manufacturers, which accounted for 75.1% of the total production capacity in 2016 and is expected to take up to 80.1% by the end of 2021. We believe that the demand for automotive modified plastic in China will grow continuously due to the fast growing Chinese automotive market, the increasing use per unit of plastic content in automobiles and favorable government incentives and regulations. Moreover, domestic producers will likely gain larger market share from imports as they are able to manufacture products with comparable quality at highly competitive prices and close proximity to their customers. We believe that the following are the key drivers for the automotive modified plastic industry in China.
Figure 2:
Analysis of Chinese Automotive Modified Plastics Market: Sales Volume and Revenue (China), 2011-2021E
According to the statistics by the China Association of Automobile Manufacturers ("CAAM") in 2016 production volume of automobiles in China rose from 18,418.9 thousand units in 2011 to 28,118.8 thousand units in 2016 . The growth of Chinese automotive industry is expected to slightly slow down after several years' rapid growth, with a relatively high CAGR of 8.4% from 2017 to 2021. China has exceeded the United States to become the world's largest auto market as measured by the number of automobiles sold. We believe the growth momentum in China's auto sales will remain strong over the next four years. The automotive industry in China is still in its infancy with passenger car ownership of 135 vehicles per 1,000 inhabitants in 2016, which is significantly below Europe's average of 515 and United States' average of 785 according to
National Bureau of Statistics, US Department of Energy, Eurosta, Frost & Sullivan.
The obvious gap of automotive ownership per 1,000 people among China, United States and Europe indicates that the Chinese automotive industry still has huge development potential.
The gap is expected to be further narrowed with China's vehicle per 1,000 people growing to 189 in 2021.
Figure 3:
Overview of Chinese Macro Economy:
Vehicle Per 1000 People Comparison (Units per 1,000 people), 2011-2021E
Source: National Bureau of Statistics, US Department of Energy, Eurosta, Frost and Sullivan
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According to the National Bureau of Statistics, the total number of Chinese automobile parts has experienced a rapid growth because of the economic development and the incentive policies issued by the government. The number kept a booming trend and increased from 93,500.0 thousand units in 2011 to 185,590.0 thousand units in 2016, and is forecasted to hit a record of
268,385.8 thousand units by 2021, with a CAGR of 6.7% from 2017 to 2021.
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Figure 4:
Overview of Chinese Macro Economy: Growth of Automotive Parts(China), 2011-2021E
Source: National Bureau of Statistics, Frost and Sullivan
•Rising personal income in China is one of the key drivers for the rapid growth of the Chinese automobile industry. As shown in Figure 5,
China has achieved strong economic growth with nominal GDP increasing from approximately RMB 36,073.8 in 2011 to RMB 53,974.8 in 2016 . And it is expected that China will maintain a steady economic growth during the period from 2017 to 2021. Per Capita Consumption Expenditure of Urban Household in China also shows a decent increase of 49% from 2011 to 2016, and is forecasted to reach RMB 78,647.20 by the end of 2021. Moreover, cars have become more affordable in China as local or joint venture automobile manufacturers continuously expand their production to achieve economies of scale to lower production cost and source cheaper auto parts locally. Growing income and decreasing vehicle prices will continue to make car ownership more affordable for China's rising middle class.
Figure 5:
Overview of Chinese Macro Economy and Chinese Auto Market: Growth of Nominal GDP and Per Capita Consumption Expenditure of Urban Household (China), 2011-2021E
Source: National Bureau of Statistics, International Monetary Fund, and Frost & Sullivan
Benefit and Increasing Use of Plastics in Automobiles
(1) Cost Reduction:
The primary demand driver for modified automotive plastics arises out of the cost-reduction characteristics evidenced by the plastics material inclusion in the automobile manufacturing process. Modified plastics can deliver the same performance as metallic materials at approximately a tenth of the cost. In addition, modified plastics can substitute some kinds of more expensive engineering plastics. This benefit of modified plastics will become more significant with the increasing competition in automobile manufacturing industry to improve efficiency and reduce costs.
(2) Vehicle Emissions Reduction:
Plastic components impact fuel efficiency by saving approximately 2.5 liters of fuel per kilograms ("kg") used (equivalent to 6 kg of CO2 emissions) over the lifetime of the vehicle. Automobile manufacturers have been reducing vehicle weights in an attempt to reduce emissions and increase efficiencies. Modified plastics reduce the weight of components by 40% compared with traditional metallic materials.
(3) Performance and Safety Improvement:
The development of advanced plastics applications lead to the improvement in performance through reducing the number and weight of the vehicle parts, causing the fuel consumption per vehicle to drop significantly. In addition, the lower net weight of the vehicles improves handling performance and thereby eliminates the likelihood of losing control in case of emergency stops. The involvement of modified plastics in automotive applications results in significant improvement of the safety features of the vehicle parts, like seat belts, air bags, and air bag containers in the recent years.
(4) New Applications:
Plastics reduce the number of the required parts used in automobile manufacturing and introduce new design possibilities. Conventional materials struggle to compete against this open innovation platform associated with the plastics industry. In addition, the performance benefits associated with plastic materials continue to create a competitive advantage for the plastics industry.
(5) Increasing Use of Plastics per Vehicle:
Weight of modified plastics per vehicle in China continually increased from 2008 to 2012, and is forecasted to reach 169.8 kg by the end of 2017, with a growth rate of 40.2% as shown in Figure 6. Although the weight of modified plastics per vehicle in China will still be less than that in North America and Europe, the highest growth rate indicates the huge potential for market growth. In 2012, plastic use in China is estimated to be about 128.6 kg per vehicle, whereas models imported from Europe contain on average as much as 219 kg per vehicle. In addition, the Chinese government's goals regarding electric and hybrid vehicles may also push the market further as weight concerns are more important for these vehicles than for traditional passenger cars.
Production volume of electric vehicle (EV) in China grew from 8.6 thousand units in 2011 to 516.6 thousand units in 2016 dramatically, with a CAGR of 126.6% from 2011 to 2016. China was also the largest market of EV in the world in 2016. In the future, backed by capital and incentive policies, EV is still a development focus of auto industry in China. The production of battery packs for EV increased the demand for automotive modified plastics. Additionally, the level of overall light-weight designs of EV is high. Therefore, the development of EV will be a strong driver of auto modified plastics market in China.
Figure 6: Comparison of Weight of Modified Plastics per Vehicle in China, North America, and Europe, 2008, 2012, 2017E
Source: Frost & Sullivan, American Chemistry Council's Plastics Industry Producers' Statistics Group
Increasing Substitution of Imports
Though China's automotive plastic market has been dominated by foreign or joint venture ("JV") companies, Chinese suppliers are continually gaining market share. It is estimated that automotive plastics imported and manufactured by multinational and JV companies accounted for 24.9% of the total China automotive plastic supply in 2016, decreasing from 33.0% in 2011 according to a report by Frost & Sullivan. Compared to foreign competitors including JV companies, local manufacturers can largely benefit from the lower cost and geographical convenience in China and their product sales can be customized with time-efficient after sales services and technical supports. As the local production capacity of both domestic and foreign companies has been expanding, share of imports and multiple national companies is expected to decrease to 19.9% by the end of 2021, while the share of domestic manufacturers is forecast to rise to 80.1% in 2021as they expand at a greater rate than MNC and JV in China.
The financial crisis beginning in 2008 and the European debt crisis beginning in 2011 forced global automakers and suppliers to concentrate on their cost structure and pricing mechanisms. Many automakers accelerated cost reduction initiatives. Moving manufacturing operations to and sourcing raw materials from low cost regions have emerged as key measures to save costs. With its huge consumer market, low labor costs and high-quality manufacturing and logistics infrastructure, China is a location favored by global auto and component makers who source parts and components not only for their local operations in China but also for their global operations. As a result, we believe that China's local plastic suppliers will benefit from such global outsourcing trends and increasingly become a good substitute for expensive imported plastic products. JV manufacturers based in China in automotive plastics sector have been slow to invest and expand in China.
Favorable National Government Policies
In the past decade, the Chinese government has adopted a number of policies and initiatives intended to encourage the development of the Chinese modified plastics industry and stimulate the growth of the Chinese automobile industry.
Since 2000, modified plastics, including engineering plastics, have been categorized as a prioritized industrialization area by a series of government guidelines or development plans. Some of these policies include:
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The 13th Five Year Plan for Development of Strategic Emerging Industries in China launched in 2016 included favorable policies toward advanced technologies in developing new aviation and space materials, encouraging the application of biodegradable plastics and the development of high-performance plastics used for additive manufacturing , as well as encouraging the development of new material industries
●
The "Made in China 2025" initiative launched on May 8, 2015 by State Council, encouraged development of new materials, energy-saving and new energy vehicles, power equipment, aerospace and aeronautical equipment, marine engineering and high-tech ships, modern railway equipment and agricultural machinery.
●
The "Development Plan of Additive Manufacturing (2015-2016)" initiative promulgated by the National Development and Reform Commission, Ministry of Industry and Information Technology and Ministry of Finance of People's Republic of China on February 28, 2015, advocated domestic production of several types of plastics with high heat resistance and high strength for additive manufacturing industry .
● It was stated in the "Outline of China's Twelfth Five-year Plan (2011)" that new functional materials, advanced structural materials, common base materials, fiber of high performance and its compounded material are key development directions of new material industry.
●
It was stated in the "Catalogue for Guidance on Adjustment of Industrial Structure (2011)" promulgated by the National Development and Reform Commission on March 27, 2011, that the country is currently promoting (i) the development of production equipment of polycarbonate by the use of non-phosgene method, with annual output of 60000t/year and above, (ii) the production of engineering plastic including liquid crystalline polymer (LCP) and development and application of bleeding modification and alloying; (iii) the development and production of water – absorbed resin, conductible resin and biodegradable polymers; (iv) the development and production of new polyamide including nylon 11, nylon 1414 and nylon 46, nylon with long carbon chain and heat resistant nylon.
●
It was stated in the "Guidance on Key Areas of Industrialization of High Technology with Current Priority in Development (2011)" jointly promulgated by the National Development and Reform Commission, the Ministry of Science and Technology, the Ministry of Commerce and the State Intellectual Property Office on June 23, 2011 that modified technologies applied to general plastics, including new engineering plastics and plastic alloy, new special engineering plastics, fire resistant modified plastics, and modified technology of general plastics, are currently prioritized areas to develop and industrialize in China's macromolecule materials sector.
It was stated in the "Investment Guide for Industrial Transforming and Upgrading" (2011) promulgated by Ministry of Industry and Information Technology of ghd People's Republic of China promoted the modification of waste plastics via the comprehensive utilization of related technologies and suggested the future trend of the application of new materials in the industrial area, including biodegradable plastics, engineering plastics, etc.
●
A series of modified plastics technologies have been listed in the "National Support for Key High-tech Fields" as stated in the Circular on the Issuance of the Administrative Measure for the Recognition of High-tech Enterprise jointly promulgated by the Ministry of Science and Technology, Ministry of Finance, the State Administration of Taxation in April 2008. These technologies include special engineering plastics, macromolecular compound or new synthetic modified, etc.
●
Determining the detailed standards for average fuel consumption for passenger car manufacturers: 1) In 2015 average fuel consumption for passenger car reach 0.069L per kilometer; 2) In 2020 average fuel consumption for passenger car reach 0.05L per kilometer. It will accelerate the automobile weight reduction progress.
In addition, with the Chinese government strongly encouraging the production of more fuel-efficient and environmentally friendly vehicles, as one means to help resolve the nation's worsening air pollution problem, especially in big cities, opportunities abound for suppliers of plastics materials and auto components.
We believe that the above government measures and programs will continue to accelerate the demand for automotive modified plastics in China.
Tightening Trend and Local Government Policies
Despite the favorable national government policies as set forth above, in the past couple of years, the Chinese government has implemented certain measures to control the pace of economic growth and discontinued certain stimulus measures implemented to deal with the recent global financial crisis, including incentives for consumers to purchase automobiles.
Since 2011, in order to resolve the extreme traffic congestion, Beijing government has been implementing a vehicle purchase quota policy, which limits the maximum vehicles sold in Beijing per month to 20,000. Other cities which have begun to show signs of traffic congestion have also begun to implement similar measures to control traffic congestion, including the limited automobile licenses policy implemented in Shanghai and Tianjin and the imposition of congestion charges in Shenzhen. The termination of nation-wide preferential policies can negatively affect consumer demand for new vehicles, and local restrictive measures over automobile purchases in major cities may result in the reduction in the sale of vehicles nationwide.
Our Products
Modified plastic is processed by adding chemical agents and other additives to basic plastic resins to generate or improve certain physical and/or chemical characteristics of plastic, such as heat resistance, hardness, tensile strength, wear resistance, and flame retardance. Based on the type of materials, our products include twelve categories: Modified Polypropylene (PP), Modified Acrylonitrile Butadiene Styrene (ABS), Modified Polyamide 66 (PA66), Modified Polyamide 6 (PA6), Modified Polyoxymethylenes (POM), Modified Polyphenylene Oxide (PPO), Plastic Alloy, Modified Polyphenylene Sulfide (PPS), Modified Polyimide (PI), Modified Polylactic acid (PLA), Poly Ether Ether Ketone (PEEK), and Polyethylene (PE).
Our products are organized into twelve product groups, based on their physical characteristics, as set forth below:
Product Group
|
|
Number of Products Certified
|
|
Characteristics
|
Automotive or Other Application
|
Modified Polyamide 66 (PA66)
|
|
|
50
|
|
Abrasive resistance, self-lubrication, high strength, high temperature resistance, and flame resistance
|
Roof handles, door knobs, transmission connection plates, fan shrouds, glovebox assembles, engine hoods, stents baffle blocks, trajectory, fasteners, etc.
|
|
|
|
|
|
|
|
Modified Polyamide 6 (PA6)
|
|
|
40
|
|
High temperature resistance, weather resistance, high strength
|
Inner door knobs, door knobs, hand shanks, transmission connection plates, visor bases, etc.
|
|
|
|
|
|
|
|
Plastic Alloy
|
|
|
163
|
|
High impact resistance, high temperature resistance, flame resistance, platable
|
Instrument panels, instrument frames, shields, automotive center stacks, speaker covers, grids, fog light shells, battery bases, seat armrests, luggage holders, etc.
|
|
|
|
|
|
|
|
Modified Polypropylene (PP)
|
|
|
165
|
|
Non-toxic, odorless, low density, insulated, and low moisture uptake
|
Instrument panels, inner panels, columns, bumpers, air conditioner shells, door knobs, mudguards, etc.
|
|
|
|
|
|
|
|
Modified Acrylonitrile butadiene styrene (ABS)
|
|
|
23
|
|
High rigidity, low density, rigidity toughness balance, slow burn, and corrosion resistance
|
Heat dissipating grids, steering wheel shells, cup holders, seal banks, instrument panels, inner door knobs, wheel covers, etc.
|
|
|
|
|
|
|
|
Polyoxymethylenes (POM)
|
|
|
1
|
|
High strength, low moisture uptake, size stability, high glass, high temperature resistance, fatigue resistance
|
Heater fans, signal lamps switches, gas reseior covers, door knobs, hand shanks, fuel pumps, dynamic valves, accelerator pedals, rampetior elements, etc.
|
|
|
|
|
|
|
|
Polyphenylene Oxide (PPO)
|
|
|
1
|
|
High rigidity, flame retardant, abrasive resistance, pollution resistance, high temperature resistance
|
Battery plants, lamp holder insulation parts, anti freezer grids, booms, instrument panels, window frames, tool cabinet covers, handwheel boxes, heater holders, heater baffles, cooling system connections, pump strainer nets, ammeler frameworks, rearview, etc.
|
|
|
|
|
|
|
|
Modified Polyphenylene Sulfide (PPS)
|
|
|
1
|
|
High temperature resistance, corrosion resistance, radiation resistance, flame resistance, size stability
|
Air bleed control valves, pneumatic signal conditioners, sparks plug wire insulation covers, tachometer sensor covers, electrical pumps, fuel pump impellers and covers, air cylinder covers, water pump impellers, etc.
|
|
|
|
|
|
|
|
Modified Polylactic Acid (PLA)
|
|
|
-
|
|
Reproducible, good biological compatibility and totally degraded
|
Glove box handle, seat cover, rearview mirror shell, etc.
|
|
|
|
|
|
|
|
Modified Polyimide (PI)
|
|
|
-
|
|
Flame resistance, high strength, high temperature resistance, corrosion resistance
|
Compressor blade, piston ring, sealing washer, bushing, gear, brake block, etc.
|
|
|
|
|
|
|
|
PEEK*
|
|
|
N/A
|
|
Excellent mechanical and chemical resistance and temperature tolerance
|
Used in communications and transport electronics and electrical appliances, machinery, medical and analytical equipment
|
|
|
|
|
|
|
|
Polyethylene
|
|
|
-
|
|
Resistance to shock, low temperature resistance, excellent electrical insulation, corosion resistance
|
Agricultural film, screw cap, water pipe, gear, food packa
|
|
|
|
|
|
|
|
Total
|
|
|
444
|
|
|
|
*PEEK is primarily used in applications that are unrelated to automotive applications, which does not require certifications and is in the product development stage.
Raw Materials
The principal raw materials used for the production of our modified plastic products are plastic resins such as polypropylene, ABS and nylon. Polypropylene is a chemical compound manufactured from petroleum. ABS is a common thermoplastic used to make light, rigid, molded products such as automotive body parts and wheel covers. Nylon is a thermoplastic silky material. Approximately 67.0% of our total raw materials purchased by volume are sourced from overseas petrochemical enterprises and 33.0% from domestic petrochemical enterprises during the year ended December 31, 2017.
The Company has one-year renewable contracts with its major suppliers, which are distributors of petrochemical enterprises. Because the raw materials used in our products are primarily petroleum products, the rise or fall in oil prices directly affects the cost of the raw materials. We attempt to mitigate the increase or decrease in our raw materials prices by appropriately raising or lowering the price for our products to pass the cost or savings to our customers as part of our pricing policy.
Because raw materials constitute a substantial part of the cost of our products, we seek to reduce costs by dealing with major suppliers. During the year ended December 31, 2017, the Company purchased approximately 54.3% of the Company's raw materials from five major suppliers. By dealing in large quantities with these major suppliers, we obtain reduced prices for raw materials, therefore reducing the cost of our products. If we were unable to purchase from these suppliers, we believe we would still have adequate sources of raw materials from other petrochemical distributors without material impact on the cost of our products.
Research and Development
HLJ Xinda Group and Sichuan Xinda were organized to provide us with ongoing additions to our technology through advanced development methods, which represent the key to our competitive strength and success. Our goal is to utilize our state-of-the-art methods, equipment and our technical expertise to produce plastics of the highest quality that are cost-efficient for our customers. Toward this end, we have staffed HLJ Xinda Group Sichuan Xinda and AL Composites with 109 employees who have Ph.D. and/or Master's degrees, 392 employees who have Bachelor's degrees, and 21 employees with Associate Bachelor's degrees. In addition, we have 11 consultants, including one consultant who is an academician of the Chinese Academy of Engineering. On average, our employees have been working in our industry for more than three years, and our key R&D employees have on average more than 10 years of experience in our industry.
To supplement the efforts of our HLJ Xinda Group and Sichuan Xinda, we have cooperated with a number of the leading technology institutions in China. Besides providing specialized research and development skills, these relationships help us formulate cutting-edge research programs aimed at developing new technologies and applications in plastics engineering.
In addition, Dubai Xinda focuses on more advanced research and development in high-end applications relative to our research and development efforts in China.
All our significant research and development activities are overseen by the members of our Scientific Advisory Board, which we have assembled from the leaders in China's chemical engineering industry. Currently, the members of the Scientific Advisory Board are:
●
|
Xigao Jian: Member of Chinese Academy of Engineering, Professor of Dalian University of Technology
|
●
|
Chao Bi: Associate Professor of School of Mechanical and Electrical Engineering of Beijing University of Chemical Technology
|
●
|
Jian Yu: Professor of Institute of Polymer Science, Tsinghua University
|
●
|
Huiliang Zhang: Researcher of Researcher of Changchun Institute of Applied Chemistry of the Chinese Academy of Sciences
|
●
|
Yanbin Chi: Professor of Xi'an University of Architecture and Technology
|
●
|
Bin Zhao: General Manager of Ningbo ZHongniyiEnergy Saving Technology Co., Ltd.
|
●
|
Yan Jin: Professor of Beijing Research Institute of Chemical Engineering, China Petroleum Chemical Corporation
|
●
|
Meiying Han: Vice General Manager of Yantai Dongyi Plastics Co., Ltd.
|
●
|
Yongquan Li: Researcher of China Petroleum & Chemical Corporation Beijing Chemical Industry Research Institute
|
●
|
Shuxi Chang: Engineer in Field of Nanjing Branch of Valeo Automotive Air Conditioning Co., Ltd.(Hu Bei )
|
●
|
Yanwen Du: General Manager of Key Point Inc., General Motors
|
We host our annual seminar on the Development of the Macromolecule Materials Industry since 2008, during which we bring prominent industry-leading consultants to meet with our R&D staff. The annual seminar gives industry experts an opportunity to review and evaluate the Company's R&D initiatives in terms of technology advancement on the backdrop of government policies which support development of the modified plastics industry. During the seminar, industry experts assess the progress of the Company's R&D projects for the current year, and then evaluate the Company's R&D projects for the next year. Projects are reviewed in terms of overall strategy, alignment with government policies, market opportunities, efficient utilization of R&D and technical feasibility.
We have been certified as a National Level Enterprise Technology Center, the only institution certified as such in the modified plastics industry in Heilongjiang. This certification makes us eligible for participation of issuing modified plastics industry standards, certain tax and tariff relief for scientific research and development, certain funding designated for National Enterprise Technology Center and municipal subsidies and Postdoctoral and Academy Member Workstation in Heilongjiang Province.
Our research and development expenses were US$36,838,261, US$47,989,665 and US$21,061,345 during the years ended December 31, 2017, 2016, and 2015, respectively.
