In 2009, China was in the aftermath of the global financial crisis. Many enterprises were in trouble, but I knew that crises often breed opportunities. That year marked an important turning point in my journey to wealth—investing in a steel plant on the brink of bankruptcy.
Distressed enterprises: The bankruptcy crisis of the steel plant
This steel plant is located in North China, established in the 1990s, and was once the largest taxpayer in the area. With the sharp decline in steel prices due to the financial crisis, coupled with management mistakes, this steel plant has ceased operation for nearly six months. Banks and creditors continuously chased debts, while workers frequently petitioned for their overdue wages. This plant has turned from a local pillar enterprise into a headache for the government.
But what piqued my interest was the actual situation of the factory:
Resource base: the production equipment of the factory is relatively advanced, with two out of three rolling production lines being imported, designed for an annual production capacity of nearly 1 million tons.
Land advantage: the factory covers a thousand acres, adjacent to the railway freight station, and there are large undeveloped lands on one side of the factory area.
Market demand: Although the steel industry is generally sluggish, the Chinese government launched a 4 trillion RMB economic stimulus plan at the end of 2008, significantly accelerating infrastructure construction, and the demand for construction steel is expected to rebound quickly.
I personally went to the factory area for on-site research. Although the plant and equipment appeared dilapidated due to suspension, the core facilities could be quickly restored. The key point is that this factory has a mineral procurement agreement, with supply prices 30% lower than the market average, which is a highly competitive advantage.
However, the biggest challenge for the company was the broken capital chain:
(1) Short-term debt reached 300 million RMB, with significant interest pressure.
(2) The factory has been shut down for half a year, with serious inventory backlog, and production lines need to be re-commissioned after workers leave.
(3) The existing management lacks confidence, and the founder even considers bankruptcy liquidation.
For me, this is not an ordinary distressed enterprise, but a treasure buried by mismanagement.
Negotiation
Negotiations with the management, creditor banks, and local government lasted an entire month. The other party's demands were complicated:
(1) Banks want to quickly recover principal and reduce risk;
(2) The management wants to retain some control;
(3) The local government is concerned about worker employment and social stability.
In the end, I proposed a solution that addressed the core issues of all parties:
1. Acquire controlling stake: invest 50 million RMB for 75% equity, while committing to restore factory production and retain most of the original management team.
2. Debt restructuring: pay 10% of the principal to the bank, extend the remaining portion for five years, and reduce the interest rate by 50%. In exchange, the factory land and inventory steel are used as collateral.
3. Worker placement: commit to restoring at least 50% of worker employment within three months and pay overdue wages.
This plan received strong support from the local government, which even helped coordinate some tax reductions.
Revitalization plan
After taking over the steel plant, I immediately initiated a three-step revitalization plan.
1. Quickly restore production
We prioritized the repair of a core production line, using existing inventory raw materials for production, aiming to quickly obtain the first batch of cash flow. At the same time, we optimized processes and improved raw material utilization, reducing production costs below the industry average.
2. Lock in orders
I contacted several contractors of local infrastructure projects to offer discounted construction steel. These clients had strong cash payment capabilities and stable demand, quickly bringing the first profitable orders to the factory.
3. Revitalize assets
The idle land of the factory is located near the railway freight station, with convenient transportation. I signed a lease agreement with a logistics company, and the annual rental income exceeds 10 million RMB. This stable income is used to pay bank interest and the daily expenses of the factory.
From loss to profit
In the first quarter, the steel plant's production recovered to 30% capacity, although profits were thin, it was already out of losses. By the second year, the company's annual revenue reached 800 million RMB, with a net profit exceeding 30 million.
More importantly, the factory has once again become an important pillar of the local economy, with over 1,500 workers returning to their jobs. The local government has promoted us as a successful 'corporate rescue' case to showcase the attractiveness of the investment environment.
Five years later, this steel plant became an industry benchmark in North China. I transferred part of my equity to a state-owned enterprise, with total returns exceeding 500 million RMB, a tenfold increase.
Investment logic in the Chinese market
1. Capture policy dividends
China's economic cycle is closely related to policy. The 4 trillion RMB infrastructure plan is the fundamental reason for the success of this investment. Without this wave of infrastructure boom, the rebound speed of the steel industry would be much slower.
2. Collaborate with the local government
In the Chinese market, the government's attitude is crucial. Whether it is tax reductions, labor relations coordination, or bank extension negotiations, the support of the local government has played a key role.
3. Cash flow priority
The first step in corporate revitalization is stabilizing cash flow. By quickly restoring production and leasing land, I ensured normal fund operation.
4. The art of debt restructuring
The Chinese banking system has a strong willingness to 'protect enterprises'. Capturing this point, persuading banks to extend loan terms, and using assets as collateral to reduce their risks is key to resolving the capital chain crisis.
Through this investment, I have come to realize that behind distressed enterprises often lie undervalued opportunities. The key is to dig deep for value and leverage it with finance and resources. This process of rebuilding from the ruins is what makes investing most fascinating.
