Hangzhou, China, 07 March 2011 -- /PRNewswire-Asia/ -- China Shengda Packaging Group Inc. (Nasdaq:CPGI - News), a leading Chinese paper packaging manufacturer, today announced that on 07 March 2011, the company signed a letter of intent (LOI) to purchase the land use rights for a 166,533 square meter plot in Yancheng City, Jiangsu Province, China, for USD 11.4 million to build a paper manufacturing plant.
China Shengda Packaging plans to build the new plant in two phases. Phase I, which is expected to be completed by the end of 2011, will entail the construction of 100,000 to 150,000 tons per annum of paper capacity and is expected to require capital expenditures of USD 34.2 million, including the cost of acquiring the land use rights. Phase II, which is expected to be completed by the end of 2012, will entail the construction of 100,000 to 150,000 tons per annum of paper capacity and is expected to require USD 18.2 million. The company plans to fund the purchase of the land use rights and construction of the new plant through the proceeds received from its recently closed equity financing and internal cash generation.
"We had initially explored opportunities to acquire a paper manufacturing company with an annual capacity of 250,000 to 300,000 tons to achieve vertical integration of our production process," said Daliang Teng, chief executive officer of China Shengda Packaging. "However, given the increase in valuations among potential targets and the level of proceeds from the company's recent equity raise, we concluded it would be more cost effective for the company and our shareholders to build a new plant in order to fulfill our strategic objectives," he said.
"By integrating upstream through the construction of a paper manufacturing plant we believe we will be able to better manage our raw material costs and, more importantly, extend our product improvement and development capability to the raw paper production level. We currently purchase raw paper from our PRC suppliers. As raw paper constitutes approximately 70% of our cost of goods sold, we expect that this vertical integration will enable us to more effectively manage our production costs and control the supply and the quality of our raw materials," Teng said.
"Upon completion of this new factory we will start our value chain as early as papermaking and all the way through to producing corrugated cartons and providing packaging solutions to our customers. We believe that by streamlining our production process in this way we will enjoy cost benefits as well as be able to offer our customers more innovative, customized, and high quality packaging solutions," Teng said.
"The corrugated paper packaging market in China is highly fragmented. There are approximately 20,000 players in China with the top 10 accounting for less than 10% market share. Vertical integration is expected to be a future trend in China's paper packaging industry and, as a market leader, we have the capabilities to integrate both vertically and horizontally in order to strengthen our competitive position. Our customers place a great emphasis on product image, packaging quality, and customization and with this integration we expect to be better able to meet the increasingly complex needs of our customers and the growing demand for sophisticated packaging products in China."
The seller of the land use rights for the plot of land in Yancheng City is Shengda Group Jiangsu Shuangdeng Paper Industry Co., Ltd., a subsidiary of Shengda Group Co., Ltd., which is a related party of the company. Yancheng City is approximately 250 miles from the company's base of operations in Hangzhou.
Teng concluded, "As a result of our relationship with the Shengda Group, we were able to acquire the land use rights for the location of our new factory at a very reasonable price and in close proximity to our current paper packaging production facilities. As part of this transaction, the accompanying government license to build a paper manufacturing facility on this lot will also be transferred to us at no additional cost. In the interest of transparency and good corporate governance, we engaged and received a third party valuation report conducted by Guangdong Top Center Certified Public Valuer Co., Ltd. to ensure the transaction value reflected the fair market value of land transactions in the area. In addition, this transaction has been reviewed and approved by our board of directors, including all of the company's independent directors.
"Shengda Group primarily makes daily-use and household paper and is one of the largest private enterprises in China. We believe it is a competitive advantage that we will be able to leverage the human resources and business expertise of the Shengda Group to assist us as we build, staff and operate our new paper manufacturing facility."
China Shengda Packaging Group Inc. is a leading paper packaging company in China. It is principally engaged in the design, manufacturing, and sale of flexo-printed and color-printed corrugated paper cartons in a variety of sizes and strengths. It also manufactures corrugated paperboards, which are used for the production of its flexo-printed and color-printed cartons. The company provides paper packaging solutions to a wide variety of industries, including food, beverage, cigarette, household appliance, consumer electronics, pharmaceuticals, chemicals, machinery, and other consumer and industrial sectors in China. For more information, visit http://www.cnpti.com.