Intellectual Property
Patents
As a result of our collection of academic and technological expertise, we have 31 approved patents and 411 pending patent applications in China, as set forth in the following table:
No
|
Patent Name
|
Application No
|
Date
|
Status
|
1
|
A preparation method of polylactic acid used in auto dashboard
|
201110035716.10
|
February 11, 2011
|
Authorized
|
|
|
|
|
|
2
|
A high impact and high heat-resistant flame retardant ABS composite material reinforce by glass fiber and its preparation process
|
201110268625.20
|
September 13, 2011
|
Authorized
|
|
|
|
|
|
3
|
Supercritical fluid rapid diffusion synthesis of nano calcium carbonate enhanced microcrystalline polypropylene composites
|
200910073402.30
|
December 11, 2009
|
Authorized
|
|
|
|
|
|
4
|
A rapid detection method of the tensile propertie of modified PP used in auto specially by non-standard situation
|
201110094454.60
|
April 15, 2015
|
Authorized
|
|
|
|
|
|
5
|
A high toughness,low warpage and high-mobility PET/PBT/PC alloy renforced by glass fiber and its preparation method
|
201110235189.90
|
August 17,2011
|
Authorized
|
|
|
|
|
|
6
|
A preparation method of polypropylene resin foam particles with supercritical CO2 act
|
201110230302.40
|
August 12,2011
|
Authorized
|
|
|
|
|
|
7
|
A high-powered aircraft tail composite material and its preparation process
|
201110196209.60
|
July 13, 2011
|
Authorized
|
|
|
|
|
|
8
|
A method for automotive interior low odor, low VOC, high performance polypropylene composites
|
201010258937.00
|
August 20, 2010
|
Authorized
|
|
|
|
|
|
9
|
A high-strength carbon fiber reinforced polyetheretherketone composite material and its preparation method
|
201210114931.50
|
April 20, 2012
|
Authorized
|
|
|
|
|
|
10
|
High performance halogen-free flame-retardant PC / ABS composite material and its preparation method
|
201210201826.50
|
June 19, 2012
|
Authorized
|
|
|
|
|
|
11
|
Graphene / polymer conductive composites
|
201210411231.20
|
October 25, 2012
|
Authorized
|
|
|
|
|
|
12
|
A high temperature conductive PPO/PA6 alloy material and its preparation method
|
201210241856.90
|
July 13, 2012
|
Authorized
|
|
|
|
|
|
13
|
High-performance, green flame retardant reinforced PA66 composites technology
|
201210260160.00
|
July 26, 2012
|
Authorized
|
|
|
|
|
|
14
|
An antistatic LSOH flame retardant PC / ABS alloy material and its preparation method
|
201210296750.90
|
August 20, 2012
|
Authorized
|
|
|
|
|
|
15
|
A free primer and sprayed directly on the bumper composites
|
201210306240.50
|
August 27, 2012
|
Authorized
|
|
|
|
|
|
16
|
A long glass fiber reinforced polypropylene material and its preparation method
|
201210362626.80
|
September 26, 2012
|
Authorized
|
|
|
|
|
|
17
|
A modified Kevlar fiber reinforced PA66 material and its preparation method
|
201210369747.50
|
September 29, 2012
|
Authorized
|
|
|
|
|
|
18
|
A high toughness wear-resistant fiberglass /PA6 composites for rail transit fasteners
|
201210396122.80
|
October 18, 2012
|
Authorized
|
|
|
|
|
|
19
|
A glass fiber reinforced poly (ethylene terephthalate) / polycarbonate alloy
|
201210403197.40
|
October 22, 2012
|
Authorized
|
|
|
|
|
|
20
|
A production method of antimicrobial, hydrophilic polypropylene particle
|
201210411680.70
|
October 25, 2012
|
Authorized
|
|
|
|
|
|
21
|
A glass fiber, SiO2 enhanced toughening polyphenylene sulfide material and its preparation method
|
201210439116.60
|
November 7, 2012
|
Authorized
|
|
|
|
|
|
22
|
A high mobility of polyvinyl alcohol / lignin WPC
|
201310203047.30
|
May 28, 2013
|
Authorized
|
|
|
|
|
|
23
|
A applied to electrostatic spraying PPO/PA6 alloy material and its preparation method
|
201310367459.00
|
August 22, 2013
|
Authorized
|
|
|
|
|
|
24
|
Preparation method of impact-resistant strain of modified polylactic acid material
|
201310468059.90
|
October 10, 2013
|
Authorized
|
|
|
|
|
|
25
|
A free spray paint bumper with modified material and preparation method
|
201310468057.X
|
October 10, 2013
|
Authorized
|
|
|
|
|
|
26
|
A stereoscopic word based on 3D printing
|
201520229477.70
|
April 16, 2015
|
Authorized
|
|
|
|
|
|
27
|
A medical chest straps based on 3D printing technology and its preparation method
|
201510290769.60
|
June 1, 2015
|
Authorized
|
|
|
|
|
|
28
|
A 3D printing withABS composite material and its preparation method
|
201610073934.70
|
February 3, 2016
|
Authorized
|
|
|
|
|
|
29
|
A kind of starch based biodegradable plastics and its preparation method
|
201610078670.40
|
February 5, 2016
|
Authorized
|
|
|
|
|
|
30
|
A high heat-resistant PC / ASA alloy material and its preparation method
|
201010508149.20
|
October 15, 2010
|
Authorized
|
|
|
|
|
|
31
|
An extrusion grade sisal fiber reinforced polypropylene composite material and its preparation process
|
201210357867.30
|
September 25, 2012
|
Authorized
|
|
|
|
|
|
32
|
A preparation method of the thermoplastic elastomers PP with high mobility and high resistance of deformation
|
201110035725.00
|
February 11, 2011
|
Pending
|
|
|
|
|
|
33
|
A special material of cooling grille with high heat resistance and high weather resistance
|
201110094466.90
|
April 15, 2011
|
Pending
|
|
|
|
|
|
34
|
A preparation method of easily dispersed and easily processimg polyprolene composite material
|
201110158511.20
|
June 14, 2011
|
Pending
|
|
|
|
|
|
35
|
A preparation method of high heat-resistant and high rigid PLA composite material reinforced by fully biodegrdable natural fiber
|
201110158512.70
|
June 14, 2011
|
Pending
|
|
|
|
|
|
36
|
A preparation method of polylactic acid used composite material modified by hydroxyapatite with supercritical water act
|
201110268687.30
|
September 13, 2011
|
Pending
|
|
|
|
|
|
37
|
Apreparation process of ABS alloy with high impact performance and high heat resistance
|
201110122586.50
|
May 12, 2011
|
Pending
|
|
|
|
|
|
38
|
A preperation process of high weathering colour ASA resin
|
201110347336.10
|
February 11, 2011
|
Pending
|
|
|
|
|
|
39
|
A high impact PA6 composite material with core-shell toughening and its preparation method
|
201110196226.X
|
July 13, 2011
|
Pending
|
|
|
|
|
|
40
|
A preparation method of polymer composites with high toughness
|
201110035736.90
|
February 11, 2011
|
Pending
|
|
|
|
|
|
41
|
A polypropylene composite material used in battery tank of new source of energy automobile and its preperation method
|
201110347320.00
|
November 7, 2011
|
Pending
|
|
|
|
|
|
42
|
A high toughness of polycarbonate blends material and its preparation method
|
201110319832.60
|
December 20, 2011
|
Pending
|
|
|
|
|
|
43
|
A preparation method of glass fiber reinforced polyether ether ketone with high strength and high heat resestance
|
201110399890.40
|
December 5, 2011
|
Pending
|
|
|
|
|
|
44
|
A preparation process of the premixed screening system
|
201110158488.70
|
June 14, 2011
|
Pending
|
|
|
|
|
|
45
|
A molding method suitable PEEK
|
201010173663.50
|
May 17, 2010
|
Pending
|
|
|
|
|
|
46
|
An anti-aging, anti-yellowing, low odor polypropylene composite material and its preparation method
|
201010508177.40
|
October 15, 2010
|
Pending
|
|
|
|
|
|
47
|
A preparation process of centralized control method used in plastic production line
|
201110122566.80
|
May 12, 2011
|
Pending
|
|
|
|
|
|
48
|
A preparation methed of the plastic production line with high performance and high honogeneity
|
201110233488.90
|
August 16, 2011
|
Pending
|
|
|
|
|
|
49
|
A rapid detection method of the impact propertie of midfide plastics used in automobile specially
|
201110158528.80
|
June 14, 2011
|
Pending
|
|
|
|
|
|
50
|
A alloy material of high-impact, high-brightness ASA
|
201010543439.00
|
November 15, 2010
|
Pending
|
|
|
|
|
|
51
|
A high notched impact PA / ASA alloy material and its preparation method
|
201010230061.90
|
July 19, 2010
|
Pending
|
|
|
|
|
|
52
|
A preparation method of SiO2/CaCO3 nano-composite particles modified polypropylene
|
201010282042.00
|
September 15, 2010
|
Pending
|
|
|
|
|
|
53
|
Nano-ZnO filled with modified PEEK film and its preparation method
|
201010258955.90
|
August 20, 2010
|
Pending
|
|
|
|
|
|
54
|
A method for automotive interior matte, anti-scratch modified polypropylene composites
|
201010230064.20
|
July 19, 2010
|
Pending
|
|
|
|
|
|
55
|
A microporous zeolite materials modified PEEK and its preparation method
|
201010282022.30
|
September 15,2010
|
Pending
|
|
|
|
|
|
56
|
A lower mold shrinkage ratio method of calcium carbonate / polypropylene nanocomposites
|
201010230088.80
|
July 19, 2010
|
Pending
|
|
|
|
|
|
57
|
A high toughnees,low warpage and low mold temperature PET/PA6 alloy reinfoced by glass fiber and preperation method
|
201110347339.50
|
Nobember 7, 2011
|
Pending
|
|
|
|
|
|
58
|
A high impact and high flow PC / ASA alloy material and its preparation method
|
201010258950.60
|
August 20, 2010
|
Pending
|
|
|
|
|
|
59
|
A high heat-resistant and high wear-resistant PEEX composite material and its preperation process
|
201110347338.00
|
Janauary 10, 2011
|
Pending
|
|
|
|
|
|
60
|
A preparation method for heat-resistant and easy processing of natural fiber reinforced polylactic acid composites
|
201210147444.90
|
May 14, 2012
|
Pending
|
|
|
|
|
|
61
|
A preparation method of high encapsulation efficiency and stable release polylactic lysozyme drug microsphere
|
201210295154.90
|
August 20, 2012
|
Pending
|
|
|
|
|
|
62
|
A preparation methods of ultra-hydrophobic microporous polymer film
|
201210358122.90
|
September 25, 2012
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Pending
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63
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A mechanical strength polypropylene power lithium battery separator and its preparation method
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201210472283.00
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November 21, 2012
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Pending
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64
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A multilayer hot pressing method for preparating hydroxyapatite / polylactide composite
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201210474211.X
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November 21, 2012
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Pending
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65
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A high-impact, green flame retardant PC / ABS alloy material and its preparation process
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201210122281.90
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April 25, 2012
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Pending
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66
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A Supercritical carbon dioxide reactor pressure method for preparating polypropylene foamed material
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201210298694.20
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August 22, 2012
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Pending
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67
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An antimicrobial, dust suppression, halogen-free flame retardant ABS and its preparation process
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201210305824.00
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August 27, 2012
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Pending
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68
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A flame-retardant glass fiber reinforced PA66 and its preparation method
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201210370558.X
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September 29, 2012
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Pending
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69
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The chest protected belts
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201220526299.00
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October 15, 2012
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Pending
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70
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A non-asbestos and non-metal materials brake pads composite material and its preparation method
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201210395921.30
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October 18, 2012
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Pending
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71
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A wear-resistant, anti-static, flame retardant ultra-high molecular weight polyethylene composite material
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201210402814.90
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October 22, 2012
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Pending
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72
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A high impact, high heat-resistant PC / PBT alloy material and its preparation process
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201210403095.20
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October 22, 2012
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Pending
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73
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A continuous aramid fiber reinforced POM materials and preparation methods
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201210411967.X
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October 25, 2012
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Pending
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74
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An alcohol solution PA66 material special for intake manifold and its preparation method
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201210442251.60
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November 8, 2011
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Pending
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75
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An environmentally friendly self- aromatic polypropylene material and its preparation process
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201210457403.X
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November 15, 2012
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Pending
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76
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Preparation of a glass fiber reinforced nylon 66 / nylon 6 Composites
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201310185041.80
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May 20, 2013
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Pending
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77
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An environmentally friendly foam polypropylene material and preparation method
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201310185228.80
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May 20, 2013
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Pending
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78
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An ramie fiber reinforced polypropylene composite material and its preparation process
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201310185514.40
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May 20, 2013
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Pending
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79
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One kind of resistance to warpage reinforced polyamide 6 material and preparation method
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201310250426.80
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June 24, 2013
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Pending
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80
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Preparing a polyamide material reinforced with continuous glass fibers
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201310250967.00
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June 24, 2013
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Pending
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81
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A low-cost method for preparing hydrophobic material of polypropylene
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201310250185.70
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June 24, 2013
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Pending
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82
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A polypropylene self-luminous material and preparation method
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201310250047.90
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June 24, 2013
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Pending
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83
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A preparation method of reinforced, flame-retardant ABS material
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201310367420.90
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August 22, 2013
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Pending
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84
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One kind of aramid pulp-reinforced PA66 composite material and preparation method
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201310367404.X
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August 22, 2013
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Pending
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85
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Preparation of a high-performance fiber-reinforced polyphenylene sulfide composites
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201310372289.50
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August 24, 2013
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Pending
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86
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One kind of anti-alcohol solution, low warpage reinforced nylon66 composite material and preparation method
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201310372282.30
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August 24, 2013
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Pending
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87
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A high-gloss, free paint, scratch-resistant alloy material and preparation method
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201310372789.90
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August 26, 2013
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Pending
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88
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A preparation process of heat-stable flame retardant reinforced nylon composite material
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201310413691.30
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September 12, 2013
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Pending
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89
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An anti-oxidation, high flow, flame retardant ABS and preparation process
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201310413270.00
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September 12, 2013
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Pending
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90
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An antistatic, low smoke, flame retardant PC / ABS alloy materials and preparing process
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201310414847.X
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September 13, 2013
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Pending
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91
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An flax noil fiber reinforced polypropylene composite material and its preparation process
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201310413287.60
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September 12, 2013
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Pending
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92
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A Preparation of appling to charging pile casing PC / ABS alloy compound
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201310414007.30
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September 12, 2013
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Pending
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93
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A no-spray, high durability, scratch-resistant, flame retardant ABS Preparation and Process
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201310414024.70
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September 12, 2013
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Pending
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94
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A direct line of long glass fiber reinforced thermoplastic composite material and its preparation method
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201310471859.60
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October 12, 2013
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Pending
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95
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A method for preparing an enhanced flame retardant rigid polyurethane composites
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201310467797.10
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October 12, 2013
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Pending
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96
|
A MARINE with wear-resistant ultra high molecular weight polyethylene composites
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201310468060.10
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October 10, 2013
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Pending
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97
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A method for preparing low temperature resistance, scratch-resistant zipper jacket compound for cars
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201310468076.20
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October 10, 2013
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Pending
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98
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An environmentally friendly fire-retardant, high-performance EVA composite material and preparation method
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201310467812.20
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October 10, 2013
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Pending
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99
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A polypropylene foam material and preparation method
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201310559024.60
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November 13, 2013
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Pending
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100
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One kind of aramid fiber / polyimide composite material and preparation method
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201310559294.70
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November 13, 2013
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Pending
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101
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An alloy NiMoB modified talc enhanced Bumper material and its preparation method
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201310559588.X
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November 13, 2013
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Pending
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102
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Method for preparing porous polymer composite superhydrophobic films
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201310559589.40
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November 13, 2013
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Pending
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103
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A silicone toughening polyphenylene sulfide material and its preparation method
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201310560625.90
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November 13, 2013
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Pending
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104
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A toughening wear-resistant alloy material and preparation method
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201310556261.70
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November 12, 2013
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Pending
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105
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A high resistance temperature reinforced polyamide 6 material and preparation method
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201310556569.10
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November 12, 2013
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Pending
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106
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Preparation of an aircraft engine surrounding high temperature polyimide composites
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201310555389.10
|
November 12, 2013
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Pending
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107
|
Preparation of a high strength of continuous glass fiber reinforced nylon 6 material
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201310555451.70
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November 12, 2013
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Pending
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108
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A highly weather-resistant polypropylene self-luminous material and preparation method
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201310555483.70
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November 12, 2013
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Pending
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109
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A high toughness, wear-resistant rail fasteners with glass / nylon 6 Composites
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201310646768.10
|
December 6, 2013
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Pending
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110
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A high-gloss, avoid spraying PTT / PMMA rearview mirror Compound and its production process
|
201310652729.20
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December 6, 2013
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Pending
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111
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A keyboard and mouse with anti-bacterial perspiration modified plastics and its preparation method
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201310676101.60
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December 13, 2013
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Pending
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112
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A high-strength lightweight hollow glass microspheres toughening PP material and preparation method
|
201310721731.00
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December 25, 2013
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Pending
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113
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a method for producing a heatproof polyimide composite used for aircraft engine periphery
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201410144739.X
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April 12, 2014
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Pending
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114
|
a method for producing a heatproof polyimide composite
|
201410205669.40
|
May 16, 2014
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Pending
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115
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An advantage of specially coupling treated carbon fibers reinforced PEEK
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201410262651.80
|
June 13, 2014
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Pending
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116
|
A high dimensional stability
、
excellent abrasion resistance PEEK valve composite
|
201410262638.20
|
June 13, 2014
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Pending
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117
|
The preparation method of a high-strength PEEK composites
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201410262746.X
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June 13, 2014
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Pending
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118
|
A Method for preparing high performance PEEK/long glass fiber composites
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201410263606.40
|
June 16, 2014
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Pending
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119
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a method for producing a polyimide composite
|
201410326840.70
|
July 10,2014
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Pending
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120
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Preparation of Carbon Fiber Reinforced PI Composite Material
|
201410326641.60
|
July 10,2014
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Pending
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121
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Preparation of a high tensile strength of PEEK composites
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201410326616.80
|
July 10,2014
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Pending
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122
|
The prepatation of a high-strength ,high-temperature polyimide composites
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201410413832.60
|
August 21, 2014
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Pending
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123
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A high-heat-resistant,excellent in abrasion resistance sheet composite PEEK valve
|
201410413379.90
|
August 21, 2014
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Pending
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|
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124
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Preparation of PI composite material by coupling agent treated glass fiber
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201410481809.00
|
September 22, 2014
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Pending
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125
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A kind of 3D printing poly lactic acid/leather powder composite materials and its preparation method
|
201410690528.60
|
November 27, 2014
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Pending
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126
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A kind of biodegradable polymer-docetaxel bonding medicine and its preparation method
|
201410690529.00
|
November 27, 2014
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Pending
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127
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A prepatation method of polyimide composite material
|
201410691532.40
|
November 27, 2014
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Pending
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128
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A prepatation method of high toughness biodegradable polylactic acid foam plastics
|
201410691587.50
|
November 27, 2014
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Pending
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129
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A preparation of antibacterial polylactic acid fiber
|
201410691901.X
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November 27, 2014
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Pending
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130
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A kind of poly lactic acid preparation method of lactide ring-opening polymerization
|
201410697015.80
|
November 28, 2014
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Pending
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131
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A modification of PLA material and its preparation method
|
201410697822.X
|
November 28, 2014
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Pending
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132
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A method of preparing high strenght PLA composites
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201410697790.30
|
November 28, 2014
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Pending
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133
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A kind of twin screw reactive extrusion method ring opening polymerization preparation of PLA
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201410697838.00
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November 28, 2014
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Pending
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134
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A method of preparing high toughness PLA composites
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201410697801.80
|
November 28, 2014
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Pending
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135
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A kind of organic molecule catalytic method for preparation of poly lactic acid
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201410703493.50
|
November 30, 2014
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Pending
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136
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A surface treatment of carbon fiber reinforced thermoplastic polyimide composites
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201410703815.60
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November 30, 2014
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Pending
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137
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A carbon fiber-reinforced thermoplastic polyimide composites
|
201410703816.00
|
November 30, 2014
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Pending
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138
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A prepatation method of high performance PEEK/carbon fiber composite material
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201410747379.20
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December 10, 2014
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Pending
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139
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A prepatation method of PEEK composite material
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201410746978.20
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December 10, 2014
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Pending
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140
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A ternary no return toughening copolymer of polylactic acid composite material and its preparation method
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201410747386.20
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December 10, 2014
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Pending
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141
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Sensor with high-performance fiber-reinforced PPS composites
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201410747061.40
|
December 10, 2014
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Pending
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142
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Glass fiber modified wearable Polyimide
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201410747053.X
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December 10, 2014
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Pending
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143
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An advantage of specially prepared by coupling treatment sio2 reinforced PEEK
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201410747062.90
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December 10, 2014
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Pending
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144
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A high-mobility PVA/wood flour composite biomass
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201410747054.40
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December 10, 2014
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Pending
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145
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One kind of thermal evaporation method graphene Gec
|
201410746877.50
|
December 10, 2014
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Pending
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|
|
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146
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A highly heat-resistant polylactic acid/Wood Flour Composites
|
201410747097.20
|
December 10, 2014
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Pending
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147
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Preparation of an enhanced flame retardant polyurethane composites
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201410747055.90
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December 10, 2014
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Pending
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158
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A process for producing fiber reinforced PA6 dedicated 3D printing materials processing using a special method
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201410747082.60
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December 10, 2014
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Pending
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149
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A preparation method of low warpage ABS special 3D printing materials
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201410746979.70
|
December 10, 2014
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Pending
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150
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A preparation method of impact-resistant strain of modified polylactic acid materials
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201410747377.30
|
December 10, 2014
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Pending
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151
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A preparation method of chemical vapor deposition method graphene films
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201410747180.X
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December 10, 2014
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Pending
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152
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A process for producing acrylic polyurethane high-solids coatings
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201410747079.40
|
December 10, 2014
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Pending
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153
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The use of core-shell particles toughening PC and PBT resin
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201410747406.60
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December 10, 2014
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Pending
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154
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A high strength,high modulus of PEEK composite material and preparation method
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201410747376.90
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December 10, 2014
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Pending
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155
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A modified high-performance carbon fiber composite materials
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201410747395.10
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December 10, 2014
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Pending
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156
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A kind of microfluids device prepared by the technology of 3D-printing
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201410747264.30
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December 10, 2014
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Pending
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157
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A high-retardant polyvinyl alcohol/Wood Flour Composites biomass
|
201410746938.80
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December 10, 2014
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Pending
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|
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158
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A method of processing aids (ACR) improved PVC materials
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201410746804.60
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December 10, 2014
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Pending
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159
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A preparation method of polylactic acid film
|
201410746939.20
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December 10, 2014
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Pending
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160
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A compressor valve plate with a modified material and the method
|
201410733902.60
|
December 8, 2014
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Pending
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|
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161
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An automobile air conditioner drive gear with the modified materials and the method
|
201410733905.X
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December 8, 2014
|
Pending
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162
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Nanoparticles/CF hybrid reinforced PEEK composite material and its preparation method
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201410729719.90
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December 5, 2014
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Pending
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163
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Method for preparing thermoplastic polyimide composites
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201410730324.00
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December 5, 2014
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Pending
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164
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Boron fiber reinforced polyimide
|
201410730235.60
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December 5, 2014
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Pending
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165
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A method of preparation of carbon fiber prepreg reinforced skis
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201410729635.50
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December 5, 2014
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Pending
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166
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High mobility TLCP/PES/PEEK composite material and its preparation method
|
201410729614.30
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December 5, 2014
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Pending
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167
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Method for preparing high toughness of polycarbonate/polylactic acid-bassed alloys
|
201410733882.20
|
December 5, 2014
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Pending
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168
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An PEEK/BaSo4 composite material and its preparation method
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201410730260.40
|
December 5, 2014
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Pending
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169
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Foamed PP and graphite fiber composites preparation methods of enhancement of skis
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201410729634.00
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December 5, 2014
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Pending
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170
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Method for increasing the compatibility of PPS/PEEK composite materials
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201410730258.70
|
December 5, 2014
|
Pending
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171
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A preparation method of the high toughness,high mobility PLA/PP Alloy
|
201410704664.60
|
December 4, 2014
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Pending
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172
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A preparation method of the natural fiber/polylactic acidbased composite materials
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201410704612.90
|
December 4, 2014
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Pending
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173
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A preparation method of the high toughness ABS/PLA-based alloys
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201410704588.90
|
December 4, 2014
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Pending
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174
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A kind of suitable for 3D printing chest straps of polylactic acid materials and its preparation method
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February 28, 2015
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Pending
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175
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A method of preparation of water-soluble PLA support material for 3D printing
|
201510180141.00
|
April 17, 2015
|
Pending
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176
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A kind of high performance PEEK/chopped carbon fiber composite material and the preparation method
|
201510180750.60
|
April 17, 2015
|
Pending
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177
|
The prepatation method of a high toughness polylactic acid based composite material
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201510180761.40
|
April 17, 2015
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Pending
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178
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A nylon base composite material for medical strap by 3D printing and the preparation method
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201510180170.70
|
April 17, 2015
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Pending
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179
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A kind of alloy material for 3D printing
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201510179994.20
|
April 16, 2015
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Pending
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180
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A preparation method of 3D printing support material of PVA with amylum filled
|
201510342646.20
|
June 19, 2015
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Pending
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181
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A preparation method of ASA composite materials for 3D printing
|
201510342647.70
|
June 19, 2015
|
Pending
|
|
|
|
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182
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A kind of PBT/carbon fiber composite material and its preparation method
|
201510343448.80
|
June 20, 2015
|
Pending
|
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|
|
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183
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A kind of anionic catalytic method for preparation of PLA
|
201510343470.20
|
June 20, 2015
|
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311
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313
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316
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323
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324
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325
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328
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338
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344
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345
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350
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351
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352
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353
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354
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356
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358
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366
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Environmental protection engineering plastic for weather resistant automobile
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370
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A kind of containing folic acid targeted polymer drug carrier and its preparation method
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A kind of material can be used to increase manufacturing polyamide 6 modifide material and the preparation method thereof
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A Kind of preparation of appling to charging pile casing PC / ABS alloy material preparation
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A high-performance lightweight plant fiber /PP composite material and its preparation method
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Preparation of one kind of ultra light and thin fiber reinforced skids
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430
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A preparation method of PEAK modified epoxyresin system/carbon fiber cable
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201410413361.90
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August 21, 2014
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431
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A preparation method of poly(lacticacid)/starch composite foams
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201410489544.90
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433
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434
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A preparation method of high strength and biodegradable PLA composite material
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201510949307.00
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December 20, 2015
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435
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A high-performance PLA and its preparation method
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201510949312.10
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436
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A kind of biodegradable recycling PLA material and its preparation method
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201510949306.60
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December 20, 2015
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437
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A high flexibility and heat resistance of PLA modified material and its preparation method
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201510949313.60
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438
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A kind of inorganic filler biodegradable 3D printing consumables and its preparation method
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201510949636.50
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December 20, 2015
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439
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A kind of biodegradable 3D printing toughening material and its preparation method
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201510949638.40
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December 20, 2015
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440
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A low-cost biodegradable 3D printing consumables and its preparation method
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201510949637.x
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December 20, 2015
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441
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201510949653.90
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December 20, 2015
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442
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201510949651.x
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December 20, 2015
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Trademark
We own the trademarks for our graphic logo and Chinese characters of "Xinda", which we use in packaging our products and marketing.
Certification Process
To meet the requirements of an automobile manufacturer, products used as component parts must pass a rigorous certification process by the manufacturer's technological quality assurance department before they can be approved for and used in production. The certification process consists of three stages.
First, the automobile manufacturer reviews the manufacturer of modified plastics. The examination involves assessment of the operation history of the modified plastics manufacturer, their experience in providing component services, the specialization of their factory equipment, their research and development capacity and quality assurance systems. The manufacturer's operations need to meet the requirements of the automobile manufacturer. Once the initial review is passed, the modified plastics manufacturer will obtain a qualification as an automobile component manufacturer. This initial stage takes approximately sixteen to twenty two months to complete.
Second, the automobile manufacturer and the manufacturer of modified plastics reach an understanding about a product specification. The modified plastics manufacturer provides product research and development materials to the automobile manufacturer for inspection. The automobile manufacturer tests the product specification according to its standards and, if results are satisfactory, the modified plastics manufacturer obtains a product specification certification and enters the product certification stage. The second stage takes approximately eight months to complete.
Third, the parties complete technology R&D tests and perform automobile component finished parts tests. The product undergoes additional testing by the automobile manufacturer and is used in road tests. This stage takes approximately five to fifteen months depending on whether the car model is an existing model or a new model. At the conclusion of the third stage, the modified plastics manufacturer receives a product certification from the automobile manufacturer.
We believe that the necessity, rigorousness, complexity and duration of the certification process make it difficult for outside competitors to enter the field in a short period of time. We have 444 certifications from automobile manufacturers as of December 31, 2017, which we believe is currently one of the largest portfolios of product certifications in the Chinese automobile modified plastics industry.
Sales and Marketing
Currently, our sales network focuses on the northeastern, northern, eastern and southwestern regions of China. We primarily sell to end customers through our approved distributors. To a less extent, we also sell directly to end customers. A typical customer development cycle starts when our R&D staff develops customized products for new end customers and obtains product certifications. These end customers are usually major automobile parts manufacturers who can only source from suppliers like China XD with product certifications granted by major automobile manufacturers. After we established relationships with these end customers and began to have large volume of transactions with them, we assign end customers to our approved distributors according to our internal policies. We also acquired end customers with our existing certifications from time to time. In 2017, approximately 87.3% of our sales were generated from approved distributors.
We enter into distribution agreements with local distributors in areas where large automobile manufacturers are located. The distribution agreements usually have a term of one year, during which period we can enter into distribution agreements with other distributors for our products. The distributors are responsible for marketing and distributing our products. Through the established sales channels, we can quickly respond to local market demand, address customer needs, enhance our ability to provide technical support and after-sales services, and lower our marketing expenses. Our general credit term with our distributors is three months and our collection of payment from distributors is not contingent upon their cash collection from end customers. We manufacture products according to orders received from our distributors and maintain a certain quantity of raw materials based on our experience and the distributors order patterns. By doing this we hope to ensure the smooth implementation of the production plan of major automobile manufacturers and avoid risks of inventory shortage. We do not provide the distributors nor end customers with the right of return, price protection or any other concessions. We allow for an exchange of products or return only if the products are defective.
We have been actively engaging our distribution network with 14 distributors in 2017 and we believe we have good relationships with our distributors. We believe that we have been able to secure and maintain strong relationships with end customers due to our existing certifications, advanced technologies and high product quality, which establish a higher barrier to entry for others. Most of the end customer relationships will be developed through our own R&D and sales force and maintained by our R&D and sales professionals and our distributors. According to our distribution contracts, our distributors are prohibited from selling our competitors' products and required to use the product certificate, brand name and package standards set by us during the distribution period. After the expiration of the distribution contracts in absence of renewal, we retain the customer relationships with end customers.
While the pricing volatility of our raw materials is a primary cause of cost variations in our products, we are generally able to pass the cost of price changes in our raw materials to our customers, although there are timing delays of varying lengths depending upon volatility of raw material prices, the type of products, competitive conditions and individual customer arrangements.
We sell our products substantially through approved distributors in the PRC. Our sales to our distributors are highly concentrated but have been gradually diversified in recent years. Sales to major distributors and direct customer, which individually exceeded 10% of our revenues, accounted for approximately 40.2%, 52.1%, 69.3% of our revenues for the years ended December 31, 2017, 2016 and 2015, respectively. We expect to reduce our distributor concentration over time, although revenues from these distributors are expected to continue to represent a substantial portion of our revenue in the future. Further information about our major distributors and the director customer, which individually exceeded 10% of our revenues, for the years ended December 31, 2017, 2016 and 2015, is set forth in Note 1 of the notes to the consolidated financial statements of this Annual Report on Form 10-K.
We have initiated our marketing efforts to develop new customers outside of China, in particular those in the Korean market. We have started offering certain high-end products, such as PA66 and long-chain Plastic Alloy, most manufactured in Heilongjiang plants and a small portion manufactured in Dubai plant since the second quarter of 2014. In January 2015, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons targeting high-end products for the overseas markets. During the second quarter of 2016, we resumed entry into ROK market by selling to the ROK customer. We plan to serve customers in oversea markets from our Dubai Xinda plant. In order to meet the increasing demand from our customer in the ROK and to develop potential overseas markets,
Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, the Company is planning to complete installing 45 production lines with 12,000 metric tons of annual production capacity by end of April, 2018, and additional 50 production lines with 13,000 metric tons of annual production capacity by end of 2018, bringing total installed production capacity in Dubai Xinda to 25,000 metric tons, targeting high-end products for the overseas market.
The Company expects to expand the international markets into Middle East and Europe. Information about geographic revenue is set forth in Note 25 of the notes to the consolidated financial statements of this Annual Report on Form 10-K.
Competition
The PRC automotive modified plastics industry is growing rapidly and highly fragmented with the top three domestic producers occupying less than approximately 26.6% of the market shares in 2013 according to Frost & Sullivan's report. According to Frost & Sullivan's report, in terms of sales volume and production capacity, we are one of the leading domestic specialized manufacturers of modified plastic for automobile parts in China, with a market share of approximately 8.0% in 2016 and 8.2% in 2015. In 2017, our sales volume of automotive plastics was approximately 457,385 MT. As of December 31, 2017, our annual production capacity of automotive plastics was 608,500 MT.
In 2014, the Company developed a customer from the ROK by the sales of mainly higher-end polymer composite materials. Our competitors in the ROK are mostly global brand name companies. Due to our high quality standard and competitive pricing, we are able to compete in and penetrate markets outside of China.
