China XD Plastics Company Limited
Q4 2016 Earnings Call Transcript

Published: 18 Mar 2017

[Operator:]

Thank you for standing by and welcome to the Fourth Quarter 2016 China XD Plastics Company Limited Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, March 16, 2017. I would now like to hand the conference over to your first speaker today, Ms. Anna Bin.

[Anna Bin:]

Thank you all for joining for the China XD Plastics fourth quarter and the fiscal year end 2016 financial results conference call. Joining me on the call today are Mr. Jie Han, Chairman and the Chief Executive Officer; Mr. Lawrence Leighton, Independent Director and Chairman of Special Committee; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer; Mr. Junjie Ma, Chief Technology Officer; Dr. Kenan Gong, General Manager of the Dubai Subsidiary; and Mr. Rujun Dai, general manager of the Heilongjiang subsidiary. Earlier today, China XD Plastics issued our press release announcing the fourth quarter and fiscal year end 2016 results. Before management's presentation, I would like to refer to the safe harbor statements in connection with today's conference call and to remind our listeners that the management's prepared remarks during the call may contain forward-looking statements which are subjected to risks and uncertainties and that, management may make additional forward-looking statements in response to your questions. All statements other than statements of historical fact contained are forward-looking statements, including but not limited to the company's growth potential in international markets, the effectiveness and profitability of the company's product diversification, the impact of company's product mix shift to more advanced products and related pricing policies, the volatility of the company's operating results and the financial condition, the company's projections of performance in 2017 and other risks detailed in the company's filings with the Securities and Exchange Commission, available on its website at www.sec.gov. These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectations, assumptions, estimates and projections about the company and its industry. The company therefore claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and I will refer you to a more detailed discussion for the risks and uncertainties in the company's filings with the Securities and Exchange Commission. In addition, any projection as to the company's future performance represents management's estimate as of today, March 16, 2017. China XD Plastics assumes no obligation to update these projections in the future as market conditions change. To supplement the financial results presented in accordance with the U.S. GAAP, management will make reference to earnings before interest expenses, income tax, depreciation and amortization, which we refer to as EBITDA. EBITDA is a non-GAAP financial measure reconciled from the net income, which the company believes to provide meaningful additional information to better understand its operating performance. A table reconciling net income to EBITDA can be found on the earnings press release issued earlier today. I would now like to turn the call over to our chairman and the chief executive officer, Mr. Han. Mr. Han will be speaking in Chinese and I will translate his opening remarks into English. Mr. Han, please go ahead.

[Jie Han:]

Thank you all for joining us today. We are pleased to have met our revenue and net income guidance for 2016 abetted by strong customer demand from new growth regions in the fourth quarter. Our robust financial results for the fourth quarter of the year and solid results for fiscal year 2016 are consistent with our expectations of a steady recovery throughout China's automotive supply chain. According to the China Association of Automobile Manufacturers, automobile production in China increased by 14.5% in 2016 as compared to 2015. An improved macroeconomic environment has improved business conditions and helped us to generate stronger profit margins. We are particularly pleased to see major revenue contributions from major new growth frontiers, fostered in large part by the commissioning of our Sichuan manufacturing facility in July 2016, a key milestone in our corporate development. The Sichuan facility will ultimately add 300,000 metric tons of annual production to our domestic capacity for a total domestic capacity of 690,000 metric tons. The new facility also extends our geographical reach beyond our established Northeast base, generating strong growth from the South and Central China regions, in addition to our continued and steady business development in Southwest and East China. We installed 50 production lines with 60,000 metric tons of annual production in the second half of 2016 and construction at the complex is expected to be completed by the end of 2017. The Sichuan facility substantially expands the footprint of our auto business in China and while we expect that automotive applications will continue to be our core business, the new facility includes precision equipment which will enable us to diversify our product platform into such high-growth verticals as ships, high-speed rail, airplanes, bio-degradable materials, medical-grade materials, food packaging, electronic equipment, electrical products, alternative energy applications and power devices, which will help to propel the Company's growth. Our new facility in Dubai also extends our specialized high tech products into an important new market. We are planning to complete installing 45 production lines with 12,000 metric tons of annual production capacity by the end of July 2017, and an additional 50 production lines with 13,000 metric tons of annual production capacity by the end of January 2018. This will bring the total installed production capacity in our Dubai facility to 25,000 metric tons. The Dubai facility will target high end products for the overseas market and will ultimately enable more active inroads into the markets of Europe, the Middle East, Russia and other international regions. China XD continues to value our deep working relationships with our customers above all, and is committed to creating value with our culture of hard work and innovation. We anticipate that the continued execution of our strategic plan driven by an increase in our production capacity, our entry into new markets, our diversified customer base and an escalation in international sales will help to generate top line growth and stronger profitability. For fiscal 2017, we are providing financial guidance of between $1.2 billion and $1.3 billion in revenues and $85 million to $100 million in net income. With that, I will now turn the call over to Taylor Zhang, our CFO, to talk you through our financials. Taylor?

