On Anaeco and the XEPT Transaction

On Anaeco and the XEPT Transaction

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The Xiaoqing Environmental Protection Technology Co Ltd (XEPT) partial debt-purchase (from Monadelphous) and equity conversion in Anaeco was expected to have been completed by the end of 2016.

This was delayed and the company announced to the market earlier in the year that all three parties have agreed to settle the transaction, on the same previously agreed terms, by the end of March 2017 or else any of them can just call it quit. In the meantime, Anaceo will have to rely on the kindness of the Australian taxpayers for its R&D tax reimbursement. That and loan facilities from Monadelphous at a best mate’s rate of 12% p.a. Yea I know, the nice people at any bank would only charge maybe 5%, but they aren’t lending and don’t know the risk as much as MND does 😀

Mixed emotions aside (I also own MND), I’ll give my two cents worth on why I think there is a delay in the transaction. Going through some of the reasons other investors have suggested and try to debunk them.

 

WHY THE DELAY

Around late November 2016, China’s new capital control rules came into effect. Requiring a much stricter reporting and approval process for any capital outflow. For instance, any personal transfer above $US10,000 needs to be reported; others have reported that any amount greater than $50,000 requiring two government departments to vet and approve.

I think this is the only reason for the delay. But let’s examine a couple of other possibilities.

 

OTHER (POSSIBLE) REASONS

1. THE COLLAPSE OF BROCKMAN WASTE SCARED THEM AWAY

While this sounds reasonable, I don’t think it is probable. Not for a company that had spent almost 12 months examining the technology and the “difficulties” at what became the Brockman waste centre.

 

2. THEY ALREADY STOLE THE PATENTS

Another investor says, in all seriousness, that XEPT had used all those months and took all the technology they need so now won’t be paying for it.

From my uni days, patents are open to the public and any would be capitalist are free to read and examine them. That’s the idea of patents – not to protect the original inventor, but to only secure their rights to it over a limited time before it’s free for everyone to copy and replicate.

So XEPT would not need to get close to steal the secrets. That and they will be sue if something just like Anaeco’s tech turn up in one of their sites.

That and in business, it is generally not a good idea to bring someone into your confidence then screw them sideways. Others tend to learn very quickly to tell you where to go when you want to propose some “deal” if only they’d let you looksy.

Long term investor, which I think our Mr Han is, would not be bothering with that kind of tactic. It’s too upfront, and the price here is too little to risk all that future possibilities with other potentials.

 

ANAECO’S TECHNOLOGY IS CRITICAL TO CHINA’S NATIONAL SECURITY

As we know, China is a fast-developing economy with a rapidly expanding urban population. With 1.38 billion people and now ready to really get grow now that the one-child policy is abolished, consumption and its wastes is massive. With land already in limited supply, air and water quality at kill-you level most days of the year, the people are demanding a clean up.

Judging by the reported $US1.8 billion China’s leadership has committed towards the environmental protection sector in its 13th Five-Year Plan (up about 4 times from $US512 billion since the 12th Five-Year Plan, CNBC), there is a real opportunity for not just the waste management and environmental protection industry, but one where a technology like that of Anaeco can really clean up.

How?

We all know about Anaeco’s small footprint, modular design; all know about its (mostly) mechanical/automated separation and recycling of mixed municipal wastes… these pretty much most other (more established) waste management companies can do.

What put Anaeco ahead of the rest is its ability to power itself, with enough left over to feed into the national power grid.

So while cost, small footprint, organic fertilisers and recycling are all important… what is most important to China is a technology that can do all that on its own gas.

Most of the world’s oil and energy reserves are owned and is far away. Any technology that could power itself will reduce demand on a scarce resource. And that is something gasification and other recyclers cannot honestly make as their selling point.

That is, with Anaeco, China can solves both its organic waste issues, extract valuable commodities, and increased China’s energy security.

 

WHAT IF XEPT WALKS AWAY?

I honestly think that if XEPT walks away, MND will just take Anaeco over in one swoop.

With an arms-length deal already proposed to the market, MND would not be at risk of any insider trading or class action if it were to then take over all the outstanding shares in Anaeco. At the price it’ll be paying, all the interests and the payment Anaeco paid to it over the year pretty much cover the entire purchase price.

So for a song, MND can take the technology in-house and either partner with another player to expand and diversify its operations.

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