Currently, the Company's primary Chinese competitor in the automobile industry is Guangzhou Kingfa Science & Technology Co., Ltd. ("Guangzhou Kingfa"). Guangzhou Kingfa entered the automotive modified plastics market in 2006 and had a sales volume of 450,800 MT in 2016 with a market share of 10.5% in 2016, according to the research report by Frost and Sullivan. Guangzhou Kingfa has the largest capacity expansion with 1.67 million MT annual capacity at the end of 2016 based on Guangzhou Kingfa's public disclosure. Frost and Sullivan's report, but its utilization rate of production capacity is expected to be lower than that of China XD based on Frost & Sullivan's report. Guangzhou Kingfa has much larger financial resources than HLJ Xinda Group and Sichuan Xinda. However, we believe that it is less focused in automotive sector and currently holds fewer number of product certifications for automotive modified plastic to the automobile industry compared to HLJ Xinda Group and Sichuan Xinda. Another top domestic manufacturer of modified plastic is Shanghai Pret Composites Co., Ltd. ("Shanghai Pret"), which focuses on the production of automotive plastics. It had a sales volume of 175,600 MT with a market share of 4.1% in 2016, according to a report by Frost and Sullivan.
Historically, the Chinese auto market predominantly used modified plastics manufactured overseas or in factories controlled by foreign companies, such as manufacturers from Germany, the US, the Netherlands and Japan. Although China's automotive plastic market has been dominated by foreign or JV players, Chinese suppliers are continuing to gain market share. It is estimated that automotive plastics imported or manufactured by multinational and JV companies accounted for approximately 24.9% of the total China automotive plastic supply in 2016, decreased from 33.0% in 2011. JV manufacturers based in China in automotive plastics sector have been slow to invest and expand in China. Compared to non-domestic competitors including JV manufacturers, domestic manufacturers can benefit from the lower costs and geographical proximity in China. As local players continue to invest in research and development, enhance product quality and improve management skills, we believe that domestic production of automotive plastics will compete very favorably with the foreign competitors in terms of price, quality, services and delivery times and continue to replace imported plastics.
Our Competitive Strengths
We believe that the following competitive strengths continue to enable us to compete effectively in the automotive modified plastics market in the PRC:
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Leading Market Position with High Barrier to Entry
. We believe that we are one of the China's leading specialized manufacturers of modified plastic for automobile parts in terms of sales volume and production capacity, with a market share of approximately 8.0% in 2016. The PRC automotive modified plastics industry is growing rapidly and is highly fragmented with the top three domestic producers occupying less than approximately 22.6% of the market shares in 2016. We installed 50 new product lines in 2012 and 2013, which are utilized primarily for the manufacture of higher value-added modified plastics products. The lines increased the Company's total production capacity by 135,000 MT to 390,000 MT per annum.
In July 2017, the HLJ Xinda Group launched new industrial
development project with the Management Committee of Harbin Economic - Technological Development Zone. It
includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect will be completed by the end of June 2018. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be completed by the end of July 2019.
In December 2013, we broke ground on the construction of our fourth production plant in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total domestic installed production annual capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production plant. Sichuan Xinda has supplied to its customers since 2013, mainly backed by production capacity in our Harbin production plant till we installed 50 production lines with production capacity of 216,000 metric tons in the second half year of 2016 in our Sichuan plant.
We
installed 50 production lines with production capacity of 216,000 metric tons in the second half year of 2016 in our Sichuan plant. As of December 31, 2017, there is still construction ongoing on the site of our Sichuan plant to be expected to be completed by the end of the second quarter of 2018.
In addition, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons targeting high-end products for the overseas markets. In order to meet the increasing demand from our customer in the ROK and to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total, including one leased 10,000 square meters, and two purchased 20,206 and 22,324 square meters on January 25, 2015, June 28, 2016, and September 21, 2016, respectively, from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In 2017, our sales volume of automotive plastics was approximately 457,385 MT, representing an increase of 14.3% compared to that in 2016 mostly due to our accelerated growth in South, East and Central China. As of December 31, 2017, our annual production capacity of automotive plastics was 606,000 MT. In addition to the earlier 10 trial production lines in Dubai Xinda, the Company is planning to complete installing 45 production lines with 12,000 metric tons of annual production capacity by the end of April, 2018, and additional 50 production lines with 13,000 metric tons of annual production capacity by end of 2018, bringing total installed production capacity in Dubai Xinda to 25,000 metric tons, targeting high-end products for the overseas market. We believe our leading market position allows us to successfully compete with other foreign and domestic modified plastic manufacturers in the market. Being one of the leading specialized manufacturers of automotive modified plastics in China, we believe we are well-positioned to not only grow with the increasing market demand but increase market share by replacing smaller and less efficient modified plastic manufacturer.
In addition, as a result of our consistent research and development efforts, we have 444 product certifications from major automotive manufacturers in the PRC as of December 31, 2017, which we believe is among the largest numbers of product certifications by any domestic player in China's automotive plastics industry. Strict certification requirements and long certification periods result in high barriers to entry. Our current or potential competitors are required to obtain relevant product certifications from automotive manufacturers in order to compete with us. Each certification normally takes over two years to complete, and as a result, automotive manufacturers are reluctant to replace suppliers like us who have already received necessary certifications and proven consistent product quality. We believe that having one of the largest portfolios of product certifications in China allows us to strengthen our competitive position
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Long-Term Relationships with Reputable End Users
. Our senior management has been involved in the business of modified plastics since 1985. We benefit from the industry connections and experience of our senior management, which have enabled us to establish long-term customer relationships and strong industry recognition. We are a qualified provider of high-quality automotive plastics, and have sold our products through plastic auto part manufacturers to many leading automotive manufacturers in China. Currently, our modified plastics are utilized in more than 30 automobile brands and over 92 automobile models manufactured in China, including
Audi, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, Volvo, Ford, Citroen, Jinbei and VW Passat, Golf, Jetta, etc.
We believe that our brand and our products are well recognized and respected in China's automotive modified plastics market.
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Manufacturing facilities are critical to the quality of products
. We have in the past invested substantial time and resources in building state-of-the-art production lines to enhance our product quality. Our facilities have maintained ISO/TS16949, a certification of quality management systems specific to the automotive industry.
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Strong Customer-Oriented R&D Capabilities
. The modified plastics industry is characterized by rapid development and increasing demand for high quality products. We have strong R&D capabilities that allow us to have successfully passed OEM automakers' certification processes in the past and continually introduce new and high quality products to the market. Compared to international plastic supply models, which target larger scale applications of common plastics and involve less customization and specialization, we provide customer-oriented product development through our certification process. By working closely with our customers, we are able to adjust our product features to better satisfy the specific needs of each customer. To achieve this, we have staffed our R&D team with professionals, of whom 109 have Ph.D. and/or Master's degrees. On average, our R&D employees have worked with us for more than three years, and some key experts have more than 10 years of experience in our industry. We have also cooperated with a number of the leading technology centers in China. Besides providing specialized research and development skills, these relationships help us formulate cutting edge research programs aimed at developing new technologies and applications in plastics engineering. We currently have 31 approved patents and 411 pending patent applications with the State Intellectual Property Office of the PRC, or SIPO.
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Established Distribution Model
. Through 16 distributors across China, we have established distribution networks that cover Northeast, North, Southwest and East China, with a current focus on Northeast China. We enter into distribution agreements with local distributors in areas where large automobile manufacturers are located. By leveraging the proximity of our distributors to the automobile manufacturers, we can enhance our relationships with our customers. Through the established sales channels, we can quickly respond to local market demand, address customer needs, enhance our ability to provide superior technological support and after-sales services, and lower our marketing expenses. At the same time, our distributors are responsible for the payments to us which is not contingent upon their cash collection from end customers. By actively managing our distribution network, we are also able to accelerate local market penetration and increase sales opportunities. For example, we entered the north China market in 2009 through a local distributor, one year earlier than we planned, and in 2013, we entered into the Southwest China market, and in 2014, we entered into South China and Central China market. For the year ended December 31, 2017, Northeast, North, East, South, Central and Southwest account for approximately 30.4%, 16.1%, 33.5%, 3.0%, 3.0% and 7.5% of our revenues, respectively.
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Stable
Presence to Overseas Market.
Since 2014, the Company developed its presence in the Korean market by selling primarily higher-end (Long Chain) Plastic Alloy, US$82.5 million products to the Korean market, accounting for 6.4% of the total revenues for the year ended December 31, 2017.
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Seasoned Management Team
. Our senior management team and key personnel have extensive operating and industry experience. Mr. Han, our chief executive officer and president, founded our former affiliate Harbin Xinda Nylon Factory in 1985. With 30 years of industry experience, Mr. Han has in-depth knowledge and expertise in China's modified plastics industry. Our chief executive officer, chief technology officer and chief operating officer have over 50 years combined experience in the modified plastics industry and we believe their extensive expertise and knowledge can well serve our customers.
Our Strategies
Our goal is to capitalize on China's modified plastics growth trend, with a specific focus on applications in the auto sector, and to eventually be the leading modified plastics manufacturer in China. We are committed to enhancing our sales and profitability and achieving our goals through the following strategies:
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Continue to Increase Production Capacity
. Over the past five years, we have consistently increased production capacity to meet the rising demands of the automotive industry in the PRC. As of December 31, 2017, we have an installed annual production capacity of 606,000 metric tons, and we have been operating at near full capacity since 2007. With the expected strong growth in the automotive modified plastics market of China, we expect that we will continue to experience strong demand from our customers. Therefore, we intend to continue to strategically increase our production capacity to meet customer demands from both expanded geographical locations and future downstream sector growth. In 2013, we commenced to construct our fourth production base with 300,000 MT new material production capacity and the affiliated research and development center and training center in Nanchong City of Sichuan Province (the "Project"). We installed 50 production lines with production capacity of 216,000 metric tons in the second half of 2016 in our Sichuan plant. As of December 31, 2017, there is still construction ongoing on the site of our Sichuan plant to be expected to be completed by the end of the second quarter of 2018. The Company completed and started the trial production in the plant in Dubai, UAE with additional 2,500 metric tons targeting high-end products for the overseas markets.
The Company is planning to complete installing 45 production lines with 12,000 metric tons of annual production capacity by end of April, 2018, and an additional 50 production lines with 13,000 metric tons of annual production capacity by end of 2018, bringing total installed production capacity in Dubai Xinda to 25,000 metric tons, targeting high-end products for the overseas market.
In July 2017, the HLJ Xinda Group launched new industrial
development project with the Management Committee of Harbin Economic - Technological Development Zone. It
includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect will be completed by the end of June 2018. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be completed by the end of July 2019.
●
Focus on R&D and Develop New Product Offerings
. We are currently utilizing our R&D capabilities to obtain further
product certifications, develop new products, applications and technologies. Approximately 90% of our automotive plastics
product certification applications are currently undergoing trial manufacturing periods to obtain the necessary certifications. In addition, we are developing new products for automotive applications to expand our product portfolio, including initiating R&D on modified plastic for use in electric vehicles. We also have
increased efforts directed towards applications in new electrical equipment and electronics, alternative energy applications, power devices, aviation equipment and ocean engineering, in addition to other new products primarily for advanced industrialized applications in the automobile sector and in new verticals such as ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical devices.
We are the first non-State-Owned-Enterprise awarded National Level Enterprise Technology Center, in Heilongjiang Province. In addition, we have Postdoctoral and Academy Member Workstation in Heilongjiang Province enhancing our research and development capabilities.
●
Expand Customer Base Domestically and Internationally
. The automotive plastics market in the PRC is highly fragmented with significant barriers to entry. In 2015, we had 8.2% of the market share with our customer coverage was originally concentrated in the northeast regions of the PRC. We seek to steadily enhance our market share in Northeast China, and also expand our reach to East China, Central China, Southwest China and South China. In addition, we have conducted sales in overseas markets and exported our products including non-auto sectors since 2014. In 2016, we had 8.0% of the market share, ranking the second in terms of sales volume of automotive modified plastics in China. We plan to implement such strategies through further expanding our distribution network by working with local distributors who have contacts and networks overseas and directly establishing strategic alliances with certain of our non-PRC customers. Although the entry barrier of some non-auto sectors might not generally be as high as that of the auto sector, our focus is to target high-value-added products by leveraging our technology, expertise and know-how accumulated in the auto sector over the course of our operational history.
●
Pursue Selective Strategic Acquisitions
. While we have experienced substantial organic growth, we plan to pursue a disciplined and targeted acquisition strategy to accelerate our growth. Our strategy will focus on strengthening presence in certain geographies, improving our penetration in attractive markets, enhancing research and development capabilities and acquiring new markets or customers.
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Increase Efficiency by Corporate Restructuring
. We completed our corporate restructuring plan at the end of 2014, with the aim of establishing a more efficient company group structure, as a result of which our subsidiaries are more easily accessible to our end customers and our operations are able to respond to the market changes in a more efficient manner.
Environmental Laws
The cost of compliance with Chinese environmental regulations currently is minimal. Most of the waste produced from our production process is water, which we circulate in our enclosed water treatment system.
Employees
China XD's operations are organized into several operational departments including manufacturing, R&D, management, finance, sales, purchasing and marketing and others. As of December 31, 2017, there were 2,461 employees, including 995 in manufacturing, 523 in R&D, 514 in management, 75 in finance, 205 in sales, purchasing and marketing and 149 in other departments.
Available Information
We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and registration statements, and any amendments thereto, with the Securities and Exchange Commission (SEC). All such filings are available online through the SEC's website at http://www.sec.gov or on our corporate website at http://www.chinaxd.net. We make available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the SEC. In addition, copies of the written charters for the committees of our board of directors and our Code of Business Conduct are also available on our website, and can be found under the Investor Relations-Corporate Governance links. You may read and copy any materials we file with the SEC at the Securities and Exchange Commission Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Our website address is intended to be an inactive textual reference only, and none of the information contained on our website is part of this report or is incorporated in this report by reference.
ITEM 1A. RISK FACTORS
In addition to the other information in this Form 10-K, readers should carefully consider the following important factors. These factors, among others, in some cases have affected, and in the future could affect, our financial condition and results of operations and could cause our future results to differ materially from those expressed or implied in any forward-looking statements that appear in this on Form 10-K or that we have made or will make elsewhere.
The global economic uncertainty could further impair the automotive industry thereby limiting demand for our products.
The continuation or intensification of the recent global economic uncertainty arising from the European debt crisis and economic slowdown in Asia may adversely impact our business and the businesses of our customers. Our specialized plastics are sold to automobile parts manufacturers and distributors. The recent global economic uncertainty harmed most industries and has been detrimental to the automotive industry. Since virtually all of our sales are made to auto industry participants, our sales and business operations are dependent on the financial health of the automotive industry and could suffer if our customers experience, or continue to experience, a downturn in their business. Presently, it is unclear whether and to what extent the economic stimulus measures facilitated by the European Union and other governments throughout the world will mitigate the effects of the crisis on the automotive industry and other industries that affect our business.
We concentrate our operations primarily in the automotive industry; therefore, the fluctuations in automotive sales and production could have a material adverse effect on our results of operations and liquidity.
We develop, manufacture, and distribute modified plastic, primarily for use in automobiles. Automotive sales and production are highly cyclical and depend, among other things, on general economic conditions and consumer spending and preferences (which can be affected by a number of issues including fuel costs and the availability of consumer financing). As the volume of automotive production fluctuates, the demand for our products also fluctuates. According to China Association of Automobile Manufacturers, for the year ended December 31, 2017, the China automotive sales and production volume recorded a stable growth rate of 3.2% and 3.0%, respectively, lower than the growth rate of 11.3% and 10.6% in 2016. There can be no assurance that the market conditions, government policies and other factors leading to the increase in the growth rate will continue. Any contraction in automotive sales and production will harm our results of operations and financial condition. Consequently, we are exposed to the risks of adverse developments affecting the auto industry to a greater extent than if our operations were dispersed over a variety of industries.
Our financial performance may be affected by the prospect of our Dubai facility and the associated expansion into Middle East, Europe and other parts of Asia.
Since 2014, we developed the presence in the ROK by selling to our ROK customer primarily long carbon chain PA plastic alloy and high-performance modified PA66 products, which embarked our entry into the international market after approximately one year of product development and marketing effort.
The Company has experienced a delay in cash collection from the ROK customer mainly due to the customer's tight funding.
As of December 31, 2017, the amount due from our ROK customer is approximately US$80.2 million. In the event the outstanding accounts receivable become uncollectable despite management's efforts, we will suffer financial losses and as a result, our plan to develop overseas market may be delayed.
The withdrawal of preferential government policies and the tightening control over the Chinese automotive industry and automobile purchase restrictions imposed in certain major cities may limit market demand for our products.
In 2011, Chinese government terminated two preferential policies for its automotive industry: (1) vehicles with 1.6L or lower air displacement were given a 50% discount in purchase tax and (2) vehicles sold in rural area were given a government subsidy. Since 2011, in order to resolve the extreme traffic congestion, the Beijing government has been implementing the vehicle purchase quota policy, which limits the maximum vehicles sold in Beijing per month to 20,000. Other cities which have begun to show signs of traffic congestion have also begun to implement similar measures to control traffic congestion, including the limited automobile licenses policy implemented in Shanghai and Tianjin and the imposition of congestion charges in Shenzhen. The termination of two nation-wide preferential policies negatively affected consumer demand for new vehicles, and local restrictive measures over automobile purchases in major cities has resulted in slower growth of sales for many years prior to the reintroduction of the preferential policies in September 2015. The national and local policies over the Chinese automotive industry may continue to impact market demand for automobiles in 2018 and any future withdrawal of preferential government policies and the further tightening of control and restrictions may eventually result in a reduction in our product sales.
The Chinese automotive industry's growth is slowing after the rapid growth since 2000 and such slowdown may adversely affect the market demand for our products.
There is a direct correlation between our business and automobile production volume and sales, which are dependent on economic policies and market sentiment. The Chinese automotive industry had been rapidly growing for a decade prior to 2011. However, inflation, higher interest rates, tighter bank lending, lifting of consumer subsidies and buying restrictions in congested cities all contributed to a more modest environment since 2011. In order to stimulate the growth of the auto industry, on September 29, 2015, the Chinese government implemented a tax incentive policy of 50% reduction of the sales tax for eligible purchase of vehicles with engines of 1.6 liters and less. This helped the recovery of vehicle sales in China since the fourth quarter of 2015 and automobile sales volume growth rate reached to 13.7% in 2016. However, the automobile sales in China had a lower growth rate of 3.0% in 2017, according to China Association of Automobile Manufacturers. There can be no assurance that the market conditions, government policies and other factors leading to the current growth in demand for automobiles will continue. Any significant decline in demand for automobiles would directly and adversely affect demand for our products and hence our business, financial condition and results of operations.
A large percentage of our sales revenue is derived from sales to a limited number of distributors and a limited number of customers, and our business will suffer if sales to these customers decline.
A significant portion of our sales revenue historically has been derived from a limited number of distributors in China. Sales to major distributors and direct customer, which individually exceeded 10% of the Company's revenues is approximately 40.2% and 52.1% in 2017 and 2016, respectively. Any significant reduction in demand for modified plastics by any of these major distributors, any decrease in demand of products by its customers or by our ROK customer could harm our sales and business operations, financial condition and results of operations.
During the second quarter of 2016, we resumed entry into ROK market by developing a customer. As of December 31, 2017, the amount due from our ROK customer is approximately
US$80.2 million, among which balance of US$37.7 million was overdue
The overdue payment was due to the ROK customer's expansion and tight funding.
In the case of any such delay in payment from the ROK customer or our major distributors or they cease to be our customers or distributors in the future, our sales and business operations, financial conditions and results of operations may be negatively affected.
We may not be able to manage our business expansion effectively, which could harm our business.
We have expanded rapidly by making substantial investments in new markets and geographic regions. For example, on March 17, 2017, we entered into a definitive agreement with People's Government of Shunqing District, Nanchong City of Sichuan Province for the production of 300,000 metric tons of bio-composite materials and additive manufacturing and 20,000 metric tons of functional masterbatch, a high-end color additive process in plastics manufacturing. On July 21, 2017, Heilongjiang Xinda Enterprise Group Company Limited ("HLJ Xinda Group) entered into three investment agreements with the Management Committee of Harbin Economic- Technological Development Zone with respect to the industrial project for 300,000 metric tons of biological composite materials, the industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics and the industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory. We anticipate continuous expansion in our business by entering into new markets serving different industries and geographic regions. Such business expansion requires significant local management resources and personnel, knowledges and expertise in new markets and geographies and building relationship with local suppliers and clients. In order to manage the planned business expansion, we will be required to expand, train and manage our growing employee base. Furthermore, our management will be required to learn new markets and geographies and build relationship with local suppliers and clients. We cannot assure you that our current resources, knowledges and business relationships will be adequate to support our current expansion plans. If we are not successful in expanding our personnel, acquiring knowledge and expertise in the new markets and geographies and building relationship with local suppliers and clients, our business may be materially and adversely affected.
We are dependent on a limited number of suppliers. While we have identified alternative sources for the materials and equipment we use, a temporary disruption in our ability to procure necessary materials and equipment could adversely impact our sales in future periods.
Materials constitute a substantial part of the cost of our products. We seek to reduce the cost of raw materials by dealing with major suppliers. During the year ended December 31, 2017, we purchased approximately 54.3% of our raw materials from five major suppliers. The Company purchased equipment from two suppliers, which accounted for 96.0% of the Company's equipment purchases for the year ended December 31, 2017. We believe the relationship with our suppliers is satisfactory and that alternative suppliers are available if relationships falter or existing suppliers should become unable to keep up with our requirements. However, there can be no assurance that our current or future suppliers will be able to meet our requirements on commercially reasonable terms or within scheduled delivery times. An interruption of our arrangements with suppliers could cause a delay in the production of our products for timely delivery to distributors and customers, which could result in a loss of sales in future periods.
If we are subject to product quality or liability claims relating to our products, we may incur significant litigation expenses and management may have to devote significant time defending such claims, which if determined adversely to us, could require us to pay significant damage awards.
Although we have adopted certain internal measures to supervise and examine the quality of our products, we may be subject to legal proceedings and claims from time to time relating to our product quality. Consistent with rapid growth and expansion in many businesses, there are risks associated with quality of newly developed products, especially during the initial stage and time and efforts needed to improve our technology and techniques in order to supply quality and batch consistency to our new customers, in particular, high-end products to overseas customers. The defense of these proceedings and claims could be both costly and time-consuming and significantly divert the efforts and resources of our management. An adverse determination in any such proceedings could subject us to significant liability. In addition, any such proceeding, even if ultimately determined in our favor, could damage our market reputation and prevent us from maintaining or increasing sales and market share. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase of our products.
We have limited insurance coverage on our assets in China and any uninsured loss or damage to our property, business disruption or litigation may result in our incurring substantial costs and have a material adverse effect on our results of operations, financial condition and/or liquidity.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited insurance products. Other than automobile insurance on certain vehicles and property and casualty insurance for some of our assets such as factories and equipment we do not have insurance coverage on our other assets or inventories, nor do we have any business interruption, product liability or litigation insurance for our operations in China. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured loss or damage to property, business disruption or litigation may result in our incurring substantial costs and the diversion of our resources, which may have a material adverse effect on our results of operations, financial condition and/or liquidity.
SAFE regulations relating to offshore investment activities by PRC individuals may increase our administrative burden and restrict our overseas and cross-border investment activity. If our shareholders and beneficial owners who are PRC individuals fail to make any required applications, registrations and filings under such regulations, we may be unable to distribute profits or become subject to liability under PRC laws, and our ability to compensate our staff through equity compensation may be hindered and business operation may be adversely affected.
The State Administration of Foreign Exchange, or "SAFE", has promulgated several regulations, including the Circular on Relevant Issues Relating to Domestic Resident's Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular No. 75.
We have requested our shareholders and beneficial owners who are PRC residents to make the necessary applications and filings as required under these regulations and under any implementation rules or approval practices that may be established under these regulations. As of the date of this Annual Report on Form 10-K, Mr. Han, our Chief Executive Officer, has registered his beneficial ownerships in China XD and XD Engineering Plastics Company Limited ("XD Engineering Plastics") respectively with local SAFE in accordance with Circular No. 37. However, we cannot assure you that the rest of our shareholders and beneficial owners who are PRC individuals have timely updated their registrations with SAFE in accordance with SAFE regulations. The failure or inability of our PRC shareholders and beneficial owners make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries' ability to make distributions or pay dividends or affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be materially and adversely affected.
On December 25, 2006, the People's Bank of China issued the Administration Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC and non-PRC citizens) under the current account or the capital account, and the corresponding Implementing Rules were issued by SAFE on January 5, 2007, both of these regulations became effective on February 1, 2007. According to these regulations, all foreign exchange matters relating to employee stock holding plans, share option plans or similar plans of an overseas publicly-listed company in which PRC citizens will participate require approval from SAFE or its authorized branch.
In February 2012, SAFE promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, or the New Stock Option Rules, which replaced and substituted the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. According to the New Stock Option Rules, if a PRC resident participates in any stock incentive plan of an overseas publicly-listed company, a qualified PRC domestic agent, which could be a PRC subsidiary of such overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, among other things, must file on behalf of such participant an application with SAFE to conduct the SAFE registration with respect to such stock incentive plan and obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with the exercise or sale of stock options or stock such participant holds. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the qualified PRC domestic agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the qualified PRC domestic agent or the overseas entrusted institution or other material changes. Such participant's foreign exchange income received from the sale of stock and dividends distributed by the overseas publicly-listed company must be fully remitted into a specific domestic foreign currency account opened and managed by such qualified PRC domestic agent first, before distribution to such participants.
We are an offshore listed company and, as a result, any Chinese employee or foreign employee of our PRC subsidiaries, who resides in PRC more than one year consecutively, including without limitation, directors, supervisors and other senior management staffs of our PRC subsidiaries, who have been granted share options or shares under our existing share incentive plan, are subject to the New Stock Option Rules. We completed the application with local SAFE in Heilongjiang on December 16, 2013, obtaining a registration in respect of our incentive share plan in accordance with the New Stock Option Rules. If our PRC subsidiaries or their qualified employees fail to comply with these regulations, including the New Stock Option Rules, they may be subject to fines or other legal sanctions imposed by SAFE or other Chinese government authorities. In that case, our ability to compensate our employees, directors, supervisors and other senior management staffs through equity compensations may be hindered and our business operations may be adversely affected.
Under the PRC EIT Law, we and/or Favor Sea (BVI) may be classified as a "resident enterprise" of the PRC. Such classification could result in tax consequences to us, our non-PRC resident shareholders and Favor Sea (BVI).
On March 16, 2007, the National People's Congress approved and promulgated the PRC Enterprise Income Tax Law, or "EIT Law," which took effect on January 1, 2008. Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise established outside of China with "de facto management bodies" within China is considered a "resident enterprise," and subject to the uniform 25% enterprise income tax rate on global income. The implementing rules of the EIT Law define "de facto management bodies" as a managing body that in practice exercises "substantial and overall management and control over the production and operations, personnel, accounting, and properties" of the enterprise; however, due to the short history of the EIT Law and lack of applicable legal precedents, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China, or whether we or our non-PRC subsidiaries would be deemed as resident enterprises of the PRC.
If the PRC tax authorities determine that we, Favor Sea Limited, a British Virgin Islands corporation ("Favor Sea (BVI)") and/or Xinda Holding (HK) Company Limited, a Hong Kong corporation ("Xinda HK"), are "resident enterprises" for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. We, Favor Sea (BVI) and/or Xinda HK may be subject to enterprise income tax at a rate of 25% on our, Favor Sea (BVI)'s and/or Xinda HK's worldwide taxable income, as well as PRC enterprise income tax reporting obligations. However, under the EIT Law and its implementing rules, dividends paid between "qualified resident enterprises" are exempt from enterprise income tax. As a result, if we, Favor Sea (BVI) and Xinda HK are treated as PRC "qualified resident enterprises," all dividends paid from HLJ Xinda Group to Xinda HK, from Xinda HK to Favor Sea (BVI) and from Favor Sea (BVI) to us may be exempt from PRC tax. Otherwise, all dividends paid from HLJ Xinda Group to Xinda HK, from Xinda HK to Favor Sea (BVI) and from Favor Sea (BVI) to us may be subject to withholding tax under the EIT Law and its implementing rules.
