Hony Capital (Hony), a mid-market private equity fund with a focus on State-Owned Enterprises (SOE) buyouts in China and targeting primarily three sectors including construction materials is the project sponsor. It specializes in transactions such as the one contemplated under the project - buying medium-sized state-owned enterprises and restructuring them into private companies that are among the leaders in their sectors. Hony’s founding investors are Legend Holdings, the parent company to, among others, Lenovo, one of the largest personal computer makers in the world. In line with the required procedures for such privatizations, Hony was selected among four bidders by the relevant authorities in early 2007. As a result of the proposed privatization, Hony will become the majority owner of the consolidated glass operations of Yaohua and Beifang.

The other main shareholder is expected to be Qing Huang Dao Municipal State-owned Asset Supervision & Administration Commission (QHDSASAC).

The total project cost is estimated at about $525 million and includes capital expenditure, debt refinancing and a compensation package under the staff retrenchment plan. The proposed IFC Investment is an equity investment of about $10 million , an A Loan of about $60 million for its own account, and a syndicated B Loan of about $100- 120 million.

75.0 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	50.0
Equity	25.0

* These investment figures are indicative

The project is primarily expected to be in Qinhuangdao, Hebei province, North China.

The project’s significant development impact includes:

- Promoting the privatization of non-performing SOEs, in line with China Government policy:

In addition, the government is encouraging non-strategic SOEs (such as Yaohua and Beifang) to be transformed into viable private companies so that they become industry leaders and more efficient in their operations. Because of the increased capacity of the combined operations of the two privatized companies, a labor requirement of 6,800 employees is anticipated, which is slightly more than are currently employed in the existing glass lines.

- Supporting the modernization of the sector and the upgrading of environmental standards:

The project will upgrade and modernize the company’s production facilities with an increased focus on higher value-added products and energy efficiency production process.
- Improving the environment by closing down old plants in urban areas:

The project is consistent with the China Government’s efforts to relocate polluting industrial companies from densely populated urban areas.

IFC role would include supporting the government’s efforts to privatize and turn around Yaohua and Beifang and, as a result, assist Hony in transforming the merged company into one of the industry leaders in China. Also, IFC will provide not readily available long-term financing and support the company’s efforts to strengthen its balance sheet and better weather any cyclical downturns in the future. Additionally, IFC will be able to leverage its experience and policies to ensure that the staff retrenchment plan and associated compensation package is designed and implemented in a fair and transparent manner. IFC will also work with Hony to introduce international standards and practices in areas such as corporate governance, energy efficiency and environmental management. By closing down old plants in urban areas, the Project will have an immediate positive impact on the environment.

This is a category B project according to IFC’s Procedure for Environmental and Social Review of Projects. IFC’s appraisal of this proposed investment included:

- a review of technical documentation and discussions with management regarding the environmental, health, safety and social performance of the Yaohua and Beifang Groups;
- a physical inspection of existing float glass production lines operated by the two groups in the cities of Qinhuangdao and Shenyang;
- a review of the designs of the proposed new float glass production lines in Qinhuangdao;
- discussions with the management of the Qinhuangdao Northern Industrial Area regarding the acquisition of land on which the project’s new float glass production lines will be constructed; and
- the engagement of a third party consultant to review the retrenchment and re-deployment of both Group’s employees as a result of the proposed privatization.

IFC has determined that the project company will, subject to the fulfillment of commitments made by the company in its Action Plan, manage environmental, health, safety and social risk in a manner consistent with the requirements of IFC''s Social and Environmental Performance Standards. A complete review of IFC''s environmental and social due diligence of the project, inclusive of the Action Plan to which the company has committed, can be found in the Environmental and Social Review Summary.