[Taylor Zhang:]

Thank you, Ms. Anna, and thank you everyone for joining the call today. Before I review the numbers, let me remind you that all figures are discussed are for the reporting period from fourth quarter of 2016 unless I state otherwise. Additionally, any year over year comparison is to the fourth quarter of 2015 and any sequential comparison is to the third quarter of 2015. So let's go over our fourth quarter results. Revenues were $377.8 million for the fourth quarter of 2016, compared to $272.8 million for the same period of 2015, representing an increase of $105 million or 38.5%. The year-over-year increase was primarily due to a 30.4% increase in sales volume and 11.7% increase in average RMB selling price of our products. The increase in revenues in the fourth quarter of 2016 was driven by growth in demand for our products in the domestic China market, our aggressive efforts to expand our customer base, attributable to our new plants in Sichuan and efforts to expand sales overseas. We recorded sales increases of 422% in South China, 121% in Central China, 39.2% in East China and 16.7% in South West China. Overseas sales were $37.7 million for the fourth quarter of 2016, accounting for 10% of total sales, representing the Company's resumed sales to overseas market in fiscal 2015. Premium products, namely PA66, PA6, Plastic Alloy, PLA, POM and PPO, in total accounted for 82.8% of revenues in the fourth quarter of 2016, compared to 81.1% in the prior year period. The Company continued to shift its production mix from traditional polymer materials to higher-end products due to, number one, the greater growth potential of advanced modified plastics in luxury automobile models in China; second, the stronger demand as a result of promotion by the Chinese government for clean and more energy efficient vehicles; and the third, better quality from end consumer recognition of higher end cars made by automotive manufacturers from Chinese and Germany joint ventures, and U.S. and Japanese joint ventures, where manufacturers tend to use more and higher-end modified plastics in quantity per vehicle in China. Gross profit was $82.3 million for the fourth quarter of 2016, compared to $52 million for the same period of 2015, representing an increase $30.3 million, or 58.3%. Gross margin was 21.8% compared to 19.1% in the fourth quarter of 2015, primarily due to a higher contribution of higher margin products sold overseas. G&A expenses were $9.9 million for the fourth quarter of 2016, compared to $6.5 million for the same period of 2015, representing an increase of $3.4 million, or 52.3%. This increase was primarily due to the increases in salary, including bonuses and welfare expenses, due to the increase in the number of management and general staff from various supporting departments. On a percentage basis, G&A expenses in the fourth quarter of 2016 were 2.6% compared to 2.4% for the same period of 2015. R&D expenses were $29.3 million for the fourth quarter of 2016, compared to $2.8 million for the same period of 2015, representing an increase of $26.5 million. This increase was primarily due to, number one, elevated R&D activities to meet the higher quality requirements of potential customers from Europe which resulted in an increase amount of $15.3 million. Second, increased R&D efforts directed towards applications in new electrical equipment, electronics, alternative energy applications, power devices, aviation equipment and ocean engineering in addition to other new products for advanced industrialized applications in the automobile sector and in new verticals such as ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics and medical devices which resulted in an increase amount of $10 million. And number three, the increased depreciation expenses after the reclassification of construction in progress for R&D purposes to fixed assets in Sichuan -- in our Sichuan South, which resulted in an increase of $0.09 million. As of December 31, 2016, the number of ongoing research and development projects was 212. Operating income was $42.6 million for the fourth quarter of 2016, compared to $42.3 million for the same period of 2015, representing an increase of $0.3 million, or 0.7%. This increase was primarily due to the higher gross margin, partially offset by higher research and development expenses. Net interest expense was $7.6 million for the fourth quarter of 2016, compared to net interest expense of $9.3 million