On April 22, 2009, State Administration of Taxation ("SAT") enacted "Circular of the State Administration of Taxation on Issues Concerning the Identification of Chinese-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With the Actual Standards of Organizational Management". On July 27, 2011, SAT enacted "Announcement of the State Administration of Taxation on Printing and Distributing the Administrative Measures for Income Tax on Chinese-controlled Resident Enterprises Incorporated Overseas (Trial Implementation)". Under those two rules, either the enterprises may request the PRC tax authorities to determine their "resident enterprises" identity or the tax authority may investigate and determine an enterprise's identity. The target enterprises under those two rules are foreign registered companies controlled by the PRC companies, however, the PRC tax authority may determine if a foreign registered company controlled by the PRC individual(s) is a "resident enterprise" or not by reference to those two rules.
Under the EIT Law and its implementation rules, dividends payable by a foreign-invested enterprise in China to its shareholders that are "non-resident enterprises" are subject to a 10% withholding tax, unless such shareholders' jurisdiction of incorporation has a tax treaty with China that provides for a preferential arrangement. Pursuant to the Notice of the SAT on Issuing the Table of Tax Rates on Dividends in Treatises, or Notice 112, which was issued on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement (Hong Kong), which became effective on December 8, 2006, such withholding tax may be lowered to 5% if the PRC enterprise is at least 25% directly held by a Hong Kong enterprise. In October 2009, the SAT further issued the Notice on How to Understand and Determine the "Beneficial Owners" in Tax Treaties, or Circular 601. According to Circular 601, non-resident enterprises that cannot provide valid supporting documents as "beneficial owners" may not be approved to enjoy tax treaty benefits, and "beneficial owners" refer to individuals, companies or other organizations which are normally engaged in substantive operations. These rules also set forth certain adverse factors on the recognition of a "beneficial owner." Specifically, they expressly exclude a "conduit company" that is usually established for the purposes of avoiding or reducing tax obligations or transferring or accumulating profits and not engaged in substantive operations such as manufacturing, sales or management, from being a "beneficial owner." As a result, if we are treated as PRC "non-resident enterprises" under the EIT Law, then dividends from HLJ Xinda Group (assuming such dividends were considered sourced within the PRC) paid to us through Xinda HK may be subject to a reduced withholding tax at a rate of 5% if Xinda HK is determined to be Hong Kong tax residents and are considered to be "beneficial owners" that are generally engaged in substantive business activities and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong). Otherwise, we may not be able to enjoy the preferential withholding tax rate of 5% under the tax arrangement and therefore be subject to withholding tax at a rate of 10% with respect to dividends to be paid by HLJ Xinda Group (assuming such dividends were considered sourced within the PRC) to us through Xinda HK. Any such taxes on dividends could materially reduce the amount of dividends, if any, we could pay to our shareholders.
However, if we are deemed as a "resident enterprise," the new "resident enterprise" classification could result in a situation in which an up to 10% PRC tax is imposed on dividends we pay to our non-PRC shareholders that are not PRC tax "resident enterprises". In such event, we may be required to withhold an up to 10% PRC tax on any dividends paid to non-PRC resident enterprise shareholders. Our non-PRC resident enterprise shareholders also may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our ordinary shares in certain circumstances if such income is considered PRC-sourced income by relevant tax authorities. We would not, however, have an obligation to withhold PRC tax with respect to such gain.
On December 15, 2009, the State Administration of Taxation ("SAT") released the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises ("Circular 698") that reinforces the taxation of non-listed equity transfers by non-resident enterprises through overseas holding vehicles. Circular 698 is retroactively effective from January 1, 2008. Subsequently SAT also released the Announcement on Several Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC Resident Enterprises ("Announcement 7"), effective from February 3, 2015, which in part supersedes Circular 698.
Announcement 7 addresses indirect share transfer as well as other issues. According to Announcement 7, if a non-PRC resident enterprise transfers the equity interests of or similar rights or interests in overseas companies which directly or indirectly own PRC taxable assets through an arrangement without a reasonable commercial purpose, but rather to avoid PRC corporate income tax, the transaction will be re-characterized and treated as a direct transfer of PRC taxable assets subject to PRC corporate income tax. Announcement 7 specifies certain factors that should be considered in determining whether an indirect transfer has a reasonable commercial purpose. Since Announcement 7 has a short history, there is uncertainty as to its application and in particular, the interpretation of the term "reasonable commercial purpose."
Announcement 7 further provides that, the entity which has the obligation to pay the consideration for the transfer to the transferring shareholders has the obligation to withhold any PRC corporate income tax that is due. If the transferring shareholders do not pay corporate income tax that is due for a transfer and the entity which has the obligation to pay the consideration does not withhold the tax due, the PRC tax authorities may impose a penalty on the entity that so fails to withhold, which may be relieved or exempted from the withholding obligation and any resulting penalty under certain circumstances if it reports such transfer to the PRC tax authorities.
We (or a foreign investor) may become at risk of being taxed or imposed a penalty under Announcement 7 and may be required to expend valuable resources to comply with Announcement 7 or to establish that we (or such foreign investor) should not be taxed under Announcement 7, which could have a material adverse effect on our financial condition and results of operations (or such foreign investor's investment in us).
PRC regulations relating to mergers and acquisitions of domestic enterprises by foreign investors may increase the administrative burden we face and create regulatory uncertainties.
On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or CSRC, and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006. The M&A Rule purports, among other things, (i) to require any PRC company, enterprise or individual that intends to merge or acquire its domestic affiliated company in the name of an overseas company which it lawfully established or controls, to apply for MOFCOM's examination on and approval for the proposed merger or acquisition; and (ii) to require SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled directly or indirectly by PRC companies or individuals, to obtain the approval of CSRC prior to publicly listing their securities on an overseas stock exchange. However, there are substantial uncertainties regarding the interpretation, application and enforcement of these rules, and CSRC has yet to promulgate any written provisions or formally to declare or state whether the overseas listing of a PRC-related company structured similar to ours is subject to the approval of CSRC. As a result, we are not sure whether the M&A Rule would require us or our entities in China to obtain the approval from either MOFCOM or CSRC or any other regulatory agencies in connection with the transaction contemplated by the share transfer contracts which were entered into between Mr. Jie Han, Mr. Qingwei Ma and Xinda Holding (HK) Company Limited on June 26, 2008, the transaction contemplated in the Agreement and Plan of Merger entered into by and among NB Telecom, Favor Sea (BVI) and the shareholders of Favor Sea (BVI) on December 24, 2008 (detailed description of both of the two aforesaid transactions and relevant contracts can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed on April 14, 2010) the adoption and performance of the option agreement dated May 16, 2008 between Ms. Piao and Mr. Han.
Further, in the event MOFCOM or CSRC deems it necessary for us to obtain its approval prior to our entry into the aforesaid agreements, we could be subject to severe penalties. The M&A Rule does not stipulate the specific penalty terms, therefore, we are unable to determine what penalties we may face, and how such penalties may affect our business operations or future strategy.
Our business will suffer if we cannot obtain or maintain necessary permits or approvals.
Under PRC laws, we are required to obtain from various PRC governmental authorities certain permits and licenses in relation to the operation of our business. These permits and licenses are subject to periodic renewal and/or reassessment by the relevant PRC government authorities and the standards of compliance required in relation thereto may from time to time be subject to change. We cannot assure you that we can always obtain, maintain or renew all the permits and licenses in a timely manner. Additionally, any changes in compliance standards, or any new laws or regulations that may prohibit or render it more restrictive for us to conduct our business or increase our compliance costs may adversely affect our operations or profitability. Any failure by us to obtain, maintain or renew necessary licenses, permits and approvals, could subject us to fines and other penalties and limit the business we could conduct, which could have a material adverse effect on the operation of our business. In addition, we may not be able to carry on business without such permits and licenses being renewed and/or reassessed.
Pursuant to PRC laws and regulations, construction or expansion of a building or a production facility is subject to various permits and approvals from different government authorities. In connection with the construction of HLJ Xinda Group's factory and production facilities, which has already been completed and put into operation, we obtained a project approval from Administration Committee of Harbin Economic and Technological & High-tech Development Zone and an approval for the environmental impact assessment report on the construction project of HLJ Xinda Group in 2003. In connection with the construction of Sichuan Xinda Group's factory and production facilities which has been partially completed in the second half of 2016, we obtained the project approvals from Bureau of Development and Reform of Shunqing District, Nanchong City in 2013 and 2015, respectively. In connection with the Phase II construction of AL Composites which has been completed by the middle of 2016, we obtained the project approval from Engineering & Project Management Department, UAE region Economic Zones World ("EZW") in June 2015, and the building permit from Department of Planning & Development, Ports, Customs & Free Zone Corporation, Government of Dubai in September 2015. In July 2017, HLJ Xinda Group launched new industrial development project with the Management Committee of Harbin Economic - Technological Development Zone for upgrading existing equipment for 100,000 metric tons of engineering plastics and building 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory. On December 21, 2017 and February 7, 2018, we got building and planning permit from Harbin Municipal Urban and Rural Bureau, respectively. Failure to obtain all necessary approvals/permits may subject us to various penalties, such as fines or being required to vacate from the facilities where we currently operate our business.
Increased environmental regulation in China could increase our costs of operation.
Certain processes utilized in the production of modified plastics result in toxic by-products. To date, the Chinese government has imposed only limited regulation on the production of these by-products, and enforcement of the regulations has been sparse. Recently, however, there is a substantial increase in focus on the Chinese environment, which has inspired considerable new regulation. Because we plans to export plastics to the U.S. and Europe in coming years, we have developed certain safeguards in our manufacturing processes to assure compliance with the environmental protection standard ISO/TS16949 Quality Assurance Standard, the European Union's RoHS Standards and Germany's PAHs Standards. Furthermore, we are in the process of applying for the U.S.'s UL Safety Certification, ISO14001 Environmental Management System Certification and OHSAS18001 Occupational Health Management System Certification. This compliance regimen brings us into compliance with all Chinese environmental regulations. Additional regulation, however, could increase our cost of doing business, which would impair our profitability.
Our independent registered public accounting firm's audit documentation related to their audit reports included in our annual report is located in China. The PCAOB currently cannot inspect audit documentation located in China and, as such, you may be deprived of the benefits of such inspection.
Our independent registered public accounting firm issued an audit opinion on the financial statements included in our annual reports filed with the SEC. Our independent registered public accounting firm's audit documentation related to their audit reports included in our annual reports is located in China, and audit procedures take place within China's borders. As auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board, or the PCAOB, our auditor is required by the laws of the United States to undergo regular inspections by the PCAOB. However, work papers located in China are not currently inspected by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities.
Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms' audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. However, the PCAOB is currently unable to inspect an auditor's audit work related to a company's operations in China and where such documentation of the audit work is located in China. As a result, our investors may be deprived of the benefits of the PCAOB's oversight of auditors that are located in China through such inspections.
The inability of the PCAOB to conduct inspections of an auditor's work papers in China makes it more difficult to evaluate the effectiveness of any of our auditor's audit procedures or quality control procedures that may be located in China as compared to auditors outside of China that are subject to PCAOB inspections. Investors may consequently lose confidence in our reported financial information and procedures and the quality of our financial statements.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in China. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially all of our operations and business are located has conducted any due diligence on our operations or reviewed or cleared any of our disclosure.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the United States, however, substantially all of our operations are located in China. Since substantially all of our operations and business takes place in China, it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise scrutinized by any local regulator.
Our independent registered public accounting firm may be temporarily suspended from practicing before the SEC if unable to continue to satisfy SEC investigation requests in the future. If a delay in completion of our audit process occurs as a result, we could be unable to timely file certain reports with the SEC, which may lead to the delisting of our stock.
The vast majority of our sales are to customers in China, and we have all of our operations in China. Like many U.S. companies with significant operations in China, our independent registered public accounting firm is located in China.
On January 22, 2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the "Big Four" accounting firms, including our independent registered public accounting firm, from practicing before the SEC for six months. In February 2014, the initial decision was appealed. While under appeal and in February 2015, the Chinese member firms of "Big Four" accounting firms reached a settlement with the SEC. As part of the settlement, each of the Chinese member firms of "Big Four" accounting firms agreed to settlement terms that include a censure, undertakings to make a payment to the SEC, procedures and undertakings as to future requests for documents by the SEC, and possible additional proceedings and remedies should those undertakings not be adhered to.
If the settlement terms are not adhered to, Chinese member firms of "Big four" accounting firms may be suspended from practicing before the SEC which could in turn delay the timely filing of our financial statements with the SEC. In addition, it could be difficult for us to timely identify and engage another qualified independent auditor to replace our independent registered public accounting firm. A delinquency in our filings with the SEC may result in NASDAQ initiating procedures, which could adversely harm our reputation and have other material adverse effects on our overall growth and prospects.
We may fail to develop and maintain an effective system of internal controls over financial reporting. As a result, we may not be able to accurately report our financial results or prevent fraud and current and potential shareholders could lose confidence in the integrity of our financial reports, which could harm our business and the trading price of our common stock.
Prior to our listing on the US stock exchange, we were a private company with all business operations within China. Our accounting and reporting system was designed to satisfy local statutory requirements and internal management needs. Since we became a public company, our business has grown significantly over the years. Management concluded that our internal controls over financial reporting were ineffective as of December 31, 2016, due to one material weakness which relates to the lack of sufficient accounting and financial reporting personnel to formalize certain key controls over the financial reporting process and report financial information based on US GAAP and SEC reporting requirements.
Our management is committed to strengthening our internal controls and complying with Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"). Since 2014 when we were required to comply with SOX 404, our efforts to improve our internal control over financial reporting include: (1) our accounting staff obtained external training of U.S. GAAP and SEC reporting by qualified entities, (2) having hired two third-party SOX 404 compliance consultants to help us improve our internal control system, (3
) continuing to seek senior qualified people with requisite expertise and knowledge to help improve our internal control procedures,
(4)
having adopted
internal policies and approval and supervision procedures governing financial reporting, (5) having adopted procedures to evaluate and assess performance of directors, officers and employees of the Company, and (6) continuing to hold internal meetings, discussions and seminars periodically to review and improve our internal control procedures.
However, we cannot be certain that these measures we have undertaken will ensure that we will develop and maintain adequate controls over our financial processes and reporting in the future. Furthermore, if we are able to rapidly grow our business, the internal controls that we will need may become more complex, and significantly more resources may be required to ensure our internal controls remain effective. Failure to implement required controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to develop and maintain an effective internal control system, our stockholders and other potential investors may lose confidence in our business operations and the integrity of our financial statements, and may be discouraged from future investments in our company, which may delay or hinder any future business development or expansion plans if we are unable to raise funds in future financings, and our current stockholders may choose to dispose of the shares of common stock they own in our company, which could have a negative impact on our stock price. In addition, non-compliance with SOX 404 could subject us to a variety of administrative sanctions, including the suspension of trading of our stock on the NASDAQ Global Market, ineligibility for listing on other national securities exchanges, and the inability of registered broker-dealers to make a market in our common stock, which could further reduce our stock price.
We may be subject to or be liable for US taxes, interest and penalties.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the "Act"), which significantly changed U.S. tax law. The Act lowered the Company's U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings.
The Company recorded a charge of approximately $71.0 million for the repatriation tax on deemed repatriation to the United States of accumulated earnings. The charge for deemed repatriation will be payable by the Company over an eight-year period commencing April 2018. $71.0 million repatriation tax, as a provisional amount, represents the Company
'
s reasonable estimate for income tax effects of the Tax Act, to the extent that the Company's accounting for certain income tax effects is incomplete as additional information is needed to be prepared, analyzed and computations.
The actual impact of the U.S. Tax Reform on the Company may differ from management's estimates, and management may update the provisional amount upon obtaining, preparing or analyzing additional information, based on its review of future regulations or guidance issued by the U.S. Department of the Treasury, and specific actions the Company may take in the future.
Our inability or failure to protect our intellectual property rights may significantly and materially impact our business, financial condition and results of operations.
Protection of our proprietary processes, methods and other technology is important to our business. We generally rely on a combination of the patent, trademark and copyright laws of the PRC and laws protecting trade secret in the PRC, as well as licenses and non-disclosure and confidentiality agreements, to protect our intellectual property rights. The patent, trademark and copyright laws of the PRC, as well as laws protecting trade secret in the PRC, may not protect our intellectual property rights to the same extent as the laws of the U.S.
Failure to protect our intellectual property rights may result in the loss of valuable proprietary technologies. Additionally, some of our technologies are not covered by any patent or patent application and, even if a patent application has been filed, it may not result in an issued patent. If patents are issued to us, those patents may not provide meaningful protection against competitors or against competitive technologies. In addition, upon the expiration of patents issued to us, we will be unable to prevent our competitors from using or introducing products using the formerly-patented technology. As a result, we may be faced with increased competition and our results of operations may be adversely affected. We cannot assure you that our intellectual property rights will not be challenged, invalidated, circumvented or rendered unenforceable.
We also rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality/non-disclosure agreements with our employees and third parties to protect our intellectual property, we cannot assure you that our confidentiality/non-disclosure agreements will not be breached, that they will provide meaningful protection for our trade secrets and proprietary manufacturing expertise or that adequate remedies will be available in the event of an unauthorized use or disclosure of our trade secrets or manufacturing expertise.
Our intellectual property rights may be challenged or infringed upon by third parties or we may be unable to maintain, renew or enter into new license agreements that are important to our business with third-party owners of intellectual property on reasonable terms. We could also face patent infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technologies. If we are found to be infringing on the proprietary technology of others, we may be liable for damages, and we may be required to change our processes, to redesign our products partially or completely, to pay to use the technology of others or to stop using certain technologies or producing the infringing product(s) entirely. Even if we ultimately prevail in an infringement suit, the existence of the suit could prompt customers to switch to products that are not the subject of infringement suits. We may not prevail in any intellectual property litigation and such litigation may result in significant legal costs or otherwise impede our ability to produce and distribute key products.
We may be unable to renew the leases for our factories on acceptable terms or these leases may be terminated
.
As of December 31, 2017, HLJ Xinda Group operated three separate factories located at 9 Qinling Road (the "Qinling Road Factory"), 9 North Dalian Road (the "Dalian Road Factory") and 9 Jiangnan First Road (the "Jiangnan Road Factory"), respectively. HLJ Xinda Group owns the titles to the land and premises of the Qinling Road Factory. HLJ Xinda Group leases the land and premises of the Dalian Road Factory from Xinda High-Tech. HLJ Xinda Group is in the process of acquiring the titles to the land and premises at Jiangnan Road Factory. The Company expects the title transfer to be completed by the end of third quarter of 2018. HLJ Xinda Group's leases will expire on December 31, 2018. If we are unable to renew our lease on acceptable terms in due course or acquire the titles to the land and premises at Jiannan Road Factory or if our lease is terminated by the lessor unilaterally for the Dalian Road Factory:
●
we may be unable to find a new property with the amenities and in the location we require for our factories, which may result in a factory closure;
●
we may have to relocate to a less desirable location;
●
we may have to relocate to a location with facilities that do not meet our requirements;
●
our factories may experience significant disruption in operations and, as a result, we may be unable to produce products during the period of disruption.
Any of these events may materially and adversely affect our business, prospects, results of operations and financial condition.
Our ability to sell our products at current profit margin is subject to a number of risks and uncertainties, which are beyond our control; in particular, we may not be able to reflect raw material cost increases in the price of our products.
Our ability to sell our products at current profit margin is subject to a number of risks and uncertainties, which are beyond our control. For example, general slow-down in the Chinese or world economy may lessen the demand for our products, and we may be forced to sell our products at a lower price.
Particularly, we may not be able to pass through raw material cost increases to our customers on a timely basis and reflect such increases in the price of our products. We purchase various plastic resins, which are derived from petroleum or natural gas, to produce our modified plastics products. Cost of raw materials made up a vast majority of our cost of revenues in 2017 and 2016. The market prices of plastic resins may fluctuate due to changes in supply and demand conditions in that industry. Any shortage in supply of or significant increase in demand for plastic resins and additives may result in higher market prices and thereby increase our cost of revenues, and we may not be able to pass on increases in the prices of raw materials to our customers. Under the terms of our distributor agreements, we will only be able to increase the sales prices for our products if the cost of our raw materials increases by more than 5% on a cumulative basis. As a result, we may not be able to adjust our selling prices in a timely manner, and our inability to increase the selling prices of our products sold during the period in which the cumulative increases of the cost of our raw materials is less than 5% may reduce our profitability. Furthermore, other adverse developments such as increased competition may not allow us to pass through cost increases to our distributors at all. Any of the foregoing could have a material adverse effect on our margins, results of operations and financial condition. When expanding into new regions, we have taken and may continue to take marketing initiatives from time to time to offer sales incentives, including discounts, to increase market share. Such initiatives and measures have put and may continue to put pressure on our margins.
Our assets are primarily located in China. So any dividends or proceeds from liquidation are subject to the approval of the relevant Chinese government agencies.
Our assets are primarily located inside China. Under the laws governing FIEs in China, dividend distribution and liquidation are allowed but subject to respective administrative procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the Board of Directors and be subject to foreign exchange rules governing such repatriation. Any liquidation is subject to the decision of the highest authority of the company, the relevant government agency's approval and supervision (including but not limited to the local branch of MOFCOM), as well as the whole process of liquidation under PRC laws and regulations, including without limitation personnel resettlement, assets disposition, settlement of debts and creditor's rights as well as deregistration, which process could be very time-consuming and complex. Since the dividend distribution procedure is subject to foreign exchange rules governing such repatriation, risks may arise for our investors when HLJ Xinda Group pays dividend to us through Xinda HK. Furthermore, the liquidation procedure is a complex and time consuming procedures subject to government approvals, additional risks and costs may arise for our investors in the process.
Governmental control of currency conversions may affect the value of your investment.
A majority of our revenue are earned in Renminbi. Any future restrictions on currency conversions may limit our ability to use revenue generated in Renminbi to make dividend or other payments in U.S. dollars. Although the PRC government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises like us may buy, sell or remit foreign currencies only after providing valid commercial documents at a PRC banks specifically authorized to conduct foreign-exchange business.
In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in the PRC, and companies are required to open and maintain separate foreign-exchange accounts for capital account items. There is no guarantee that PRC regulatory authorities will not impose additional restrictions on the convertibility of the Renminbi. Such restrictions could prevent us from distributing dividends and thereby reduce the value of our stock.
The fluctuation of the exchange rate of the Renminbi against the dollar could reduce the value of your investment.
The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and Renminbi. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. Dollar could reduce the value in Renminbi of our funds. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.
On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. Dollar. Under the 2005 policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Renminbi appreciated by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. On June 19, 2010, the People's Bank of China decided to further promote the reform of the Renminbi exchange rate formation mechanism, and improve the flexibility of Renminbi exchange rate. The Company and its subsidiaries (both domestic and overseas) have debts denominated in foreign currencies, fluctuations in the exchange rates of Renminbi and Singapore dollar into foreign currencies creates exchange risk for the Company. With the internationalization process and RMB joining the SDR, RMB exchange rate may continue to fluctuate in the future. In August 2015, the People's Bank of China perfected its midpoint rate determination mechanism, which led to a 2% depreciation of Renminbi against the U.S. dollar. However, it is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. There remains significant international pressure on the PRC Government to further liberalize its currency policy, which could result in further fluctuations in the value of the Renminbi against the U.S. dollar. However, there is no assurance that there will not be a devaluation of Renminbi in the future. If there is such devaluation, our debt servicing cost will increase and the return to our overseas investors may decrease.
The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the China. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi are to be converted into foreign currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies.
The PRC government could also restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain expenses as they become due.
MSPEA Modified Plastics Holding Limited ("MSPEA") has significant influence over our affairs
.
MSPEA currently owns 100% of our outstanding Series D Preferred Stock, representing approximately 24.3% of our issued and outstanding shares of common stock on an as converted basis. Pursuant to the Amended and Restated Certificate of Designation of Series D Preferred Stock, holders of Series D Preferred Stock have the right to elect, voting as a separate class, two directors to serve on the Board so long as at least 12,800,000 (adjusted for any dilutive corporate actions) shares of Series D Preferred Stock are outstanding, and one director to serve on the Board if the number of shares of Series D Preferred Stock outstanding at such time is less than 12,800,000 but more than 1,600,000 (in each case adjusted for any dilutive corporate actions). For so long as at least 1,600,000 (adjusted for any dilutive corporate actions) shares of Series D Preferred Stock remain outstanding, holders of Series D Preferred Stock have veto rights over certain material corporate actions of the Company and its subsidiaries as described in the Amended and Restated Certificate of Designation of Series D Preferred Stock. As such, MSPEA currently has significant influence over our affairs.
Upon the occurrence of certain events, we may be required to redeem all or a portion of the Series D Preferred Stock.
On January 27, 2014, the Company adopted and filed the Amended and Restated Certificate of Designation of Series D Preferred Stock (the "Restated Certificate of Designation") with the Secretary of State of the State of Nevada, pursuant to which, the maturity date of the Series D Preferred Stock is extended to February 4, 2019, and, the performance target for the year ended December 31, 2013 the failure to meet which target could trigger the mandatory redemption of the Series D Preferred Stock, has been removed.
As of December 31, 2013, the Company concluded that it has met the actual profit targets under the Restated Certificate of Designation that could otherwise trigger mandatory redemption. The remaining trigger events pursuant to the terms of the Restated Certificate of Designation for such mandatory redemption include:
(i) a breach by the Company, XD Engineering Plastics Company Limited ("XD Engineering Plastics"), or Mr. Han of certain provisions of the financing documents in connection with the issuance and sale of the Series D Preferred Stock, if such breach would constitute a material adverse effect on the Company and its subsidiaries taken as a whole or which materially diminishes the value of the Series D Preferred Stock,
(ii) the commencement by the Company or any of its subsidiaries of any bankruptcy, insolvency, reorganization or the like, or
(iii) the appointment of a custodian, receiver, liquidator, assignee, trustee or other similar officials of the Company or any of its subsidiaries for the winding up or liquidation of its affairs.
If any of the events mentioned above occurs prior to February 4, 2019, or, in the event the Series D Preferred Stock remains outstanding as of February 4, 2019, we may be required to redeem such shares at a price per share equal to an amount that would yield a total (annualized) internal rate of return of 15% to the holder of such Series D Preferred Stock on the original issue price of US$6.25 per share, and, in the event we have insufficient cash available or do not have access to additional third-party financings on commercially reasonable terms or at all to complete such redemption, we may experience liquidity problems, which could have a material adverse effect on our ability to service our debt, including the Notes, and we may be required to liquidate assets to fund such redemption.
The consummation of the proposed going-private transaction is uncertain, and the announcement and pendency of such transaction could adversely affect our business, results of operations and financial condition.
On February 16, 2017, the Board has received a preliminary nonbinding proposal letter from the Buyer Consortium to acquire all of the outstanding shares of common stock of the Company not already beneficially owned by the Buyer Consortium in a "going-private" transaction (the "Transaction") for US$5.21 per share of common stock in cash. The proposal letter states that the Buyer Consortium expects that the Board will appoint a special committee of independent directors to consider the proposal and make a recommendation to the Board. The proposal letter also states that the Buyer Consortium will not move forward with the proposed Transaction unless it is approved by such a special committee, and the proposed Transaction will be subject to a nonwaivable condition requiring approval by majority shareholder vote of shareholders other than the Buyer Consortium members. The Buyer Consortium currently beneficially owns approximately 74% of the issued and outstanding shares of common stock of the Company on a fully diluted and as-converted basis. The Board has established a special committee (the "Special Committee") of disinterested directors to consider the proposal The Special Committee is composed of the following independent directors of the Company:, Mr. Feng Li, and Mr. Linyuan Zha, with Mr. Li serving as chairperson of the Special Committee. The Special Committee will be responsible for evaluating, negotiating and recommending to the Board any proposals involving a strategic transaction by the Company with one or more third parties.
There can be no assurance that any definitive offer will be made, that any agreement will be executed or that a transaction with the Buyer Consortium or any other transaction will be approved or consummated. The process of consummating the proposed Transaction or any other significant strategic transaction involving our company could cause disruptions in our business and divert our management's attention and other resources from day-to-day operations, which could have an adverse effect on our business, results of operations and financial condition. Additionally, current and prospective employees and members of management could become uncertain about their future roles with us in the event the Transaction is completed. This uncertainty could adversely affect our ability to retain and hire employees and members of management.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Physical Plant and Production
Our executive offices are located in Chaoyang District, Beijing, the capital city of China. Our owned facility includes two-floor office space (2,331.90 square meters) and 5-parking-lot spaces (288.17 square meters). The Company obtained the title of such offices and parking lots on April 28, 2017.
