DongHao Seeks Way out of Crisis


Working to emerge from a financial crisis, Chinese lubricant marketer DongHao Oil Group is receiving financial support from distributors and planning to sell its chain of automobile maintenance centers, the companys president told Lube Report Asia.

DongHao Oil President Min Chungaung said that the Shanghai company needs half a billion yuan (U.S. $81.6 million) to restructure and that it is seeking strategic investments from base oil producers. So far it has no takers, but the company hopes to reach agreements with investors by the end of December.

By then we can start the restructuring once the external investment is put in place, and we hope to finish the transaction early next year, said Min. We can focus on marketing planning and move forward after we secure the financing.

DongHaos lubricants blending plant in Shanghai has 200,000 metric tons per year capacity. The company reported sales of CNY 4 million last year. Chinese news organizations have described it as one of the nations largest independent domestic lube marketers, but it fell on hard times earlier this year. The company halted lubricant production in September and resumed operations last month.

DongHao hired Ernst & Young as its on-site financial advisor and with its help drafted a restructuring framework, Min said, but the actual organizational restructuring has not been initiated yet. The plan calls for an infusion of yaun and cannot be executed until those funds are obtained. Min said the company is in active talks with several domestic companies that he categorized as upstream petrochemical businesses. He noted that DongHao has reached the initial stages of agreements with multiple potential investors, including base oil producer Hainan Handi Sunshine Petrochemical and China National Offshore Oil Corp., the nations third-largest oil supplier.

Min said DongHao is trying to sell potential investors the idea that investments in finished lubricant suppliers can help protect base oil producers from base oil and crude oil price swings that can compress base oil profit margins. Such prospects are especially compelling, he said, during times like these when base oil margins are down.

If it cannot raise enough funds selling minority stakes to that type of investor, DongHao would consider other options, including bringing in venture capitalists, as the company is open to domestic and international partners.

DongHao has two business units, including lubricants and auto maintenance chain shops. Min said the group plans to divest its auto maintenance business to financial investors because management believes the maintenance business has potential to grow with proper financial assistance and direction.

DongHao Vice President Wang Jing said in a press release that financial investors and venture capitals are more interested in DongHaos service business. Currently, DongHao has 30 auto maintenance service outlets in Shanghai, and it continues to expand.

According to a Nov. 10 press release, Shanghai-based Yunfeng Group – a group specializing in the energy industry, real estate, logistics and automotive services – visited DongHao to discuss potential collaboration. These two groups have worked together for almost 10 years.

Future plans

Min said DongHao was financially healthy in the past two years, backed by local banks. There were some problems with our financial management certainly, he said. This time we will take it as an opportunity to reform and continue to look for investment. We will create a new sales model, and we are also planning [to introduce] an e-commerce platform and online sales.

According to Min, DongHao suffers from a problem that has been common for domestic, independent lubricant suppliers – inadequate processes to deliver their products. DongHaos strategy has been to focus on first-tier cities, such as Shanghai, and it has better coverage in that city than international oil giants such as Shell and ExxonMobil.

Before the crisis, DongHao planned to develop oversea sales while trying to continue its growth in country. The company entered Switzerland and Brazil last year, and had planned to enter 10 more countries this year. Those plans have stalled for the moment, but once DongHao is financially secured and the investors agree on strategy, the company will continue expanding overseas.

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