We had production facilities located in the Harbin Development Zone in the City of Harbin, which is the provincial capital of Heilongjiang Province in northeast China. Our owned facility has a total usable area of 7,359 square meters (79,212 square feet). The facility includes six buildings with one office building attached by one workshop, one storage room, one transformer station, and two guard rooms. All the Company's properties are insured by China Pacific Property Insurances Co., Ltd.
The land on which our owned facility in Heilongjiang is located measures 14,715 square meters (158,391 square feet). The land use right was issued to HLJ Xinda Group by the City of Harbin and will expire in 2053. In October 2017, HLJ Xinda Group gained additional 95,758 square meters (1,030,734 square feet) land use right by the City of Harbin and will expire in 2067. We also have a long-term lease of the production facilities with Harbin Xinda High-Tech Co., Ltd ("Xinda High-Tech"). The land on which our leased facility is located measures 16,537 square meters (178,009 square feet). The facility we rent includes three buildings with two office buildings attached by one workshop respectively and one guard room.
The two lands on which our owned facility in Sichuan are located measures 287,503 square meters (3,094,657 square feet) and 23,859 square meters (256,816 square feet), respectively. The land use right were issued to Sichuan Xinda by the City of Nanchong and will expire in 2065 and 2085, respectively.
The land on which our owned facility in Dubai is located measures 52,530 square meters (565,428 square feet) issued to Dubai Xinda by Department of Planning & Development, Ports, Customs & Free Zone, Government of Dubai.
On May 9, 2011, Harbin Xinda, a subsidiary of China XD, entered into a purchase agreement with Harbin Shengtong Engineering Plastics Co. Ltd. ("Harbin Shengtong") as amended on June 1, 2011. The legal representative of Harbin Shengtong is a former employee of Harbin Xinda. Pursuant to the purchase agreement, Harbin Xinda will purchase from Harbin Shengtong land use rights and a plant consisting of five workshops, a building and certain ancillary facilities (the "Project"). Harbin Shengtong is responsible to complete the construction of the plant and workshops according to Harbin Xinda's specifications. Once the Project is fully completed and accepted by Harbin Xinda, Harbin Shengtong shall transfer titles of the Project to Harbin Xinda. During the year ended December 31, 2014, the Project was completed. The total cost for the Project was RMB501.5 million. The titles of the five workshops are expected to transfer to the Company in 2018.
As of December 31, 2017, we had approximately 608,500 metric tons of production capacity across 144 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems, including the three additional workshops with 30 production lines completed the trial-run in December of 2012 and further expanded our annual capacity potential by approximately 135,000 metric tons and support our future growth in 2013
. In December 2013, we broke ground on the construction of our fourth production plant in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total domestic installed production capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production plant. Sichuan Xinda has supplied to its customers since 2013, mainly backed by production capacity in our Harbin production plant. We installed 50 production lines with production capacity of 216,000 metric tons in the second half of 2016 in our Sichuan plant as of December 31, 2017. There is still construction ongoing on the site of our Sichuan plant to be expected to be completed
by the end of the second quarter of 2018
.
In order to meet the increasing demand from our customer in the ROK and to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total, including leased 10,000 square meters, and purchased 20,206 and 22,324 square meters on January 25, 2015, June 28, 2016 and September 21, 2016, respectively, from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, the Company is planning to complete installing 45 production lines with 12,000 metric tons of annual production capacity by the end of April, 2018, and additional 50 production lines with 13,000 metric tons of annual production capacity by end of 2018, bringing total installed production capacity in Dubai Xinda to 25,000 metric tons, targeting high-end products for the overseas market.
In July 2017, the HLJ Xinda Group launched new industrial
development project with the Management Committee of Harbin Economic - Technological Development Zone. It
includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect will be completed by the end of June 2018. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be completed by the end of July 2019.
The process of manufacturing modified plastic consists of modifying a standard plastic (polypropylene, ABS, PA6, PA66, etc.) by adding various agents and additives that will alter the physical and/or functional characteristics of the plastic. Catalysts are added that facilitate the desired chemical reactions, all of which occurs in a specially designed equipment. The resulting plastics are then extracted from the equipment by an extraction technique that is proprietary to HLJ Xinda Group. Further processing may involve additional blending, extrusion, cooling and cutting, homogenizing and packing, as needed to meet the customer's requirements.
In addition to its unique extraction technology, HLJ Xinda Group has developed its own techniques and equipment for many of the steps in the production process. Among the aspects of production for which HLJ Xinda Group has proprietary technology are product formulae, a technique for combining extruder screws, and certain stuffing techniques
.
With these unique formulas and techniques, our products can satisfy clients' standard requirements at a lower cost than competitive products.
Our facilities have been certified under the following international qualifications criteria: ISO9001: 2000 quality management system certification and ISO/TS16949: 2002 international auto parts industry quality systems certification. The government of China has designated HLJ Xinda Group as a National Torch Project and a National Spark Plan Project, and has given HLJ Xinda Group the "Most Valuable High Tech in China" award. HLJ Xinda Group is an executive member of the Council of the Chinese Automobile Parts Association, a member of the Chinese Modified Plastics Professional Committee, a member of the Chinese Plastics Engineering Committee and Heilongjiang Province Postdoctoral Workstation.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its officers and directors were named as defendants in two putative securities class action lawsuits filed in the United States District Court for the Southern District of New York. These actions, which alleged violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, were filed on July 15, 2014 and July 16, 2014 and are captioned Yang v. Han, et al., No. 14-cv-5308 (GBD) and Tompkins v. China XD Plastics Company Ltd., et al., No. 14-cv-5359 (GBD), respectively. On November 21, 2014, the Court consolidated the actions and appointed lead plaintiffs. On February 17, 2015, the lead plaintiffs filed a Consolidated Class Action Complaint on behalf of a class of all persons other than the defendants who purchased the common stock of China XD Plastics Company Limited between March 25, 2014 and July 10, 2014, both dates inclusive. Specifically, the lead plaintiffs alleged that the Company and two of its officers made false or misleading statements and/or omitted material facts in the Company's Form 10-K for the year ended December 31, 2013 and the Company's Form 10-Q for the first quarter ended March 31, 2014. They also asserted that the individual defendants are liable because they allegedly controlled the Company during the time the allegedly false and misleading statements and omissions were made. The lead plaintiffs sought damages in unspecified amounts. On April 3, 2015, the Company moved to dismiss the Consolidated Class Action Complaint. On March 23, 2016, the Court entered an Opinion and Order dismissing the Consolidated Class Action Complaint without prejudice. On May 6, 2016, the lead plaintiffs moved the Court for leave to amend the Consolidated Class Action Complaint. On June 24, 2016, the Company filed its opposition to the lead plaintiffs' motion. On August 8, 2016, in conjunction with filing the reply brief in support of their motion, the lead plaintiffs moved to strike certain documents referred to in the Company's opposition. The Company filed its opposition to the lead plaintiffs' motion to strike on September 16, 2016. The lead plaintiffs filed their reply on October 7, 2016. On March 8, 2017, the Court entered an Order in the Company's favor denying the lead plaintiffs' motion for leave to amend and denying the lead plaintiffs' motion to strike. The time for the lead plaintiffs to appeal the dismissal of their lawsuits has expired.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Prior to November 27, 2009, our common stock was quoted on the OTC Bulletin Board ("OTCBB") under the symbol "CXDC". On November 27, 2009, we terminated our listing on OTCBB and listed our common stock on NASDAQ Global Market, also under the symbol "CXDC." The following table sets forth, for the indicated periods, the high and low sales prices for our common stock, as reported on NASDAQ.
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Common Stock
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High
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|
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Low
|
|
Fiscal Year Ending December 31, 2017
|
|
|
|
|
|
|
First Quarter
|
|
|
5.03
|
|
|
|
3.95
|
|
Second Quarter
|
|
|
4.95
|
|
|
|
4.65
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|
Third Quarter
|
|
|
4.80
|
|
|
|
4.50
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|
Fourth Quarter
|
|
|
5.00
|
|
|
|
4.58
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|
|
|
|
|
|
|
|
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Fiscal Year Ending December 31, 2016
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|
|
|
|
|
|
|
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First Quarter
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|
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4.13
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|
|
|
2.70
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Second Quarter
|
|
|
3.86
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|
|
|
2.82
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Third Quarter
|
|
|
5.36
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|
|
|
3.21
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Fourth Quarter
|
|
|
4.70
|
|
|
|
3.85
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|
Number of Holders
As of March 9, 2018, there were 456 record holders of our common stock.
Interwest Transfer Company Inc. is the registrar and transfer agent for our common stock. Its address is 1981 Murray Holladay Road, Suite 100, Salt Lake City, UT 84117 USA, telephone: (801) 272-9294.
Dividend Policy
We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain our earnings, if any, to provide funds for the expansion of our business. Future dividend policy will be determined periodically by the Board of Directors based upon conditions then existing, including our earnings and financial condition, capital requirements and other relevant factors.
Under current PRC regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.
Securities Authorized for Issuance under Equity Compensation Plans
The information set forth in Item 12 of this Annual Report on Form 10-K is incorporated herein by reference.
Stockholder Return Performance Graph
The following Performance Graph and related information shall not be deemed "soliciting material" or deemed to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that we specifically incorporate such information by reference into such filing.
The following graph compares the change in cumulative total stockholders' return on our common stock with (a) NASDAQ Composite Index and (b) Russell Small Cap Completeness Index, for each year from December 31, 2012 through December 31, 2017. The graph assumes an initial investment of $100 at the closing price on December 31, 2012 and assumes all dividends (if any) were reinvested. The figures for the chart and graph set forth below have been calculated based on the closing prices on the last trading day on the NASDAQ Global Market for each period indicated.
Adjusted Closing Stock Price Cumulative Change
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12/31/2017
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12/31/2016
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12/31/2015
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12/31/2014
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|
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12/31/2013
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|
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12/31/2012
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China XD Plastics Co. Ltd.
|
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$
|
120
|
|
|
$
|
105
|
|
|
$
|
116
|
|
|
$
|
142
|
|
|
$
|
138
|
|
|
$
|
100
|
|
Nasdaq Composite Index
|
|
$
|
229
|
|
|
$
|
178
|
|
|
$
|
166
|
|
|
$
|
157
|
|
|
$
|
138
|
|
|
$
|
100
|
|
Russell Small Cap Completeness Index
|
|
$
|
193
|
|
|
$
|
158
|
|
|
$
|
138
|
|
|
$
|
145
|
|
|
$
|
1137
|
|
|
$
|
100
|
|
*$100 invested on 12/31/2012 in stock or index, including reinvestment of dividends. Data points are the last day of each fiscal year for the Company's common stock and December 31 of each year for indexes.
ITEM 6. SELECTED FINANCIAL DATA
The tables below set forth selected historical financial information of the Company that has been derived from the audited financial statements as of December 31, 2013, 2014, 2015, 2016 and 2017, and for the last five years in the period ended December 31, 2017. The selected historical financial data should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations", included elsewhere in this Form 10-K.
(in millions, except number of shares and per share amounts).
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2017
|
|
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2016
|
|
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2015
|
|
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2014
|
|
|
2013
|
|
Revenues
|
|
$
|
1,290.4
|
|
|
$
|
1,201.7
|
|
|
$
|
999.2
|
|
|
$
|
1,110.6
|
|
|
$
|
1,050.8
|
|
Net income
|
|
$
|
31.6
|
|
|
$
|
101.6
|
|
|
$
|
83.7
|
|
|
$
|
120.7
|
|
|
$
|
133.8
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- basic
|
|
$
|
0.48
|
|
|
$
|
1.54
|
|
|
$
|
1.27
|
|
|
$
|
1.85
|
|
|
$
|
2.08
|
|
- diluted
|
|
$
|
0.48
|
|
|
$
|
1.54
|
|
|
$
|
1.27
|
|
|
$
|
1.85
|
|
|
$
|
2.08
|
|
Shares used in computing earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- basic
|
|
|
49,598,609
|
|
|
|
49,418,188
|
|
|
|
49,225,566
|
|
|
|
48,833,434
|
|
|
|
47,794,028
|
|
- diluted
|
|
|
49,598,609
|
|
|
|
49,419,197
|
|
|
|
49,229,460
|
|
|
|
48,833,434
|
|
|
|
47,794,028
|
|
Total cash, cash equivalents, restricted cash and time deposits
|
|
|
608.1
|
|
|
|
456.4
|
|
|
|
408.4
|
|
|
|
296.5
|
|
|
|
390.5
|
|
Total Assets
|
|
|
2,544.1
|
|
|
|
2,126.5
|
|
|
|
1,752.0
|
|
|
|
1,299.7
|
|
|
|
1,075.9
|
|
Long term bank loans
|
|
|
114.2
|
|
|
|
249.5
|
|
|
|
107.5
|
|
|
|
174.3
|
|
|
|
-
|
|
Notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
145.6
|
|
|
|
148.6
|
|
|
|
-
|
|
Total liabilities
|
|
|
1,733.7
|
|
|
|
1,394.7
|
|
|
|
1,076.4
|
|
|
|
676.8
|
|
|
|
566.0
|
|
Redeemable Series D Convertible Preferred Stock
|
|
|
97.6
|
|
|
|
97.6
|
|
|
|
97.6
|
|
|
|
97.6
|
|
|
|
97.6
|
|
Total Stockholder's equities
|
|
|
712.8
|
|
|
|
634.3
|
|
|
|
578.0
|
|
|
|
525.3
|
|
|
|
412.3
|
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the "SEC") or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in this Item 7, "Management's Discussion and Analysis or Plan of Operation," regarding our future plans, strategies and expectations are forward-looking statements. In some cases these statements are identifiable through the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "proje
ct,"
"target," "can," "could," "may," "should," "will," "would" and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). You are cautioned not to place undue reliance on these forward-looking statements because these forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Thus, our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: global and domestic economic conditions generally and the automotive modified plastics market specifically, legislative or regulatory changes that affect our business, including changes in environmental regulations and control policies over the domestic automotive industry, the availability of working capital, the introduction of competing products and other risk factors described herein. These risks and uncertainties, together with the other risks described from time-to-time in reports and documents that we filed with the SEC should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
General
China XD is one of the leading specialty chemical companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China, and to a lesser extent, in Dubai, UAE. Through our wholly-owned operating subsidiaries in China and UAE we develop modified plastics using our proprietary technology, manufacture and sell our products primarily for use in the fabrication of automobile parts and components.
We have 444 certifications from manufacturers in the automobile industry as of December 31, 2017. We are the only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang province. Our Research and Development (the "R&D") team consists of 522 professionals and 11 consultants, including one consultant who is a member of Chinese Academy of Engineering. As a result of the integration of our academic and technological expertise, we have a portfolio of 442 patents, 31 of which we have obtained the patent rights and the remaining 411 of which we have applications pending in China as of December 31, 2017.
Our products include twelve categories: Modified Polypropylene (PP), Modified Acrylonitrile Butadiene Styrene (ABS), Modified Polyamide 66 (PA66), Modified Polyamide 6 (PA6), Modified Polyoxymethylenes (POM), Modified Polyphenylene Oxide (PPO), Plastic Alloy, Modified Polyphenylene Sulfide (PPS), Modified Polyimide (PI), Modified Polylactic acid (PLA), Poly Ether Ether Ketone (PEEK), and Polyethylene (PE).
The Company's products are primarily used in the production of exterior and interior trim and functional components of 30 automobile brands and 92 automobile models manufactured in China, including Audi, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, Volvo, Ford, Citroen, Jinbei, VW Passat, Golf, Jetta, etc. Our research center is dedicated to the research and development of modified plastics, and benefits from its cooperation with well-known scientists from prestigious universities in China. We operate three manufacturing plants in Harbin, Heilongjiang in the PRC. As of December 31, 2017, in Harbin, Heilongjiang Province, we had approximately 390,000 metric tons of production capacity across 84 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwanese conveyer systems. In December 2013, we broke ground on the construction of our fourth production plant in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total domestic installed production capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production plant. Sichuan Xinda has supplied to its customers since 2013, mainly backed by production capacity in our Harbin production plant. We installed 50 production lines in the second half of 2016 in our Sichuan plant with production capacity of
216,000
metric tons during the year of 2017.
As of December 31, 2017, there is still construction ongoing on the site of our Sichuan plant which is to be expected to be completed by the end of the second quarter of 2018. In order to meet the increasing demand from our customer in the ROK and to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total, including one leased 10,000 square meters, and two purchased 20,206 and 22,324 square meters on January 25, 2015, June 28, 2016 and September 21, 2016, respectively, from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, the Company is planning to complete installing 45 production lines with 12,000 metric tons of annual production capacity by the end of April, 2018, and an additional 50 production lines with 13,000 metric tons of annual production capacity by end of 2018, bringing total installed production capacity in Dubai Xinda to
25,000 metric tons
, targeting high-end products for the overseas market.
In July 2017, the HLJ Xinda Group launched new industrial
development project with the Management Committee of Harbin Economic - Technological Development Zone. It
includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect will be completed by the end of June 2018. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be completed by the end of July 2019.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities; (2) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (3) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of current business and other conditions and our expectations regarding the future based on available information which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
When reading our consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the application of such policies, and the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.
Long-Lived Assets
Our long-lived assets include property, plant and equipment and land use rights.
We depreciate and amortize our property, plant and equipment and land use rights, using the straight-line method of accounting over the estimated useful lives of the assets. We make estimates of the useful lives of property, plant and equipment, including the salvage values, and land use rights in order to determine the amount of depreciation and amortization expense to be recorded during each reporting period. The estimated useful life is the period over which the long-lived assets are expected to contribute directly or indirectly to the future cash flows of the Company.
We evaluate long-lived assets, including property, plant and equipment, and land use rights for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We assess recoverability by comparing carrying amount of a long-lived asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, we recognize an impairment charge based on the amount by which the carrying amount exceeds the estimated fair value of the asset or asset group. We estimate the fair value of the asset or asset group through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Assets to be disposed are reported at the lower of carrying amount or fair value less costs to sell, and are no longer depreciated.
No impairment on our long-lived assets was recognized in 2017, 2016 and 2015.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In establishing the required allowance, we consider historical losses adjusted to take into account current market conditions, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to our customers.
We extend unsecured credit to customers with good credit history. We review our accounts receivable on a regular basis to determine if the bad debt allowance is adequate at each year-end. We have not experienced any material write-offs in history.
Note 1 – Description of business and significant concentrations and risks
China XD Plastics Company Limited ("China XD") is a holding company that is incorporated in Nevada of the United States of America. China XD and its subsidiaries (collectively referred to hereinafter as the "Company"), is primarily engaged in the research and development, production and sales of modified plastics products. The plastics products, which are manufactured by the Company, are primarily for use in the fabrication of automobile parts and components and secondarily for applications in high-speed railway, airplanes and ships and consist of the following major products categories: Polypropylene ("PP"), Acrylonitrile Butadiene Styrene ("ABS"), Polyamid6 ("PA6"), Polyamid66 ("PA66"), Polyformaldehyde ("POM"), Polyphenylene Oxide ("PPO"), Plastic Alloy, Polyphenylene Sulfide ("PPS"), Poly Imide ("PI"), Polylactide Acid ("PLA") , Poly Ether Ether Ketone ("PEEK") and Polyethylene ("PE") .
The Company's operations are primarily conducted through its subsidiaries in the People's Republic of China ("PRC") and Dubai, United Arab Emirates ("UAE"). The Company's other subsidiaries in the US, the British Virgin Islands ("BVI") and Hong Kong Special Administrative Region ("SAR"), do not have significant operations.
Sales concentration
The Company sells its products primarily through approved distributors in the PRC. To a lesser extent, the Company also sells its products to an overseas customer in the Republic of Korea (the "ROK"). The Company's sales are highly concentrated. Sales to distributors, which individually exceeded 10% of the Company's revenues, for the years ended December 31, 2017, 2016 and 2015, are as follows:
(in millions, except percentage)
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
US$
|
|
|
%
|
|
|
US$
|
|
|
%
|
|
|
US$
|
|
|
%
|
|
Distributor A, located in PRC
|
|
|
186.8
|
|
|
|
14.5
|
%
|
|
|
179.6
|
|
|
|
14.9
|
%
|
|
|
192.0
|
|
|
|
19.2
|
%
|
Distributor B, located in PRC
|
|
|
136.5
|
|
|
|
10.6
|
%
|
|
|
149.4
|
|
|
|
12.4
|
%
|
|
|
155.3
|
|
|
|
15.5
|
%
|
Distributor C, located in PRC
|
|
|
106.5
|
|
|
|
8.3
|
%
|
|
|
127.0
|
|
|
|
10.6
|
%
|
|
|
127.3
|
|
|
|
12.7
|
%
|
Distributor D, located in PRC
|
|
|
88.3
|
|
|
|
6.8
|
%
|
|
|
114.5
|
|
|
|
9.5
|
%
|
|
|
106.5
|
|
|
|
10.7
|
%
|
Distributor E, located in PRC
|
|
|
0.1
|
|
|
|
0.0
|
%
|
|
|
55.9
|
|
|
|
4.7
|
%
|
|
|
112.1
|
|
|
|
11.2
|
%
|
Total
|
|
|
518.2
|
|
|
|
40.2
|
%
|
|
|
626.4
|
|
|
|
52.1
|
%
|
|
|
693.2
|
|
|
|
69.3
|
%
|
The Company expects revenues from these distributors to continue to represent a substantial portion of its revenue in the future. Any factor adversely affecting the automobile industry in the PRC, or the business operations of these customers will have a material effect on the Company's business, financial position and results of operations.
Purchase concentration of raw materials and equipment
The principal raw materials used for the Company's production of modified plastics products are plastic resins, such as polypropylene, ABS and nylon. The Company purchases substantially all of its raw materials through a limited number of distributors. Raw material purchases from these distributors, which individually exceeded 10% of the Company's total raw material purchases, accounted for approximately
35.9% (three distributors),
67.3% (five distributors) and 80.0% (seven distributors) of the Company's total raw material purchases for the years ended December 31, 2017, 2016 and 2015, respectively. Management believes that other suppliers could provide similar raw materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect the Company's business, financial position and results of operations.
The Company purchased equipment from two equipment distributors, which accounted for 91.0% and 99.8% of the Company's total equipment purchases for the years ended December 31, 2016 and 2015, respectively. The Company didn't have equipment purchase from these two major equipment distributors for the year ended December 31, 2017. Management believes that other suppliers could provide similar equipment on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which could adversely affect the Company's business, financial position and results of operations.
Cash concentration
Cash and cash equivalents, restricted cash, time deposits and other non-current assets mentioned below maintained at banks consist of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
US$
|
|
|
US$
|
|
RMB denominated bank deposits with:
|
|
|
|
|
|
|
Financial Institutions in the PRC
|
|
|
605,125,974
|
|
|
|
464,427,328
|
|
Financial Institutions in Hong Kong Special Administrative Region ("Hong Kong SAR")
|
|
|
8280
|
|
|
|
7,946
|
|
U.S. dollar denominated bank deposits with:
|
|
|
|
|
|
|
|
|
Financial Institution in the U.S.
|
|
|
121,756
|
|
|
|
20,192
|
|
Financial Institutions in the PRC
|
|
|
17,772
|
|
|
|
18,025
|
|
Financial Institution in Hong Kong SAR
|
|
|
1,895,508
|
|
|
|
1,629,199
|
|
Financial Institution in Macau Special Administrative Region ("Macau SAR")
|
|
|
55,206
|
|
|
|
1,810
|
|
Financial Institution in Dubai, UAE
|
|
|
879,012
|
|
|
|
139,201
|
|
HK dollar denominated bank deposits with:
|
|
|
|
|
|
|
|
|
Financial institution in Hong Kong SAR
|
|
|
131
|
|
|
|
148
|
|
Dirham denominated bank deposits with:
|
|
|
|
|
|
|
|
|
Financial institution in Dubai, UAE
|
|
|
11,043
|
|
|
|
53,647
|
|
The bank deposits with financial institutions in the PRC are insured by the government authority up to RMB500,000. The bank deposits with financial institutions in the Hong Kong SAR are insured by the government authority up to HK$500,000. The bank deposits with financial institutions in the Macau SAR are insured by the government authority up to MOP$500,000. The bank deposits with financial institutions in the Dubai, UAE are not insured by the government authority. Total bank deposits amounted to $1,505,747 and $1,207,996 are insured as of December 31, 2017 and December 31, 2016, respectively. The Company has not experienced any losses in uninsured bank deposits and does not believe that it is exposed to any significant risks on cash held in bank accounts. To limit exposure to credit risk, the Company primarily places bank deposits with large financial institutions in the PRC, Hong Kong SAR, Macau SAR and Dubai, UAE with acceptable credit rating.
Note 2 – Summary of significant accounting policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
(b) Consolidation
The accompanying consolidated financial statements include the financial statements of China XD and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
(c) Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the recoverability of the carrying amounts of property, plant and equipment, the realizability of inventories, the useful lives of property, plant and equipment, the collectability of accounts receivable, the fair values of stock-based compensation awards and the accruals for tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
(d) Foreign Currency
The Company's reporting currency is the U.S. dollar (US$). The functional currency of China XD Plastics and its subsidiaries in the United States, BVI, Hong Kong and Dubai, UAE is the US$. The functional currency of China XD's subsidiaries in the PRC is Renminbi (RMB).
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the applicable exchange rates at the balance sheet date. The resulting exchange differences are recorded in foreign currency exchange gains (losses) in the consolidated statements of comprehensive income.
Assets and liabilities of subsidiaries with functional currencies other than US$ are translated into US$ using the exchange rate on the balance sheet date. Revenues and expenses are translated into US$ at average rates prevailing during the reporting period. The differences resulting from such translation are recorded as a separate component of accumulated other comprehensive loss within stockholders' equity.
Since the RMB is not a fully convertible currency, all foreign exchange transactions involving RMB must take place either through the People's Bank of China or other institutions authorized to buy and sell foreign exchange.
(e) Cash and cash equivalents, time deposits and restricted cash
Cash and cash equivalents consists of cash on hand, cash in bank and interest-bearing certificates of deposit with an initial term of three months or less when purchased.
Time deposits represent certificates of deposit with initial terms of six or twelve months when purchased. As of December 31, 2017 and 2016, the Company's time deposits bear a weighted average interest rate of 1.3% and 1.3% per annum, respectively.
Cash deposits in bank that are restricted as to withdrawal or usage for up to 12 months are reported as restricted cash in the consolidated balance sheets and excluded from cash and cash equivalents in the consolidated statements of cash flows. Cash deposits of nil and US$9,917,832 as of December 31, 2017 and 2016 that are restricted for period beyond 12 months from the balance sheet date are included in other non-current assets in the consolidated balance sheets and also excluded from cash and cash equivalents in the consolidated statements of cash flows.
Short-term bank deposits that are pledged as collateral for bills payable relating to purchases of raw materials are reported as restricted cash and amounted to US$65,766,735 and US$33,673,057 as of December 31, 2017 and 2016, respectively. Upon maturity and repayment of the bills payable, which is generally within 6 months, the cash becomes available for use by the Company. The cash will be available for use by the Company 90 days from the issuance of the letter of credit. The cash flows from the pledged bank deposits, which relate to purchases of raw materials, are reported within cash flows from operating activities in the consolidated statements of cash flows.
Short-term bank deposits that are pledged as collateral for short-term and long-term bank borrowings are reported as restricted cash and amounted to US$59,884,913 and US$69,816,345 as of December 31, 2017 and 2016, respectively. Long-term bank deposits that are pledged as collateral for issuance of letter of guarantee are reported as other non-current assets and amounted to nil and US$9,917,832 as of December 31, 2017 and 2016, respectively. The cash flows from such bank deposits are reported within cash flows from financing activities in the consolidated statements of cash flows.
Short-term bank deposits that are related to government grant are reported as restricted cash and amounted to US$1,537,935 and nil as of December 31, 2017 and December 31, 2016, respectively. On February 11, 2017, the Company entered into a fund support agreement with the People's Government of Shunqing District, Nanchong City, Sichuan Province, pursuant to which the Company was granted RMB10 million (equivalent to US$1.5 million) to support the construction of the Sichuan plant. Such amount has been received in full in the Company's bank account with reimbursement be subject to the Government's preapproval and will be released by the Government when the construction progress of the plant is 60%. Such balance is reported as restricted cash.
Short-term bank deposits that are pledged as collateral for foreign currency option contract are reported as restricted cash and amounted to US$2,509,871 and nil as of December 31, 2017 and December 31, 2016, respectively. The cash flows from such bank deposits are reported within operating activities in the consolidated statements of cash flows.
(f) Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. In establishing the required allowance, management considers historical losses, the amount of accounts receivables in dispute, the accounts receivables aging and the customers' payment patterns. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
(g) Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average cost method. Work-in-progress and finish goods comprise direct materials (including purchasing, receiving and inspection costs), direct labor and an allocation of related manufacturing overhead based on normal operating capacity.
(h) Long-lived Assets
Property, plant and equipment
Property, plant and equipment are initially recorded at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. The estimated useful lives of property, plant and equipment are as follows:
|
Estimated
Useful Life
|
Workshops and buildings
|
39 years
|
Machinery, equipment and furniture
|
5-10 years
|
Motor vehicles
|
5 years
|
An appropriate allocation of depreciation expense of property, plant and equipment attributable to manufacturing activities based on normal capacity is capitalized as part of the cost of inventory, and expensed in cost of revenues when the inventory is sold. Costs incurred in the construction of property, plant and equipment, including an allocation of interest expense incurred, are capitalized and transferred into their respective asset category when the assets are ready for their intended use, at which time depreciation commences. Ordinary maintenance and repairs are charged to expenses as incurred, while replacements and betterments are capitalized. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value of the item disposed and proceeds realized thereon.
Land Use Rights
A land use right in the PRC represents an exclusive right to occupy, use and develop a piece of land during the contractual term of the land use right. The cost of a land use right is usually paid in one lump sum at the date the right is granted. The prepayment usually covers the entire period of the land use right. The lump sum advance payment is capitalized and recorded as land use right and then charged to expense on a straight-line basis over the period of the right, which is normally 50 years.
Amortization expense of land use rights was US$522,153, US$468,007 and US$411,178 for the years ended December 31, 2017, 2016 and 2015, respectively, and is included in general and administrative expenses.
(i) Impairment of Long-lived Assets
Long-lived assets, such as property, plant and equipment, and land use rights, are reviewed for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of a long-lived asset or asset group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying value of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount that the carrying value exceeds the estimated fair value of the asset or asset group. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary. Assets to be disposed are reported at the lower of carrying amount or fair value less costs to sell, and are no longer depreciated.
No impairment of long-lived assets was recognized for any of the years presented.
(j) Derivative Financial Instruments
The Company recognizes all derivative instruments as either assets or liabilities at their respective fair values. Changes in the fair value of derivative instruments not designated for hedge accounting are recognized in earnings.
(k) Revenue Recognition
The Company sells its products primarily to approved distributors. Revenue is recognized when all of the following conditions are met: persuasive evidence of an arrangement exists, delivery of the products has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured. These criteria as they relate to each of the following major revenue generating activities are described below.
Products sales
For sales in PRC, acceptance of delivery of the products by the distributors is evidenced by goods receipt notes signed by the distributors' customers (or end users). The distributors accept the products at the time they are delivered to the distributors' customers (or end customers). Delivery acceptance is evidenced by signed goods receipt notes. The Company has no remaining obligations after the distributors' acceptance of the products. Under the terms of the contracts or purchase orders between the Company and the distributors, the risks and rewards of ownership of the products is transferred to the distributor upon the signing of the goods receipt notes and the distributor has no rights to return the products (other than for defective products). For sales to ROK, delivery of the products occurs at the point in time the product is delivered to the named port of shipment, which is when the risks and rewards of ownership are transferred to the customer. For the years ended December 31, 2017, 2016 and 2015, sales returns were minimal.
The selling price, which is specified in the sales contracts or purchase orders, is fixed. Under the terms of the sales contract, upon the sale of the products to the distributors and the signing of the good receipts notes, the Company has the legal enforceable right to receive full payment of the sales price. The distributors' obligation to pay the Company is not dependent on the distributors selling the products or collecting cash from their customers (or end customers).
The Company's sales are net of value added tax ("VAT") and business tax collected on behalf of tax authorities in respect of product sales. VAT and business tax collected from customers, net of VAT paid for purchases, is recorded as a liability in the consolidated balance sheets until it is paid to the tax authorities.
(l) Cost of revenues
Cost of revenues represents costs of raw materials (including purchasing, receiving and inspection costs), packaging materials, labor, utilities, depreciation and amortization of manufacturing facilities and warehouses, handling costs, outbound freight and inventory write-down. Depreciation and amortization of manufacturing facilities and warehouses attributable to manufacturing activities is capitalized as part of the cost of inventory, and expensed in costs of revenues when the inventory is sold.
(m) Selling, general and administrative expenses
Selling expenses represents primarily costs of payroll, benefits, commissions for sales representatives and advertising expenses. General and administrative expenses represents primarily payroll and benefits costs for administrative employees, rent and operating costs of office premises, depreciation and amortization of office facilities, and other administrative expenses.
(n) Research and Development Expense
Research and development costs are expensed as incurred.
(o) Government Grants
Government grants are recognized when there is reasonable assurance that the Company will comply with the conditions attaching to them and the grants will be received. Government grants for the purpose of giving immediate financial support to the Company with no future related costs are recognized as other income in the Company's consolidated statements of comprehensive income. Government grants related to the acquisition of assets are recorded as deferred income on the consolidated balance sheets when the grants become receivable, and recognized as other income in the consolidated statements of comprehensive income on a straight-line basis over the estimated useful lives of those assets.
(p) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates or tax laws on deferred income tax assets and liabilities is recognized in the consolidated statements of comprehensive income in the period the change in tax rates or tax laws is enacted. A valuation allowance is provided to reduce the carrying amount of deferred income tax assets if it is considered more likely than not that some portion or all of the deferred income tax assets will not be realized.
The Company recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of interest expense, and general and administration expenses, respectively in the consolidated statements of comprehensive income.
(q) Bills Payable
Bills payable represent bills issued by financial institutions to the Company's raw material suppliers. The Company's suppliers receive payments from the financial institutions upon maturity of the bills and the Company is obliged to repay the face value of the bills to the financial institutions.
(r) Employee Benefit Plans
Pursuant to relevant PRC regulations, the Company is required to make contributions to various defined contribution plans organized by municipal and provincial PRC governments. The contributions are made for each PRC employee at rate of approximately 40% on a standard salary base as determined by local social security bureau. Contributions to the defined contribution plans are charged to the consolidated statements of comprehensive income when the related service is provided. For the years ended December 31, 2017, 2016 and 2015, the costs of the Company's contributions to the defined contribution plans amounted to US$6,223,903, US$3,878,202, and US$1,788,552, respectively.
For the years ended December 31, 2017, 2016 and 2015, 64%, 70% and 77% of costs of employee benefits were recorded in general and administration expenses, respectively, with the remaining portion of costs of employee benefits in selling expenses, research and development expenses and cost of revenues each year.
The Company has no other obligation for the payment of employee benefits associated with these plans beyond the contributions described above.
(s) Stock Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the cost over the period during which the employee is required to provide service in exchange for the award, which generally is the vesting period. The amount of cost recognized is adjusted to reflect any expected forfeitures prior to vesting. The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date.
(t) Commitments and Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and non-income tax matters. An accrual for a loss contingency is recognized when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.
(u) Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income attributable to common stockholders by the weighted average number of common stock outstanding during the year using the two-class method. Under the two-class method, net income attributable to common stockholders is allocated between common stock and other participating securities based on participating rights in undistributed earnings. Nonvested shares and redeemable Series D convertible preferred stock are participating securities since the holders of these securities participate in dividends on the same basis as common stockholders. Diluted EPS is calculated by dividing net income attributable to common stockholders as adjusted for the effect of dilutive common stock equivalent, if any, by the weighted average number of common stock and dilutive common stock equivalent outstanding during the year. Potential dilutive securities are not included in the calculation of diluted earnings per share if the impact is anti-dilutive.
(v) Segment reporting
The Company uses the management approach in determining reportable operating segments. The management approach consider the internal reporting used by the Company's chief operating decision maker for making operating decisions about the allocation of resources of the segment and the assessment of its performance in determining the Company's reportable operating segments. Management has determined that the Company has one operating segment, which is the modified plastics segment.
(w) Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
-
Level 1
Inputs:
Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
-
Level 2
Inputs
: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
-
Level 3
Inputs
: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
-
The fair value of restricted cash and time deposits as of December 31, 2017 and 2016 are categorized as Level 2 measurement.
-
The fair value of foreign currency contracts as of December 31, 2017 is categorized as Level 3 measurement.
The Company did not have any financial assets and liabilities or nonfinancial assets and liabilities that are measured and recognized at fair value on a recurring or nonrecurring basis as of December 31, 2017 and 2016. Management used the following methods and assumptions to estimate the fair values of financial instruments at the balance sheet dates:
-
Short-term financial instruments, including cash and cash equivalents, restricted cash, time deposits, accounts receivable, amounts due from a related party, short-term bank loans, bills payable, accounts payable, amounts due to a related party and accrued expenses and other current liabilities- carrying amounts approximate fair values because of the short maturity of these instruments.
-
Long-term bank loans-fair value is based on the amount of future cash flows associated with each loan discounted at the Company's current borrowing rate for similar debt instruments of comparable terms. The carrying value of the long-term bank loans approximate their fair values as the long-term bank loans carry interest rates which approximate rates currently offered by the Company's banks for similar debt instruments of comparable maturities.
-
Derivative liabilities on foreign currency forward contracts-
fair values are determined using a discount cash flow model, which discounts the difference between the forward contract exchange rate from the quoted curve and the contract rate multiplied by the notional amounts. It considers the following significant inputs: risk-free rate and foreign exchange rate.
-
Derivative liabilities on foreign currency option contracts-fair values are determined using Black-Scholes model. It considers the following significant inputs: risk-free rate, foreign exchange rate and volatility.
(x) Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. The original effective date for ASU 2014-09 would have required the Company to adopt beginning in its first quarter of 2017. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year and permits early adoption as early as the original effective date of ASU 2014-09. The new revenue standard may be applied retrospectively to each prior period presented ("full retrospective method) or retrospectively with the cumulative effect recognized as of the date of adoption ("modified retrospective method"). The Company plans to apply the modified retrospective method to those contracts that are not completed contracts on January 1, 2018 upon adoption of ASU 2014-09. The Company has completed its evaluation by the end of 2017 and concluded that there is no impact on the retained earnings as of January 1, 2018 and there is no material impact on its consolidated financial statements and related disclosures as a result of the new adoption of the guidance.
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 is effective for public companies for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addressed and provided guidance for each of eight specific cash flow issues with the objective of reducing the existing diversity in practice. This standard will be effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has early adopted ASU 2016-15 on its consolidated financial statements and there was no impact as a result of the adoption.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard required that companies recognize the income tax consequences of an intra-entity transfer of an asset (other than inventory) when the transfer occurs. Current guidance prohibits companies from recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This standard will be effective for public companies for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The Company has early adopted ASU 2016-16 on its consolidated financial statements and there was no impact as a result of the adoption.
Effective January 1, 2017, the Company adopted the FASB ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The standard simplified certain aspects of the accounting for share-based payment transactions, including recognition of excess tax benefits and deficiencies, classification of awards and classification in the statement of cash flows and forfeitures. As a result of adoption, the Company elected to estimate the number of awards that are expected to vest. The adoption of this standard had no impact on the Company's consolidated financial statements.
Note 3 – Accounts receivable
Accounts receivable consists of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
US$
|
|
|
US$
|
|
Accounts receivable
|
|
|
298,909,440
|
|
|
|
410,087,666
|
|
Allowance for doubtful accounts
|
|
|
(40,456
|
)
|
|
|
(38,107
|
)
|
Accounts receivable, net
|
|
|
298,868,984
|
|
|
|
410,049,559
|
|
As of December 31, 2017 and 2016, the accounts receivable balances also include notes receivable in the amount of US$1,181,029 and US$374,296, respectively. As of December 31, 2017 and 2016,
US$99,526,978
and US
$63,301,966
respectively of accounts receivable are pledged for the short-term bank loans.
The following table provides an analysis of the aging of accounts receivable as of December 31, 2017 and 2016:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
US$
|
|
|
US$
|
|
Aging:
|
|
|
|
|
|
|
– current
|
|
|
259,870,056
|
|
|
|
373,108,359
|
|
– 1-3 months past due
|
|
|
8,299,000
|
|
|
|
36,941,200
|
|
– 4-6 months past due
|
|
|
30,699,928
|
|
|
|
-
|
|
– 7-12 months past due
|
|
|
-
|
|
|
|
-
|
|
– greater than one year past due
|
|
|
40,456
|
|
|
|
38,107
|
|
Total accounts receivable
|
|
|
298,909,440
|
|
|
|
410,087,666
|
|
The movements of the allowance for doubtful accounts are as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
US$
|
|
|
US$
|
|
Balance at the beginning of the year
|
|
|
(38,107
|
)
|
|
|
(40,631
|
)
|
Effect of foreign currency exchange rate changes
|
|
|
(2,349
|
)
|
|
|
2,524
|
|
Balance at the end of the year
|
|
|
(40,456
|
)
|
|
|
(38,107
|
)
|
Note 4 – Inventories
Inventories consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
US$
|
|
|
US$
|
|
Raw materials
|
|
|
405,731,330
|
|
|
|
270,605,823
|
|
Work in progress
|
|
|
18,876
|
|
|
|
157,953
|
|
Finished goods
|
|
|
15,986,476
|
|
|
|
10,175,232
|
|
Total inventories
|
|
|
421,736,682
|
|
|
|
280,939,008
|
|
There were no write down of inventories during the years ended December 31, 2017, 2016 and 2015.
Note 5 – Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
US$
|
|
|
US$
|
|
Receivables from Hailezi (i)
|
|
|
68,430,244
|
|
|
|
88,286,651
|
|
Receivables from Jiamu (ii)
|
|
|
-
|
|
|
|
20,628,987
|
|
Value added taxes receivables (iii)
|
|
|
6,840,774
|
|
|
|
4,814,920
|
|
Advances to suppliers (iv)
|
|
|
62,376,588
|
|
|
|
3,365,930
|
|
Interest receivable (v)
|
|
|
2,235,902
|
|
|
|
3,231,763
|
|
Others (vi)
|
|
|
4,442,643
|
|
|
|
4,982,058
|
|
Total prepaid expenses and other current assets
|
|
|
144,326,151
|
|
|
|
125,310,309
|
|
(i) In
September 2016, the Company's two subsidiaries, Heilongjiang Xinda Enterprise Group Company Limited ("HLJ Xinda Group") and Sichuan Xinda Enterprise Group Co., Ltd ("Sichuan Xinda") each entered into equipment purchase contracts with Harbin Hailezi Science and Technology Co., Ltd. ("Hailezi") to purchase production equipment, testing equipment and storage facility. Pursuant to the contracts with Hailezi, HLJ Xinda Group and Sichuan Xinda have prepaid RMB612.5 million (equivalent to US$88.3 million) as of December 31, 2016, which was recognized in investing activities in the statements of cash flows. In November 2016, the three parties agreed to terminate the contracts and Hailezi agreed to refund all the prepayment. As of December 31, 2017, Hailezi has refunded the above mentioned prepayment to HLJ Xinda Group and Sichuan Xinda.
In March 2017, Sichuan Xinda signed a series of contracts with Hailezi to purchase production equipment, and prepaid RMB1,728.9 million (equivalent to US$264.6 million ) to Hailezi, which was recognized in investing activities in the statements of cash flows. In June 2017, the two parties agreed to partially terminate the contracts and Hailezi agreed to refund the prepayment amounting to RMB1,704.9 million (equivalent to US$260.9 million) by the end of March 2018. For details, please refer to Note 7.
(ii) Sichuan Xinda prepaid RMB143.1 million (equivalent to US$20.6 million) to purchase equipment from Harbin Jiamu Import and Export Co., Ltd. ("Jiamu"), in November 2016. As Harbin Jiamu Import and Export Co., Ltd. had cancelled its registration and transferred its business to Harbin Jiamu Science and Technology Co., Ltd., Harbin Jiamu Import and Export Co., Ltd. agreed to refund the prepayment. As of
December
31, 2017, Harbin Jiamu Import and Export Co., Ltd. has refunded all the prepayment. The prepayments and refund were recognized in operating activities in the statements of cash flows.
The majority owner of Hailezi is also the majority owner of Harbin Jiamu Import and Export Co., Ltd and Harbin Jiamu Science
and Technology Co., Ltd. (collectedly "Jiamu Group"), which is one of the major equipment distributors.
(iii) Value added taxes receivables mainly represent the input taxes on purchasing equipment by Sichuan Xinda, which are to be net off with output taxes. Value added taxes receivables were recognized in operating activities in condensed consolidated statements of cash flows.
(iv) Advances to suppliers are the advances to purchase raw materials as of December 31, 2017.
(v) Interest receivable mainly represents interest income accrued from time deposits and restricted cash.
(vi) Others mainly include prepaid miscellaneous service fee, staff advance and prepaid rental fee.
Note 6 – Property, plant and equipment, net
Property, plant and equipment consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
US$
|
|
|
US$
|
|
Machinery, equipment and furniture
|
|
|
413,551,963
|
|
|
|
391,149,907
|
|
Motor vehicles
|
|
|
2,838,540
|
|
|
|
2,640,477
|
|
Workshops and buildings
|
|
|
146,595,501
|
|
|
|
119,503,091
|
|
Construction in progress
|
|
|
439,116,574
|
|
|
|
409,257,584
|
|
Total property, plant and equipment
|
|
|
1,002,102,578
|
|
|
|
922,551,059
|
|
Less: accumulated depreciation
|
|
|
(166,540,839
|
)
|
|
|
(116,187,367
|
)
|
Property, plant and equipment, net
|
|
|
835,561,739
|
|
|
|
806,363,692
|
|
The Company capitalized US$2,893,631, US$2,562,026, US$231,356 of interest costs as a component of the cost of construction in progress for the years ended December 31, 2017, 2016 and 2015 respectively.
Depreciation expense on property, plant and equipment was allocated to the following expense items:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
35,758,544
|
|
|
|
28,245,742
|
|
|
|
21,980,993
|
|
General and administrative expenses
|
|
|
2,723,839
|
|
|
|
1,808,284
|
|
|
|
1,531,389
|
|
Research and development expenses
|
|
|
4,047,893
|
|
|
|
3,720,126
|
|
|
|
3,615,758
|
|
Selling expenses
|
|
|
3,546
|
|
|
|
2,683
|
|
|
|
894
|
|
Total depreciation expense
|
|
|
42,533,822
|
|
|
|
33,776,835
|
|
|
|
27,129,034
|
|
Note 7 – Prepayments to equipment and construction suppliers
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Hailezi (i)
|
|
|
157,358,774
|
|
|
|
-
|
|
Shanghai Green River (ii)
|
|
|
16,572,489
|
|
|
|
-
|
|
Beijin Construction (iii)
|
|
|
10,001,333
|
|
|
|
4,324,636
|
|
Sichuan Construction (iv)
|
|
|
6,177,647
|
|
|
|
907,024
|
|
Samim Group FZE (v)
|
|
|
-
|
|
|
|
5,308,737
|
|
Sports City (vi)
|
|
|
-
|
|
|
|
2,859,952
|
|
Others
|
|
|
517,271
|
|
|
|
767,353
|
|
Total Prepayments to equipment and construction suppliers
|
|
|
190,627,514
|
|
|
|
14,167,702
|
|
(i) On September 26, 2016 and February 28, 2017, HLJ Xinda Group entered into equipment purchase contracts with Hailezi for a total consideration of RMB782.2 million (equivalent to US$119.7 million) to purchase storage facility and other equipment, which will be used for upgrading the storage system of warehouse located in Harbin, China. Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB621.6 million (equivalent to US$95.1 million) as of December 31, 2017. Due to a redesign of outdoor storage facility in June 2017,
HLJ Xinda Group
entered into a supplementary agreement with Hailezi, which decreased the original contract amount to RMB283.7 million (equivalent to US$43.4 million). Hailezi refunded RMB369.1 million (equivalent to US$56.5 million) to
HLJ Xinda Group
on June 22, 2017. The prepayment and refund were recognized in investing activities in the statements of cash flows
.
On July 21, 2017, HLJ Xinda Group entered into three investment agreements with the Management Committee of Harbin Economic- Technological Development Zone with respect to the industrial project for 300,000 metric tons of biological composite materials, the industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics and the industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory (the "HLJ Project"). In order to fulfill the agreements, HLJ Xinda Group entered into an equipment purchase contract with Hailezi to purchase production equipment in November 2017, which will be used for 100,000 metric tons of engineering plastics located in Harbin, for a consideration of RMB939.7 million (equivalent to US$143.8 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB751.8 million (equivalent to US$115.1 million) as of December 31, 2017.
On March 17, 2017, Sichuan Xinda entered into a definitive agreement with the People's Government of Shunqing District, Nanchong City of Sichuan Province for the production of 300,000 metric tons of bio-composite materials and additive manufacturing and 20,000 metric tons of functional masterbatch, a high-end color additive process in plastics manufacturing ("the Nanchong Project"). The Nanchong Project will be located in a land area of 250 mu (equivalent to 41.2 acres), with 215 mu designated for bio-composite materials and additive manufacturing production and 35 mu to be designated for functional masterbatch production. The projected total capital expenditures for the project is approximately RMB2.5 billion (estimated to be US$376.7 million) with anticipated completion by the end of December 2018.
In connection with the Nanchong Project, Sichuan Xinda entered into equipment purchase contracts with Hailezi to purchase production equipment and testing equipment. Pursuant to the contracts with Hailezi, Sichuan Xinda has prepaid RMB1,728.9 million (equivalent to US$264.6 million) as of December 31, 2017. By the end of June 2017, in order to ensure the traceability of the product and management of supply chain, Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$260.9 million) by the end of March 2018. As of December 31, 2017, Sichuan Xinda signed a supplementary agreement with Hailezi, pursuant to the agreement, Sichuan Xinda agreed to pay RMB12.4 million (equivalent to USD1.9 million) to Hailezi for the compensation of Hailezi due to the termination of the purchase contracts. As of December 31, 2017, Hailezi has refunded the prepayment in the amount of RMB1,245.5 million (equivalent to US$190.6 million) and the remaining part of the prepayment has been reclassified as prepaid expenses and other current assets, for details, please refer to Note 5.
(ii) In December, 2017, HLJ Xinda Group entered into a building purchase contract with Shanghai Caohejing Kangqiao Science & Green River Construction & Development Co., Ltd. ("Green River") for a total consideration of RMB216.6 million (equivalent to US$33.2 million) , with a total area of 13,972.64 square meters. According to the contract, the Company will be entitled to obtain the property by March 31, 2018 upon the 50% payment by end of 2017. The Company is planning to use this building as the offices of the newly set up Shanghai Research and Development Center, which was established on December 27, 2017. As of December 31, 2017, the Company has prepaid RMB108.3 million (equivalent to US$16.6 million).
(iii) Since November 15, 2016, Sichuan Xinda entered into decoration contracts with Sichuan Beijin Construction Engineering Company Limited ("Beijin Construction") to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$36.4 million). Pursuant to the contract with Beijin Construction, Sichuan Xinda has prepaid RMB119.8 million (equivalent to US$18.3 million) as of December 31, 2017, in which RMB54.4 million (equivalent to US$8.3 million) was transferred to construction in progress. The prepayment was recognized in investing activities in the statements of cash flows.
(iv) On October 20, 2016, Sichuan Xinda entered into an equipment purchase contract with Peaceful Treasure Limited ("Peaceful") for a total consideration of US$13.7 million to purchase certain production and testing equipment. The Company prepaid RMB33.9 million (equivalent to USD5.2M) as of December 31, 2017. The equipment will be delivered when the construction of plants and buildings of the Nanchong project completed in June 2018.
(v) On September 21, 2016, AL Composites Materials FZE ("Dubai Xinda") entered into a purchase contract with Samim Group FZE pertaining approximately 22,324 square meters property in JAFZA in Dubai, UAE with constructed building including a warehouse, office and service block for a total consideration of AED55.3 million (equivalent to US$15.0 million). As of December 31, 2017, the Company has paid the full amount of the contract, which was recognized in investing activities in the statements of cash flow. As of December 31, 2017, the building has been delivered, and the amount has been transferred to property, plant and equipment.
(vi) In September 2016, Dubai Xinda entered into apartment purchase contracts with Dubai Sports City LLC ("Sports City") for a total consideration of AED14.0 million (equivalent to US$4.0 million), which was recognized in investing activities in the statements of cash flows. As of December 31, 2017, the apartments have been occupied by the Company, and the amount has been transferred to property, plant and equipment.
Note
8
– Other non-current assets
On November 21, 2017, HLJ Xinda Group signed a purchase contract with Xinda High-Tech Co.,Ltd. ("Xinda High-Tech") on 100% equity transfer of Xinda High-Tech for a total consideration of RMB105 million (US$16.1 million). Pursuant to the contract, HLJ Xinda Group prepaid deposits of RMB78 million (equivalent to US$11.9 million) in November and December, 2017, with the remaining RMB27 million (equivalent to US$4.2 million) with the thirty days of the completion of the legal transfer. The Company is in the process of obtaining the government approval.
Note 9 – Foreign currency option contracts
On February 24, 2017, the Company entered into two foreign currency option contracts with Bank of China ("BOC"), Harbin Branch, pursuant to which the Company and BOC both have options to excise the foreign currency contracts depending on the future currency fluctuation, and the nominal values are US$5.0 million and US$10.0 million respectively, with the defined exchange rates for settlement on March 15, 2018. Changes in fair value of the above foreign currency options amounted to US$0.4 million and US$0.7 million, respectively, from the date of its inception to December 31, 2017 and were recognized in earnings because they did not qualify or was designated for hedge accounting.
Note 10 – Borrowings
The Company has credit facilities with several banks under which they draw short-term and long-term bank loans as described below.
(a) Current
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
US$
|
|
|
US$
|
|
Unsecured loans
|
|
|
363,319,152
|
|
|
|
273,147,455
|
|
Loans secured by accounts receivable
|
|
|
68,868,415
|
|
|
|
50,454,086
|
|
Loans secured by restricted cash
|
|
|
41,500,000
|
|
|
|
32,474,300
|
|
Loans secured by land use right
|
|
|
30,608,184
|
|
|
|
-
|
|
Current portion of long-term bank loans (note b)
|
|
|
271,101,178
|
|
|
|
88,681,635
|
|
|
|
|
|
|
|
|
|
|
Total short-term loans, including current portion of long-term bank loans
|
|
|
775,396,929
|
|
|
|
444,757,476
|
|
As of December 31, 2017 and 2016, the Company's short-term bank loans (including the current portion of long-term bank loans) bear a weighted average interest rate of 4.1% and 4.0% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.
In January 2016, the Company obtained a one-year secured loan of US$16.6 million from HSBC Middle East at an annual interest rate of one-month LIBOR (1.5678% as of December 31, 2017) plus 1.8%. This loan was secured by restricted cash of RMB25.5 million (equivalent to US$3.7 million) in the HSBC Bank in Harbin, China. The Company repaid the loan on January 23, 2017.
In April 2016, the Company obtained ten six-month loans in a total amount of RMB350 million (equivalent to US$50.5 million) secured by accounts receivables of RMB439.2 million (equivalent to US$63.3 million) at an annual interest rate of 4.350% from Harbin Longjiang Bank. The Company repaid the above loans in year 2017. During year 2017, the Company obtained another fifty-six loans in a total amount of RMB1,351.0 million (equivalent to US$206.8 million) secured by accounts receivables of RMB1,762.3 million (equivalent to US$269.7 million) at an annual interest rate of 4.350%. The Company repaid thirty-seven loans in total RMB901.0 million (equivalent to US$137.9 million) in year 2017, and retrieved accounts receivables of RMB1,112.0 million (equivalent to US$170.2 million).
In August 2016, the Company obtained a one-year secured loan of US$13.9 million from Industrial and Commercial Bank of China (Abu Dhabi Branch) at an interest of three-month LIBOR (1.6947% as of December 31, 2017) plus 2.0%. This loan was secured by restricted cash of RMB100.0 million (equivalent to US$14.6 million) in the Industrial and Commercial Bank of China in Harbin, China. The interest rate is reset every three months. The company repaid the loan in August 2017.
On October 7, 2016, the Company obtained a one-year secured loan of US$2.0 million from Bank of China (Macau Branch) at an annual interest rate of 1.8%. The loan was secured by restricted cash of RMB15.0 million (equivalent to US$2.2 million) in Bank of China in Harbin, China. The Company repaid the loan in September 2017 in advance, with the restricted cash remained restricted until October 2017.
In January 2017, the Company obtained a one-year secured loan of US$12.0 million from HSBC Middle East at an annual interest rate of one-month LIBOR (1.5678% as of December 31, 2017) plus 1.8%. This loan was secured by restricted cash of RMB18.5 million (equivalent to US$2.8 million) in the HSBC Bank in Harbin, China. The company repaid the loan in December 2017.
In January 2017, the Company obtained a one-year secured loan of US$12.0 million from Bank of China (Macau Branch) at an annual interest rate of 2.3%. The loan was secured by restricted cash of RMB94.0 million (equivalent to US$14.1 million) in Bank of China in Harbin, China. The company repaid the loan in December 2017.
In February 2017, the Company obtained a one-year secured loan of US$17.0 million from Bank of China (Abu Dhabi Branch) at an annual interest rate of 2.3%. The loan was secured by restricted cash of RMB136.0 million (equivalent to US$20.8 million) in Bank of China in Harbin, China.
In July 2017, the Company obtained a one-year secured loan of US$14.0 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB107.0 million (equivalent to US$16.4 million) in Bank of China in Harbin, China.
In October 2017, the Company obtained a one-year secured loan of US$5.0 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB37.5 million (equivalent to US$5.8 million) in Bank of China in Harbin, China.
In October 2017, the Company obtained a one-year secured loan of US$5.5 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB42.0 million (equivalent to US$6.4 million) in Bank of China in Harbin, China.
In November 2017, the Company obtained a three-month secured short-term loan of RMB200 million (equivalent to US$30.6 million) from Nanchong Shuntou Development Group Co., Ltd. at an annual interest rate of 4.35%. The loan was secured by one of the land use rights of RMB43.5 million (equivalent to US$6.7 million).
(b) Non-current
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
|
US$
|
|
|
US$
|
|
Secured loans
|
|
|
30,400,000
|
|
|
|
90,170,000
|
|
Unsecured loans
|
|
|
199,146,032
|
|
|
|
73,518,812
|
|
Syndicate loan facility
|
|
|
155,763,465
|
|
|
|
174,513,438
|
|
Less: current portion
|
|
|
(271,101,178
|
)
|
|
|
(88,681,635
|
)
|
Total long-term bank loans, excluding current portion
|
|
|
114,208,319
|
|
|
|
249,520,615
|
|
On June 12, 2014, the Company obtained a three-year secured loan of US$70 million from Bank of China Paris Branch at interest rate of three-month LIBOR (1.6947% as of December 31, 2017). The loan is secured by restricted cash of RMB110 million (equivalent to US$15.9 million). In accordance with the requirements of the bank, additional RMB109 million (equivalent to US$15.7 million) is pledged as restricted cash for this long-term bank loan on July 22, 2016. The Company repaid US$4 million in 2015, US$5 million on June 9, 2016, US$15 million on December 9, 2016, and US$46 million on June 9, 2017.
On January 23, 2015, the Company obtained two two-year unsecured loans in the total amount of RMB100 million (equivalent to US$14.4 million) from Agriculture Bank of China at an annual interest rate of 6.0%. Both loans were due and repaid by the Company in January 2017.
On April 22, 2015, the Company obtained a two-year unsecured loan of RMB40 million (equivalent to US$5.8 million) from Agriculture Bank of China at an annual interest rate of 5.75%. The Company repaid the loan on April 20, 2017.
In October and November, 2015, the Company obtained three long term unsecured loans of RMB260 million (equivalent to US$39.8 million) from Bank of China at an annual interest rate of 4.75%. In January 2016, the Company obtained a long term unsecured loan of RMB80 million (equivalent to US$12.2 million) from Bank of China at an annual interest rate of 4.75%. On December 9, 2016, the Company obtained a long term unsecured loan of RMB30 million (equivalent to US$4.6 million) from Bank of China at an annual interest rate of 4.75%. On March 23, 2017, the Company obtained a long term unsecured loan of RMB25.0 million (equivalent to US$3.8 million) from Bank of China at an annual interest rate of 4.75%. The Company repaid RMB10 million (equivalent to US$1.5 million) on April 28, 2017 and RMB40 million (equivalent to US$6.1 million) on October 28, 2017. RMB25 million (equivalent to US$3.8 million), RMB100 million (equivalent to US$15.3 million), RMB25 million (equivalent to US$3.8 million), RMB100 million (equivalent to US$15.3 million), RMB20 million (equivalent to US$3.1 million), and RMB75 million (equivalent to US$11.5 million) will be repaid on April 28, 2018, October 28, 2018, April 28, 2019, October 28, 2019, April 28, 2020 and October 28, 2020, respectively.
On May 13, 2016, the Company obtained two two-year secured loans of US$14.3 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (1.6947% as of December 31, 2017, 2017) plus 1.6%. On May 17, 2016, the Company obtained two two-year secured loans of US$12.3 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (1.6947% as of December 31, 2017) plus 1.6%. On May 22, 2016, the Company obtained a two-year secured loan of US$3.8 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (1.6947% as of December 31, 2017) plus 1.6%. The interest rate is reset every three months. These loans are secured by restricted cash of RMB68.8 million (equivalent to US$10.5 million). All of these loans will be due on March 22, 2018.
On August 22, 2016, Xinda Holding (HK) Company Limited ("Xinda Holding (HK)") a wholly owned subsidiary of the Company, entered into a facility agreement for a loan facility in an aggregate amount of US$180 million with a consortium of banks and financial institutions led by Standard Chartered Bank (Hong Kong) Limited. The Company paid arrangement fees and legal fees in the amount of US$6.77 million of which the unamortized balance is US$1.74 million as of December 31, 2017 for the related loan. Debt issuance costs are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the loan and amortized to interest expense using the effective interest rate of 5.594% as of December 31, 2017.
The Company repaid US$22.5 million on November 22, 2017. US$22.5 million, US$45.0 million and US$90.0 million of the principal amount will be repaid on February 22, 2018, May 22, 2018 and August 22, 2018, respectively.
On November 7, 2016, the Company obtained a fifteen-month secured loan of US$3.3 million from Industrial and Commercial Bank of China (Abu Dhabi Branch) at an annual interest rate of 2.2%. The loan is secured by restricted cash of RMB25 million (equivalent to US$3.6 million). The loan will be due on February 7, 2018.
The Company repaid the loan in October 2017 in advance.
On November 30, 2016, the Company obtained a fifteen-month secured loan of US$10.5 million from Industrial and Commercial Bank of China (Abu Dhabi Branch) at an annual interest rate of 2.2%. The loan is secured by restricted cash of RMB80 million (equivalent to US$11.5 million). The loan will be due on February 28, 2018.
The Company repaid the loan in November 2017 in advance.
During year 2017, the Company obtained four long-term unsecured loans of RMB430 million (equivalent to US$65.8 million) from Nanchong Shuntou Development Group Co., Ltd. at an annual interest rate of 4.35%. The repayment terms were extended and the loans will be due on December 31, 2018.
On December 1, 2017, the Company obtained a seven-year unsecured loan of RMB526.3 million (equivalent to US$80.6 million) from Longjiang Bank, Harbin Branch at an annual interest rate of 4.9%. RMB15 million (equivalent to US$2.3 million), RMB20 million (equivalent to US$3.1 million), RMB35 million (equivalent to US$5.4 million), RMB35 million (equivalent to US$5.4 million), RMB70 million (equivalent to US$10.7 million), RMB70 million (equivalent to US$10.7 million), and RMB281.26 million (equivalent to US$43.0 million) will be repaid on June 30, 2019, December 30, 2019, June 30, 2020, December 30, 2020, June 30, 2021, December 30, 2021, and after 2021, respectively.
As of December 31, 2017, the Company had total lines of credit of RMB8,097.6 million (US$1,239.3 million) including unused lines of credit of RMB2,056.0 million (US$314.7 million) with remaining terms less than 12 months and RMB228.7million (US$35.0 million) with remaining terms beyond 12 months.
Certain lines of credit contain financial covenants such as total stockholders' equity, debt asset ratio, contingent liability ratio and net profit. As of December 31, 2017, the Company has met these financial covenants.
Maturities on long-term bank loans (including current portion) are as follows:
|
|
December 31, 2017
|
|
|
|
US$
|
|
2018
|
|
|
271,101,178
|
|
2019
|
|
|
24,486,547
|
|
2020
|
|
|
25,251,753
|
|
2021
|
|
|
21,425,729
|
|
After 2021
|
|
|
43,044,290
|
|
Total
|
|
|
385,309,497
|
|
Note 11 –Redemption of the senior notes
On February 4, 2014, Favor Sea (BVI), a wholly owned subsidiary of the Company, issued US$150,000,000 aggregate principal amount of 11.75% Guaranteed Senior Notes due 2019 (the 'Notes') with issuance price of 99.080%. The Notes bear interest at a rate of 11.75% per annum, payable on February 4 and August 4 of each year, commencing August 4, 2014. The Notes were due to mature on February 4, 2019. Net proceeds after debt issuance costs and debt discount in the amount of US$6.5 million were approximately US$143.5 million. Debt issuance costs are presented on the consolidated balance sheets as a direct deduction from the carrying amount of notes payable and amortized to interest expense using the effective interest of 13.338% per annum.
The Notes can be redeemed prior to their maturity.
On August 29, 2016, the Company redeemed the Notes outstanding, which had an aggregate principal of US$150,000,000 and a carrying of US$147,626,121 (including accrued and unpaid interest of US$1,194,081) at a redemption price equal to 100% of the principal amount of the Notes plus the applicable premium of US$15,382,395 and accrued and unpaid interest of US$1,223,958. The total aggregate amount paid to redeem the Notes was US$166,606,353, which resulted in a US$18,963,834 loss on debt extinguishment.
Note 12 – Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
US$
|
|
|
US$
|
|
Payables for purchase of property, plant and equipment
|
|
|
98,791,115
|
|
|
|
98,472,641
|
|
Accrued freight expenses
|
|
|
10,491,635
|
|
|
|
7,972,067
|
|
Accrued interest expenses
|
|
|
3,997,036
|
|
|
|
885,290
|
|
Advance from customers (i)
|
|
|
8,843,649
|
|
|
|
93,066
|
|
Non income tax payables
|
|
|
4,002,092
|
|
|
|
4,499,161
|
|
Others (ii)
|
|
|
12,479,982
|
|
|
|
7,417,141
|
|
Total accrued expenses and other current liabilities
|
|
|
138,605,509
|
|
|
|
119,339,366
|
|
(i) Advance from customers mainly represents the advance received from five customers in the PRC for the raw material purchases during the twelve-month ended December 31, 2017.
(ii) Others mainly represent accrued payroll and employee benefits, accrued audit and consulting fees, electricity fee and other accrued miscellaneous operating expenses.
Note 13 – Related party transactions
The Company entered into related party transactions with Harbin Xinda High-Tech Co., Ltd. ("Xinda High-Tech"), an entity controlled by the wife of Mr. Han, the chief executive officer and controlling stockholder of the Company and Mr. Han's son.
The significant related party transactions are summarized as follows:
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
US$
|
|
US$
|
|
US$
|
|
Costs and expenses resulting from transactions with related parties:
|
|
|
|
|
|
|
Rental expenses for plant and office space
|
|
|
-
|
|
|
|
723,769
|
|
|
|
777,248
|
|
The related party balances are summarized as follows:
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
US$
|
|
US$
|
|
Amounts due from a related party:
|
|
|
|
|
Prepaid rental expenses to Xinda High-Tech
|
|
|
-
|
|
|
|
229,624
|
|
|
2017
|
|
2016
|
|
|
US$
|
|
US$
|
|
Amounts due to a related party:
|
|
|
|
|
Rental payable to Mr Han's son
|
|
|
-
|
|
|
|
11,548
|
|
The Company rents the following plant and office buildings in Harbin, Heilongjiang province from Xinda High-Tech:
Premise Leased
|
Area (M
2
)
|
|
Annual Rental Fee (US$)
|
|
Period of Lease
|
Office building
|
|
|
23,894
|
|
|
|
707,543
|
|
Between January 1, 2014 and December 31, 2018
|
The Company rents the following facilities in Harbin, Heilongjiang province from Mr. Han's son:
Premise Leased
|
|
Area (M
2
)
|
|
|
Annual Rental Fee (US$)
|
|
Period of Lease
|
Facility
|
|
|
200
|
|
|
|
5,922
|
|
Between August 17, 2014 and August 16, 2016
|
|
|
|
|
|
|
|
|
|
|
Note 14 – Income Taxes
China XD and Xinda Holding (HK) US Sub Inc. ("Xinda Holding (US) ") (collectively referred to as the "U.S. Entities") are each subject to a tax rate of 34% before 2018 and 21% per the new tax rules beginning 2018, and file separate U.S. federal income tax returns. Xinda Holding (US) was dissolved in 2016 as a result of the group re-organization.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act has made significant changes to the U.S. Internal Revenue Code, including the taxation of U.S. corporations, by, among other things, limiting interest deductions, reducing the U.S. corporate income tax rate, disallowing certain deductions that had previously been allowed, altering the expensing of capital expenditures, adopting elements of a territorial tax system, assessing a repatriation tax or "toll-charge" on undistributed earnings and profits of U.S.-owned foreign corporations, and introducing certain anti-base erosion provisions. The Company recorded a charge of approximately US$
71.0
million for the repatriation tax on deemed repatriation to the United States of accumulated earnings. The charge for deemed repatriation will be payable by the Company over an eight-year period commencing April 2018.
US
$
71.0
million repatriation tax, as a provisional amount, represents the Company's reasonable estimate for income tax effects of the Tax Act, to the extent that the Company's accounting for certain income tax effects is incomplete as additional information is needed to be prepared, analyzed and computations.
The actual impact of the U.S. Tax Reform on the Company may differ from management's estimates, and management may update the provisional amount upon obtaining, preparing or analyzing additional information, based on its review of future regulations or guidance issued by the U.S. Department of the Treasury, and specific actions the Company may take in the future.
Under the current laws of the British Virgin Island ("BVI"), Favor Sea (BVI) and Xinda Deluxe Faith Limited, subsidiaries of China XD, these two are not subject to tax on its income or capital gains.
No provision for Hong Kong Profits Tax was made for Xinda Holding (HK) Co., Ltd. ("Xinda Holding (HK) "), (formerly known as Hong Kong Engineering Plastics Co., Ltd.), Xinda (HK) International Trading Co., Ltd. ("Xinda Trading", liquidated in February 2015), Xinda (HONGKONG) Macromolecule Material Limited and Xinda (HK) Trading as they did not have any assessable profits arising in or derived from Hong Kong for any of the periods presented.
Under the current laws of Dubai, AL Composites Materials FZE ("Dubai Xinda"), a subsidiary of China XD, is exempted from income taxes.
The Company's PRC subsidiaries file separate income tax returns in the PRC. Effective from January 1, 2008, the PRC statutory income tax rate is 25% according to the Corporate Income Tax ("CIT") Law which was passed by the National People's Congress on March 16, 2007.
Pursuant to an approval from the local tax authority in July 2013, Sichuan Xinda, a subsidiary of China XD, became a qualified enterprise located in the western region of the PRC, which entitled it to a preferential income tax rate of 15% from January 1, 2013 to December 31, 2020.
The CIT Law and its implementation rules impose a withholding income tax at 10%, unless reduced by a tax treaty or arrangement, on the amount of dividends distributed by a PRC-resident enterprise to its immediate holding company outside the PRC that are related to earnings accumulated beginning on January 1, 2008. Dividends relating to undistributed earnings generated prior to January 1, 2008 are exempt from such withholding income tax.
China XD earnings from its subsidiaries in PRC and Dubai are subject to the U.S. federal income tax at 34%, less any applicable foreign tax credits. Due to its plan to indefinitely reinvest its earnings in the PRC, the Company has not provided for deferred income tax liabilities related to PRC withholding income tax on undistributed earnings of US$673,784,710 and US$546,430,378 as of December 31, 2017 and 2016, respectively. In addition, due to its plan to indefinitely reinvest its earnings in Dubai, the Company has not provided for deferred income tax liabilities related to Dubai on undistributed earnings of US$206,128,306 and US$172,774,247 as of December 31, 2017 and 2016, respectively. It is not practicable to estimate the amounts of unrecognized deferred income tax liabilities thereof.
The components of income (loss) before income taxes are as follows:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
US$
|
|
US$
|
|
US$
|
|
US
|
|
|
(2,490,668
|
)
|
|
|
(3,221,934
|
)
|
|
|
(3,512,598
|
)
|
BVI
|
|
|
(394
|
)
|
|
|
(31,424,331
|
)
|
|
|
(18,685,588
|
)
|
Hong Kong SAR
|
|
|
(12,544,625
|
)
|
|
|
(5,447,344
|
)
|
|
|
(306,945
|
)
|
Dubai
|
|
|
33,354,059
|
|
|
|
54,947,200
|
|
|
|
34,554,739
|
|
PRC, excluding Hong Kong SAR
|
|
|
103,827,741
|
|
|
|
104,181,978
|
|
|
|
89,920,646
|
|
Total income before income taxes
|
|
|
122,146,113
|
|
|
|
119,035,569
|
|
|
|
101,970,254
|
|
The Company's income tax expense (benefit) recognized in the consolidated statements of comprehensive income consists of the following:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Current income tax expense-PRC
|
|
|
21,966,937
|
|
|
|
19,715,649
|
|
|
|
20,618,211
|
|
Current income tax expense-US
|
|
|
70,965,148
|
|
|
|
-
|
|
|
|
-
|
|
Deferred income tax benefit-PRC
|
|
|
(2,407,706
|
)
|
|
|
(2,292,830
|
)
|
|
|
(2,380,236
|
)
|
Total income tax expense
|
|
|
90,524,379
|
|
|
|
17,422,819
|
|
|
|
18,237,975
|
|
The effective income tax rate based on income tax expense and income before income taxes reported in the consolidated statements of comprehensive income differs from the PRC statutory income tax rate of 25% due to the following:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
PRC statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Increase (decrease) in effective income tax rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax rate differential on HK entities not subject to PRC income tax
|
|
|
0.9
|
%
|
|
|
0.4
|
%
|
|
|
-
|
|
Tax rate differential on BVI entities not subject to PRC income tax
|
|
|
0.1
|
%
|
|
|
6.6
|
%
|
|
|
4.6
|
%
|
Tax rate differential on UAE entities not subject to PRC income tax
|
|
|
(6.9
|
)%
|
|
|
(11.5
|
)%
|
|
|
(8.5
|
)%
|
Non-deductible expenses
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
Preferential tax rate
|
|
|
(4.5
|
)%
|
|
|
(4.2
|
)%
|
|
|
(4.5
|
)%
|
Change in valuation allowance
|
|
|
3.1
|
%
|
|
|
2.3
|
%
|
|
|
1.2
|
%
|
R&D additional deduction
|
|
|
(3.9
|
)%
|
|
|
(5.1
|
)%
|
|
|
(2.6
|
)%
|
Repatriation tax
|
|
|
58.1
|
%
|
|
|
-
|
|
|
|
-
|
|
Others
|
|
|
2.0
|
%
|
|
|
0.8
|
%
|
|
|
2.3
|
%
|
Effective income tax rate
|
|
|
74.1
|
%
|
|
|
14.6
|
%
|
|
|
17.9
|
%
|
The principal components of the Company's deferred income tax assets and deferred income tax liabilities are as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
Tax loss carry forwards
|
|
|
7,818,069
|
|
|
|
3,951,012
|
|
Foreign currency contracts
|
|
|
270,964
|
|
|
|
-
|
|
Less: valuation allowance
|
|
|
(7,818,069
|
)
|
|
|
(3,951,012
|
)
|
Deferred income tax assets, net (included in other non-current assets)
|
|
|
270,964
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities (included in other non-current liabilities):
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
9,267,501
|
|
|
|
10,818,305
|
|
The Research Institute was established with a registered capital of approximately US$0.4 million in 2007. The Research Institute provided research and development services to the Company's ultimate end customers. In December 2010, for tax purposes and because the Research Institute could not meet the Company's development needs, the Company dissolved the Research Institute and formed a new legal entity, Heilongjiang Xinda Enterprise Group Macromolecule Materials R&D Center Company Limited ("Xinda Group Material Research"). Based on applicable regulations promulgated by the local Civil Affairs Bureau, only the local government has the authority for the distribution of the assets of the Research Institute upon liquidation. Therefore, the Company dissolved the Research Institute by distributing the net assets of the Research Institute in the amount of US$84.0 million to the local government. The difference between the net assets in the amount of US$84.0 million and the amount of the initial registered capital of US$0.4 million represents undistributed accumulated profit generated by the Research Institute from its inception date to its liquidation date. Simultaneously, the local government granted the net assets back to the Research Center, the newly established subsidiary of Harbin Xinda in December 2010. The Research Center was established with a registered capital of approximately US$0.5 million funded by cash. A loss equal to the net assets of the Research Institute distributed to the local government was recognized in other expenses and a government grant for the receipts of the same assets back from the local government was recognized as other income in the consolidated statements of comprehensive income. Pursuant to the local tax regulations, the net assets granted to the Research Center are not subject to income tax to the extent the Research Center spends a total of US$84.0 million in five years from the date of grant. The expenditures of US$84.0 million will not be deductible for income tax purposes. As a result, the Company recognized a deferred income tax liability in the amount of US$21.5 million in connection with the net assets granted to the Research Center as of December 31, 2010. To the extent that the Company has spent on research and development equipment during the five years from the date of grant, deferred income tax liabilities relating to the net assets of Research Institute granted to Research Center will be reclassified to deferred income tax liabilities relating to property, plant and equipment, and recognized in profit or loss over the useful life of the asset. The Company spent a total of US$84.0 million on research and development equipment by the end of December 31, 2015, and the deferred income tax liabilities was US$9,267,501 and US$10,818,305 as of December 31, 2017 and 2016, respectively.
The movements of the valuation allowance are as follows:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year
|
|
|
3,951,012
|
|
|
|
1,941,124
|
|
|
|
727,711
|
|
Expiration due to liquidation
|
|
|
(86,139
|
)
|
|
|
(661,144
|
)
|
|
|
(68,070
|
)
|
Additions of valuation allowance
|
|
|
3,960,392
|
|
|
|
2,801,055
|
|
|
|
1,333,527
|
|
Reduction of valuation allowance
|
|
|
(7,196
|
)
|
|
|
(130,023
|
)
|
|
|
(52,044
|
)
|
Balance at the end of the year
|
|
|
7,818,069
|
|
|
|
3,951,012
|
|
|
|
1,941,124
|
|
The valuation allowance as of December 31, 2017, 2016 and 2015 was primarily provided for the deferred income tax assets of certain entities, which were at cumulative loss positions. As of December 31, 2017, for U.S. federal income tax purposes, the Company had tax loss carry forwards of (i) US$673,763 from US Entity, of which US$153,565, US$520,617 and nil would expire by 2035, 2036 and 2037, respectively, if unused, (ii) US$18,804,872 from subsidiaries in PRC, of which US$3,423,410, US$6,900,933 and US$8,480,529 would expire by 2020, 2021 and 2022, respectively, if unused, and (iii) US$18,298,922 from subsidiaries in HK, which could be carried forward indefinitely to be offset against future profits. In view of the cumulative losses for the entities concerned, 100% valuation allowances were provided against their deferred income tax assets as of December 31, 2017, 2016 and 2015, which in the judgment of the management, are not more likely than not to be realized.
A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
25,929,112
|
|
|
|
21,660,307
|
|
|
|
14,609,258
|
|
Increase related to current year tax positions
|
|
|
8,267,958
|
|
|
|
4,268,805
|
|
|
|
7,051,049
|
|
Balance at end of year
|
|
|
34,197,070
|
|
|
|
25,929,112
|
|
|
|
21,660,307
|
|
At December 31, 2017, 2016 and 2015, there are US$28,149,386, US$21,547,559 and US$18,370,729 of unrecognized tax benefits that if recognized, would affect the annual effective tax rate.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and does not recognize penalties. During the years ended December 31, 2017, 2016 and 2015, the Company recognized approximately US$4,092,605, US$2,982,479, and US$1,905,191 interest expense. The Company had approximately US$10,342,390 and US$5,757,273 for the interest accrued related to unrecognized tax benefits amounting to US$34,045,550 and US$25,845,041 as of December 31, 2017 and 2016, respectively. The unrecognized tax benefits in 2012 amounting to US$2,934,853 and related accrued interest amounting to US$2,432,993 was classified as current liabilities as the five-year tax assessment period will expire on May 31, 2018. US$151,520 of unrecognized tax benefit were presented as a reduction of the deferred income tax assets for tax loss carry forwards since the uncertain tax position would reduce the tax loss carry forwards under the tax law. The unrecognized tax benefits represent the estimated income tax expenses the Company would be required to pay, should the income tax rate used, taxable income and deductible expenses for tax purpose recognized in accordance with tax laws and regulations. The Company is currently unable to provide an estimate of a range of the total amount of unrecognized tax benefits that is reasonably possible to change significantly within the next twelve months.
The tax returns of the U.S. Entities are subject to U.S. federal income tax examination by tax authorities for the years from 2015 to 2017. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances where the underpayment of taxes is more than US$15,000. In the case of transfer pricing issues, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. The tax returns of the Company's PRC subsidiaries for the years from 2015 to 2017 are open to examination by the PRC tax authorities.
Note 15 – Deferred Income
On January 26, 2015, the Company entered into a memorandum and a fund support agreement (the "Agreement") with the People's Government of Shunqing District, Nanchong City, Sichuan Province ("Shunqing Government") pursuant to which Shunqing Government, through its investment vehicle, extended to the Company RMB350 million (equivalent to US$53.6 million) to support the construction of the Sichuan plant, which has been received in full in the form of government repayment of bank loans on behalf of the Company.
In addition, the Company has received RMB309.2 million (equivalent to US$47.3 million) from Shunqing Government and RMB6.4 million (equivalent to US$1.0 million) from Ministry of Finance of the People's Republic of China to support the construction and RMB2.2 million (equivalent to US$0.3 million) special funds of ministerial key research projects from Ministry of Science and Technology of PRC as of December 31, 2017.
Since the funding is related to construction of long-term assets, the amounts were recognized as government grant, which is included in deferred income on the condensed consolidated balance sheets, and to be recognized as other income in the condensed consolidated statements of comprehensive income over the periods and in the proportions in which depreciation expense on the long-term assets is recognized.
The Sichuan factory has been operational since July 2016. A cumulative RMB39.4 million (equivalent to US$6.0 million) government grants have been amortized as other income proportionate to the depreciation of the related assets, of which RMB29.9 million (equivalent to US$4.6 million) was amortized in the year ended December 31, 2017.
The Company also received RMB36.0 million (equivalent to US$5.5 million) from Shunqing Government with respect to interest subsidy for future bank loan. A cumulative RMB16.4 million (equivalent to US$2.5 million) government grants have been amortized as other income in line with the amount of related loan interest paid, of which RMB1.4 million (equivalent to US$0.2 million) was amortized in the year ended December 31, 2017.
Note 16 – Other non-current liabilities
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Income tax payable-noncurrent (i)
|
|
|
98,630,817
|
|
|
|
31,602,314
|
|
Deferred income tax liabilities (note
14
)
|
|
|
9,267,501
|
|
|
|
10,818,305
|
|
Total other non-current liabilities
|
|
|
107,898,318
|
|
|
|
42,420,619
|
|
(i) Income tax payable-noncurrent represents the repatriation tax, the accumulative balance of unrecognized tax benefits since 2013 and related accrued interest. According to the Tax Act, the management estimated the amount of U.S. tax corporate income tax is US$
70,965,148
based on the deemed repatriation to the United States of accumulated earnings mandated by the U.S. tax reform, US$
11,354,425
of which will be paid in 2018 and was classified as current liabilities. As the five-year tax assessment period for unrecognized tax benefits occurred in 2012 will expire on May 31, 2018, the unrecognized tax benefits occurred in 2012 and related accrued interest amounting to RMB19.2 million (equivalent to US$2,934,853) and RMB15.9 million (equivalent to US$2,432,993), respectively, were classified as current liabilities.
Note 17 – Common Stock
Pursuant to the amended Article of Incorporation dated March 12, 2009, the Company's authorized share capital is 550,000,000 shares, consisting of 500,000,000 shares of common stock (US$0.0001 par value), and 50,000,000 shares of all classes of preferred stock (US$0.0001 par value).
Note 18 – Preferred Stock
Series B preferred stock
The Company issued 1,000,000 shares of Series B preferred stock to XD Engineering Plastics in December 2008. The Series B preferred stock is not convertible or redeemable. The holder of Series B preferred stock has 40% of the total voting power of the Company on a fully diluted basis. Holders of Series B preferred stock are not entitled to receive dividends. In the event of any liquidation, dissolution or winding up, whether voluntary or involuntary, the holders of issued and outstanding shares of Series B preferred stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the common stockholders and any other series of preferred stock ranking junior to the Series B preferred stock with respect to liquidation, US$1.00 per share in cash. The holders of Series B preferred stock will not be entitled to any further participation in any distribution of assets by the Company.
Redeemable Series D convertible preferred stock
On August 15, 2011, China XD entered into a securities purchase agreement (the "Securities Purchase Agreement") with MSPEA Modified Plastics Holding Limited, a Cayman Islands company and an affiliate of Morgan Stanley Private Equity Asia III Holdings (Cayman) Ltd, a Cayman Islands limited liability company ("MSPEA"), XD Engineering Plastics and Mr. Han, pursuant to which MSPEA purchased 16,000,000 shares of the Company's Series D convertible preferred stock with par value of US$0.0001 per share (the "Series D Preferred Stock"), for a total consideration of US$100 million or US$6.25 per share. On September 28, 2011, China XD issued 16,000,000 shares of Series D Preferred Stock and received total gross proceeds of US$100 million in cash. Net proceeds after issuance cost were approximately US$99.1 million.
The significant terms of Series D Preferred Stock are as follows:
(i) Conversion
The holders of the Series D Preferred Stock have the right to convert all or any portion of their holdings into common stock at a price of US$6.25 per share from January 1, 2012 through February 4, 2019, subject to adjustments for stock splits, combinations, dividends or distributions of common stock, merger and reorganization. In addition, if the Company achieves net income as adjusted to exclude (i) all extraordinary or non-recurring gains or losses for the relevant period, (ii) all gains or losses derived from any business operation other than the principal business of the Company or otherwise derived outside the ordinary course of business of the Company for the relevant period, and (iii) all gains or losses attributable to the Series D Preferred Stock ("Actual Profit"), at least RMB360 million, RMB520 million and RMB800 million in 2011, 2012 and 2013, respectively, each outstanding Series D Preferred Stock will be converted into common stock from September 28, 2014 upon the delivery of a written notice from the Company to the holders of Series D Preferred Stock. The Company determined that there was no embedded beneficial conversion feature attributable to the Series D Preferred Stock at the commitment date since the initial conversion price of the Series D Preferred Stock was greater than the price of China XD's common stock.
(ii) Voting
The holders of Series D Preferred Stock have the same voting rights as the common stockholders on an "if-converted" basis. In addition, if 1,600,000 shares or more (adjusted for any dilutive corporate actions) of Series D Preferred Stock remain outstanding, holders of Series D Preferred Stock have veto rights over certain material corporate actions of the Company.
(iii) Dividends
Each share of Series D Preferred Stock shall be entitled to dividend or other distribution simultaneously with any dividend or distribution on any shares of the Company's common stock as if each share of Series D Preferred Stock has been converted to common stock.
(iv) Liquidation preference
In the event of the liquidation, dissolution or winding-up of the affairs of the Company, whether voluntary or involuntary (a "Liquidation"), the holders of Series D Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders before any payment shall be made to the holders of shares of common stock by reason of their ownership thereof, but after any payment shall be made to the holders of any Series B preferred stock by reason of their ownership thereof, with respect to each share of Series D Preferred Stock, an amount equal to the greater of (i) an amount per share that would yield a total internal rate of return of 15% on the Series D Original Issuance Price, taking into account all cash dividends and/or distributions paid by the Company and received by the holder in respect of his or her share of Series D Preferred Stock (the IRR Price); and (ii) an amount per share as would have been payable had all shares of Series D Preferred Stock been converted into the Company's common stock pursuant to a voluntary conversion or a mandatory conversion immediately prior to such Liquidation (without taking into account any limitations or restrictions on the convertibility of the shares of Series D Preferred Stock).
(v) Redemption
Upon the occurrence of a triggering event as defined below, the holders of the Series D Preferred Stocks have the option to redeem the Series D Preferred Stock at a price equal to the IRR Price (the "Redemption Price"), by delivery of written notice to the Company (the "Redemption Request") at least 6 months prior to the proposed date of redemption (the "Redemption Date").
A triggering event means any of the following events: (I) the occurrence of any of the following: (i) the Actual Profit for the Financial Year ended December 31, 2011 is less than RMB360 million, or (ii) the Actual Profit for the Financial Year ended December 31, 2012 is less than RMB468 million, or (iii) the Actual Profit for the Financial Year ending December 31, 2013 is less than RMB608 million, which Actual Profit target has been removed pursuant to the Restated Certificate of Designation filed as of January 27, 2014 (such targets under (I) collectively, the "Actual Profit Targets"); (II) any breach by any of the Company, XD Engineering Plastics and Mr. Han (the "Principal Stockholders") of any representation, warranty, covenant or other agreement in the Securities Purchase Agreement, the Certificate of Designation, the Registration Rights Agreement, the Stockholders' Agreement, the Pledge Agreement and the Indemnification Agreements (collectively, the "Transaction Document") that (i) in the case of a breach of a covenant or agreement that is curable, has remained uncured for 30 days after the holder of Series D Preferred Stock has given written notice of such breach to the Company' Principal Stockholders and (ii) has had or could reasonably be expected to have a material adverse impact on (a) the business, operations, properties, financial position (including any material increase in provisions), earnings or condition of the Company, or (b) the value, marketability or liquidity of the Series D Preferred Stock taking into account any remedies already sought and received in connection with such breach; or (III) the commencement by the Company or any other member of the Company of any bankruptcy, insolvency, reorganization or of any other case or proceeding to be adjudicated a bankruptcy or insolvency, or the consent by it to the entry of a decree or order for relief in respect of the Company or any other member of the Company in an involuntary case; or the appointment of a custodian, receiver, liquidator, assignee, trustee, sequestrator other similar officials of the Company or any other member of the Company for the winding up or liquidation of its affairs.
If any shares of Series D Preferred Stock remain outstanding on February 4, 2019, the holders of such shares shall require the Company to redeem each share of Series D Preferred Stock at a price equal to the IRR Price (the "Mandatory Redemption Price") no later than six months after the Maturity Date. The Mandatory Redemption Price per share was US$15.25 and US$13.26 as of December 31, 2017 and 2016, respectively.
The Company concluded that it has met the Actual Profit Targets and that it is not probable any of the triggering events has occurred or is expected to occur. In addition, the Company concluded that it has met the performance target of RMB360 million, RMB520 million and RMB800 million in 2011, 2012 and 2013, respectively and accordingly it has the right to request the conversion of Series D Preferred Stock into common stock. As a result, it was not probable that the Series D Preferred Stock is redeemable as of December 31, 2017. Therefore no changes in the redemption value were recognized for any of the periods presented. The Company will assess the probability of whether the Series D Preferred Stock is redeemable at each reporting period end.
Pursuant to the Stockholders' Agreement between MSPEA and the Principal Stockholders, if the Company shall at any time issue or sell any shares of common stock or equity securities, other than an issuance or sale in an exempted issuance, at a price per share, or in the case other equity securities exchangeable or convertible into shares of common stock, at a conversion or exercise price for a share of common stock (in each case, the "New Issue Price") that is less than the then effective conversion price of Series D Preferred Stock, the holders of Series D Preferred Stock shall have the right to purchase from the Principal Stockholders, and Principal Stockholders shall sell and transfer to the holders of Series D Preferred Stock, at par value per share, a number of shares of common stock that is equal to (i) the number of shares of common stock that the Series D Preferred Stock held by the holders of Series D Preferred Stock would have been convertible into as if the then effective conversion price is equal to the New Issue Price, minus (ii) the number of shares of common stock that the outstanding Series D Preferred Stock held by the holders of Series D Preferred Stock are convertible into under the then effective conversion price. The exempted issuance refers to (a) any issuance of common stock upon the conversion of the Series D Preferred Stock; (b) the conversion, exercise or exchange of options, warrants or convertible securities of the Company that are outstanding and have been fully disclosed to MSPEA as of September 28, 2011; (c) any issuance of shares of common stock or options to employees, officers, directors or other service providers of the Company pursuant to any stock or option plan duly approved for such purpose including the board of directors; (d) any issuance of common stock, options, warrants or convertible securities of the Company pursuant to acquisitions or other strategic transactions, in each case approved by the board of directors and (e) any issuance of adjustment shares that the Principal Stockholders shall sell and transfer to the holders of Series D Preferred Stock if the Company is unable to achieve the Actual Profit as defined below.
In addition, the Principal Stockholders entered into a pledge agreement with the holders of Series D Preferred Stock to secure the payment and performance of the following obligations (collectively, the "Secured Obligations"), which are secured by the collateral under the Pledge Agreement between the holders of Series D Preferred Stock and the Principal Stockholders: (a) the full and prompt payment when due (whether at stated maturity, by redemption or acceleration or otherwise) of all debts, obligations and liabilities of Principal Stockholders owing to the holders of Series D Preferred Stock; (b) all reasonable costs and expenses incurred by the holders of Series D Preferred Stock to enforce this Agreement and maintain, preserve, collect and realize upon the collateral. The collateral refers to 16,000,000 shares of common stock, par value $0.0001, of China XD registered in the name of XD Engineering Plastic.
The holders of Series D Preferred Stock have an option to purchase common stock at par value from the Principal Stockholders if the Company is unable to achieve the Actual Profit of RMB360 million, RMB520 million and RMB800 million in 2011, 2012 and 2013, respectively. The number of common stock to be purchased is based on a pre-set formula as specified in the Stockholders' Agreement.
The Stockholders' Agreement was an inducement made to facilitate the investment in the Series D Preferred Stock on behalf of the Company. Therefore, the fair value of the options issued by the Principal Stockholders to the holders of the Series D Preferred Stock was recognized as additional paid-in capital and reflected as a reduction of the proceeds allocated to the Series D Preferred Stock. As of September 28, 2011, the fair value of the options was determined to be US$1,501,000 based on the Company's common stock price on September 28, 2011, and the probability of the Company's future financial projection and the expected volatility of the Company's common stock.
Note 19 – Stock based compensation
Stock options issued to employees, directors and consultants
On May 26, 2009, the Board of Directors approved the adoption of the 2009 Stock Incentive Plan (the "2009 Plan"), which provides for the granting of stock options and other stock-based awards to key employees, directors and consultants of the Company. The aggregate number of common stock which may be issued under the 2009 Plan may not exceed 7,800,000 shares.
Nonvested shares
A summary of the nonvested shares activity for the years ended December 31, 2017, 2016, and 2015 is as follows:
|
|
Number of Nonvested
Shares
|
|
|
Weighted Average
Grant date Fair Value
|
|
|
|
|
|
|
US$
|
|
Outstanding as of December 31, 2014
|
|
|
647,288
|
|
|
|
5.00
|
|
Granted
|
|
|
203,207
|
|
|
|
6.00
|
|
Vested
|
|
|
(171,488
|
)
|
|
|
4.40
|
|
Forfeited
|
|
|
(64,280
|
)
|
|
|
4.65
|
|
Outstanding as of December 31, 2015
|
|
|
614,727
|
|
|
|
5.54
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(161,257
|
)
|
|
|
4.24
|
|
Forfeited
|
|
|
(51,260
|
)
|
|
|
5.28
|
|
Outstanding as of December 31, 2016
|
|
|
402,210
|
|
|
|
6.10
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(216,190
|
)
|
|
|
5.12
|
|
Forfeited
|
|
|
(24,910
|
)
|
|
|
5.60
|
|
Outstanding as of December 31, 2017
|
|
|
161,110
|
|
|
|
7.49
|
|
Expected to vest as of December 31, 2017
|
|
|
137,119
|
|
|
|
7.49
|
|
The total fair value of shares vested during the years ended December 31, 2017, 2016, and 2015 was and US$1,106,893, US$683,106 and US$754,547, respectively.
The Company recognized US$553,512, US$686,491 and US$813,699 of compensation expense in general and administrative expenses relating to nonvested shares for the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2017, total unrecognized compensation cost relating to nonvested shares was US$200,243, which is to be recognized over a weighted average period of 0.6 years.
Stock options
A summary of stock options activity for the years ended December 31, 2017, 2016, 2015 is as follows.
|
|
Number of
Options
Outstanding
|
|
|
Weighted Average
Exercise Price
US$
|
|
Outstanding as of December 31, 2015
|
|
|
72,000
|
|
|
|
0.24
|
|
Vested
|
|
|
(27,000
|
)
|
|
|
0.24
|
|
Forfeited
|
|
|
(45,000
|
)
|
|
|
0.24
|
|
Outstanding as of December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
The Company recognized negative US$151,893 of share-based compensation expense in general and administration expenses relating to stock options for the years ended December 31, 2016 and, US$230,463 of share-based compensation expense in general and administration expenses relating to stock options for the years ended December 31, 2015.
Note 20 – Earnings per share
Basic and diluted earnings per share are calculated as follows:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
31,621,734
|
|
|
|
101,612,750
|
|
|
|
83,732,279
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings allocated to participating Series D convertible preferred stock
|
|
|
(
7,678,801
|
)
|
|
|
(24,652,636
|
)
|
|
|
(20,350,826
|
)
|
Earnings allocated to participating nonvested shares
|
|
|
(
139,318
|
)
|
|
|
(817,078
|
)
|
|
|
(770,145
|
)
|
Net income for basic and diluted earnings per share
|
|
|
23,803,615
|
|
|
|
76,143,036
|
|
|
|
62,611,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
49,598,609
|
|
|
|
49,418,188
|
|
|
|
49,225,566
|
|
Dilutive effect of outstanding share options
|
|
|
-
|
|
|
|
1,009
|
|
|
|
3,894
|
|
Denominator for diluted earnings per share
|
|
|
49,598,609
|
|
|
|
49,419,197
|
|
|
|
49,229,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per common share
|
|
|
0.
48
|
|
|
|
1.54
|
|
|
|
1.27
|
|
The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the years ended December 31, 2017, 2016 and 2015, because their effects are anti-dilutive:
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
US$
|
|
US$
|
|
US$
|
|
Numerator:
|
|
|
|
|
|
|
Shares issuable upon conversion of Series D convertible preferred stocks
|
|
|
16,000,000
|
|
|
|
16,000,000
|
|
|
|
16,000,000
|
|
Note 21 – Statutory reserves
Under PRC rules and regulations, all subsidiaries of China XD in the PRC are required to appropriate 10% of their net income, as determined in accordance with PRC accounting rules and regulations, to a statutory surplus reserve until the reserve balance reaches 50% of their registered capital. The appropriation to this statutory surplus reserve must be made before distribution of dividends to China XD can be made. The statutory reserve is non-distributable, other than during liquidation, and can be used to fund previous years losses, if any, and may be converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently outstanding, provided that the remaining balance of the statutory reserve after such issue is not less than 25% of the registered capital.
For the years ended December 31, 2017, 2016 and 2015, China XD's subsidiaries in the PRC made appropriations to the reserve fund of RMB61,532,122 (equivalent to US$9,110,606), RMB46,947,403 (equivalent to US$7,072,842), and RMB48,174,525 (equivalent to US$7,651,365), respectively. As of December 31, 2017, 2016 and 2015, the accumulated balance of the statutory surplus reserve was RMB248,484,805 (equivalent to US$38,758,986), RMB186,952,683 (equivalent to US$29,648,380), and RMB140,005,280 (equivalent to US$22,575,538), respectively.
Note 22 – Commitments and contingencies
(1)
Lease commitments
Future minimum lease payments under non-cancellable operating leases agreements as of December 31, 2017 were as follows. The Company's leases do not contain any contingent rent payments terms.
|
|
US$
|
|
Years ending December 31,
|
|
|
|
2018
|
|
|
1,381,380
|
|
2019
|
|
|
873,556
|
|
2020
|
|
|
769,623
|
|
2021
|
|
|
695,386
|
|
2022
|
|
|
656,333
|
|
2023 and thereafter
|
|
|
7,318,130
|
|
Rental expenses incurred for operating leases of plant and equipment and office spaces were US$2,431,139, US$2,317,321 and US$1,698,088 in 2017, 2016 and 2015, respectively. There are no step rent provisions, escalation clauses, capital improvement funding requirements, other lease concessions or contingent rent in the lease agreements. The Company has no legal or contractual asset retirement obligations at the end of leases. The Company's leases do not contain any contingent rent payments terms.
(2) Sichuan plant construction and equipment purchase
On March 8, 2013, Xinda Holding (HK) entered into an investment agreement with Shunqing Government, pursuant to which Xinda Holding (HK) will invest RMB1.8 billion in property, plant and equipment and approximately RMB0.6 billion in working capital, for the construction of Sichuan plant. As of December 31, 2017, the Company has a remaining commitment of RMB55.7 million (equivalent to US$8.5 million) mainly for facility construction.
In September 2016, Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB17.0 million (equivalent to US$2.6 million) to purchase storage facility and testing equipment. Afterward, Sichuan Xinda cancelled two contracts with Hailezi for a consideration of RMB1.6 million (equivalent to US$0.2 million). As of December 31, 2017, Sichuan Xinda prepaid RMB6.0 million (equivalent to US$0.9 million) and has a remaining commitment of RMB9.4 million (equivalent to US$1.5 million).
On October 20, 2016, Sichuan Xinda entered into an equipment purchase agreement
purchase contract with Peaceful for a total consideration of RMB89.8 million (equivalent to US$13.7 million) to purchase certain production and testing equipment. As of December 31, 2017, the Company has a commitment of
RMB55.9 million (equivalent to
US$8.5 million).
On November 15, 2016, Sichuan Xinda entered into decoration contract with Beijin Construction to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$36.4 million). On February 20, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform outdoor decoration work for a consideration of RMB2.9 million (equivalent to US$0.5 million). On June 10, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform ground decoration work for a consideration of RMB23.8 million (equivalent to US$3.6 million). As of December 31, 2017, Sichuan Xinda prepaid RMB119.8 million (equivalent to US$18.3 million) of which RMB54.4 million (equivalent to US$8.3 million) was transferred to construction in progress and has a remaining commitment of RMB144.5 million (equivalent to US$22.2 million).
In connection with the Nanchong Project mentioned in Note 7 (i), Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB2,242.8 million (equivalent to US$343.2 million) to purchase production equipment and testing equipment in March 2017. By the end of June 2017, Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Thus the original contracts have been terminated with the amount of RMB2,222.9 million (equivalent to US$340.2 million), and Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$260.9 million) by the end of March 2018, out of the total prepayment made by Sichuan Xinda of RMB1,722.9 million (equivalent to US$263.7 million). As of December 31, 2017, Sichuan Xinda signed a supplementary agreement with Hailezi, pursuant to the agreement, Sichuan Xinda agreed to pay RMB12.4 million (equivalent to USD1.9 million) to Hailezi for the compensation of Hailezi due to the termination of the purchase contracts. As of December 31, 2017, Hailezi has refunded the prepayment in the amount of RMB1,245.5 million (equivalent to US$190.6 million) and the remaining part of the prepayment has been reclassified as prepaid expenses and other current assets, for details, please refer to Note 5. As of December 31, 2017, Sichuan Xinda prepaid RMB18.0 million (equivalent to US$2.7 million) and has a remaining commitment of RMB1.9 million (equivalent to US$0.3 million).
(3) Heilongjiang plant construction and equipment purchase
In connection with the equipment purchase contracts with Hailezi signed On September 26, 2016 and February 28, 2017 mentioned in Note 7 (i), HLJ Xinda Group has a remaining commitment of RMB31.1 million (equivalent to US$4.8 million) as of December 31, 2017.
In connection with the "HLJ Project" mentioned in Note 7 (i), pursuant to the three investment agreements, the project total capital expenditure will be RMB4,015.0 million (equivalent to be US$614.5 million), among which the investment in fixed assets shall be no less than RMB3,295.0 million (equivalent to US$504.3 million) in total. Pursuant to the contracts with Hailezi signed in November, 2017 mentioned in Note 7 (i), HLJ Xinda Group has a remaining commitment of RMB187.9 million (equivalent to US$28.7 million) as of December 31, 2017.
(4) Dubai plant construction and equipment
On April 28, 2015, Dubai Xinda entered into a warehouse construction contract with Falcon Red Eye Contracting Co. L.L.C. for a total consideration of AED6.7 million (equivalent to US$1.8 million). As of December 31, 2017, the Company has a remaining commitment of AED2.1 million (equivalent to US$0.6 million).
(5) Xinda CI (Beijing) office building decoration
On March 30, 2017, Xinda CI (Beijing) entered into a decoration contract with Beijing Fangyuan Decoration Engineering Co., Ltd for a total consideration of RMB5.8 million (equivalent to US$0.9 million) to decorate office building. As of December 31, 2017, the decoration work in the amount of RMB2.0 million (equivalent to US$0.3 million) was recorded in construction in progress. As of December 31, 2017, the Company has a remaining commitment of RMB3.8 million (equivalent to US$0.6 million).
On June 9, 2017, Xinda CI (Beijing) entered into a decoration contract with Beijing Zhonghongwufang Stone Co., Ltd for a total consideration of RMB1.2 million (equivalent to US$0.2 million) to decorate office building. As of December 31, 2017, the decoration work in the amount of RMB0.6 million (equivalent to US$0.1 million) was recorded in construction in progress. As of December 31, 2017, the Company has a remaining commitment of RMB0.6 million (equivalent to US$0.1 million).
(6) Xinda Shanghai Research & Development office building
In connection with the building purchase contract mentioned in Note 7 (ii), HLJ Xinda Group has a remaining commitment of RMB108.3 million (equivalent to US$16.6 million) as of December 31, 2017.
The Company and certain of its officers were named as defendants in two putative securities class action lawsuits filed on July 15, 2014 and July 16, 2014 in the United States District Court for the Southern District of New York. On March 23, 2016, the Court issued an Opinion and Order dismissing the Consolidated Class Action Complaint without prejudice. On May 6, 2016, the lead plaintiffs moved the Court for leave to amend the Consolidated Class Action Complaint. On June 24, 2016, the Company filed its opposition to the lead plaintiffs' motion. On August 8, 2016, in conjunction with filing the reply brief in support of their motion, the lead plaintiffs moved to strike certain documents referred to in the Company's opposition. The Company filed its opposition to the lead plaintiffs' motion to strike on September 16, 2016. On March 8, 2017, the Court entered an Order in the Company's favor denying the lead plaintiffs' motion for leave to amend and denying the lead plaintiffs' motion to strike. The time for the lead plaintiffs to appeal the dismissal of their lawsuits has expired. In accordance with ASC Topic 450, no loss contingency was accrued as of December 31, 2017 since the lawsuit has been dismissed.
Note 23 – Revenues
Revenues consist of the following:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Modified Polyamide 66 (PA66)
|
|
|
286,526,792
|
|
|
|
260,107,405
|
|
|
|
219,082,301
|
|
Modified Polyamide 6 (PA6)
|
|
|
224,086,830
|
|
|
|
280,070,036
|
|
|
|
203,485,029
|
|
Plastic Alloy
|
|
|
363,319,049
|
|
|
|
401,664,431
|
|
|
|
350,620,202
|
|
Modified Polypropylene (PP)
|
|
|
231,255,726
|
|
|
|
178,729,819
|
|
|
|
164,828,880
|
|
Modified Acrylonitrile butadiene styrene (ABS)
|
|
|
43,333,667
|
|
|
|
42,121,680
|
|
|
|
40,510,344
|
|
Polyoxymethylenes (POM)
|
|
|
12,008,089
|
|
|
|
13,370,532
|
|
|
|
3,481,072
|
|
Polyphenylene Oxide (PPO)
|
|
|
17,468,208
|
|
|
|
15,315,570
|
|
|
|
12,984,368
|
|
Polylactide (PLA)
|
|
|
88,644,132
|
|
|
|
2,591,856
|
|
|
|
5,661
|
|
Polyethylene (PE)
|
|
|
22,756,186
|
|
|
|
-
|
|
|
|
-
|
|
Raw materials
|
|
|
1,049,069
|
|
|
|
2,409,070
|
|
|
|
3,373,854
|
|
Others
|
|
|
-
|
|
|
|
5,298,499
|
|
|
|
821,183
|
|
Total Revenue
|
|
|
1,290,447,748
|
|
|
|
1,201,678,898
|
|
|
|
999,192,894
|
|
Note 24 – Selected Quarterly Financial Information (Unaudited)
The following tables show a summary of the Company's quarterly financial information for each of the four quarters of 2017 and 2016 (in millions, except gross margin and per share amounts):
|
|
Fourth Quarter
|
|
|
Third Quarter
|
|
|
Second Quarter
|
|
|
First Quarter
|
|
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
427.6
|
|
|
$
|
311.4
|
|
|
$
|
313.6
|
|
|
$
|
237.8
|
|
Gross profit
|
|
$
|
91.5
|
|
|
$
|
47.3
|
|
|
$
|
63.1
|
|
|
$
|
34.8
|
|
Net income
|
|
$
|
(
20.5
|
)
|
|
$
|
14.1
|
|
|
$
|
28.1
|
|
|
$
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.
31
|
)
|
|
$
|
0.21
|
|
|
$
|
0.43
|
|
|
$
|
0.15
|
|
Diluted
|
|
$
|
(0.
31
|
)
|
|
$
|
0.21
|
|
|
$
|
0.43
|
|
|
$
|
0.15
|
|
|
|
Fourth Quarter
|
|
|
Third Quarter
|
|
|
Second Quarter
|
|
|
First Quarter
|
|
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
377.8
|
|
|
$
|
331.8
|
|
|
$
|
277.1
|
|
|
$
|
215.0
|
|
Gross profit
|
|
$
|
82.3
|
|
|
$
|
69.6
|
|
|
$
|
60.3
|
|
|
$
|
34.8
|
|
Net income
|
|
$
|
36.7
|
|
|
$
|
20.2
|
|
|
$
|
33.3
|
|
|
$
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.56
|
|
|
$
|
0.31
|
|
|
$
|
0.51
|
|
|
$
|
0.17
|
|
Note 25 – Geographic Information
The following summarizes the Company's revenues from the following geographic areas (based on the location of the operating units):
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (in US$ millions)
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
1,207.9
|
|
|
|
1,091.5
|
|
|
|
927.6
|
|
Dubai, UAE
|
|
|
82.5
|
|
|
|
110.2
|
|
|
|
71.6
|
|
Total
|
|
|
1,290.4
|
|
|
|
1,201.7
|
|
|
|
999.2
|
|
The following summarizes the Company's Long-lived assets (including Property, plant and equipment, net, Land use rights, net, Long-term prepayments to equipment and construction suppliers and Other non-current assets) from the following geographic areas (based on the location of the operating units):
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets (in US$ millions)
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
694.9
|
|
|
|
483.7
|
|
|
|
544.6
|
|
Dubai, UAE
|
|
|
376.2
|
|
|
|
369.9
|
|
|
|
253.8
|
|
Total
|
|
|
1,071.1
|
|
|
|
853.6
|
|
|
|
798.4
|
|
Note 26 – Subsequent Events
On February 2, 2018, the Company's Board of Directors approved the grant of 560,000 non-vested shares to 2 consultants at no cost, which will vest on February 2, 2018.