for the same period of 2015. Income tax expense was $2.3 million for the fourth quarter of 2016, representing an effective income tax rate of 6%, compared to an effective income tax rate of 19.2% for the same period of 2015. Net income was $36.7 million for the fourth quarter of 2016, compared to $26.8 million for the same period of 2015, representing an increase of $9.9 million, or 36.9%. Basic and diluted earnings per share were $0.56, compared to $0.41 per basic and diluted share in the fourth quarter of 2015. The average number of shares used in the computation of basic and diluted earnings per share for the three months ended December 31, 2016 was 49.5 million, compared to 49.3 million shares for basic and diluted earnings per share in the prior year period. Earnings before interest, tax, depreciation and amortization or EBITDA was $58.2 million for the fourth quarter of 2016, compared to EBITDA of $51.2 million for the same period of 2015, representing an increase of $7 million, or 13.7%. For a detailed reconciliation of EBITDA, a non-GAAP measure, to its nearest GAAP equivalent, please see the financial tables at the end of this release. Now, let's take a look at our full year financial results. Revenues were $1.2 billion in fiscal 2016, compared to $999.2 million in fiscal 2015, representing an increase of $202.5 million, or 20.3%. The year-over-year increase was largely driven by 20.5% increase in sales volume and a 4.8% increase in the average RMB selling price of our products. The increase in revenues in fiscal 2016 was driven largely by growth in demand for our products in the domestic China market, our efforts to expand our customer base both in Sichuan and also in overseas sales. Premium products in total accounted for 81.3% of revenues in fiscal 2016, compared to 79.1% in fiscal 2015. Gross profit was $247 million in fiscal 2016, compared to $181.4 million in fiscal 2015, representing an increase of $65.6 million, or 36.2%. Our gross margin increased to 20.6% during the year of 2016 from 18.2% for fiscal 2015, primarily due to higher contribution of higher margin product sales from the overseas market. G&A expenses were $30 million in fiscal 2016, compared to $23.8 million for fiscal 2015, representing an increase of $6.2 million, or 26.1%. This increase is mainly due to the increase of $5.8 million in salary, including bonus and welfare expenses, due to the increase in the number of management and general staff from various departments; $0.8 million in travelling and transportation expenses; $0.4 million in professional fees; and $0.4 million in rental fees, partially offset by a decrease of $1.5 million in non-income taxation expenses. R&D expenses were $48 million in fiscal 2016 compared with $21.1 million in fiscal 2015, an increase of $26.9 million, or $127.5 million. This increase was primarily due to the same reasons stated for this increase in the fourth quarter 2016, this quarter over quarter comparison. Operating income was $167.7 million in fiscal 2016 compared to $135 million for fiscal 2015, representing an increase of $32.7 million, or 24.2%. This increase was due to the higher gross margin, partially offset by higher G&A expenses and higher R&D expenses. Income tax expense was $17.4 million in fiscal 2016, representing an effective income tax rate of 14.6%, compared to an effective income tax rate of 17.9% in fiscal 2015. Net income was $101.6 million in fiscal 2016, compared to $83.7 million for fiscal 2015, representing an increase of $17.9 million, or 21.4%. Basic and diluted earnings per share were $1.54 in fiscal 2016, compared to basic and diluted earnings per share of $1.27 for fiscal 2015. The average number of shares used in the computation of basic and diluted earnings per share for fiscal 2016 was 49.4 million, compared to 49.2 million shares for last year. EBITDA was $194.7 million for the fiscal year 2016 as compared to EBITDA of $172.2 million for fiscal 2015, representing an increase of $22.5 million, or 13.1%. For a detailed reconciliation of EBITDA to its nearest GAAP equivalent, please see the financial tables at the end of our earnings release. Now, let's turn now to the balance sheet. Our balance sheets remain strong, even as we continued our base expansion. As of December 31, 2016, the Company had $168.1 million in cash and cash equivalents, $184.8 million in time deposits with commercial banks, $239.5 million in working capital and a current ratio of 1.2. Stockholders' equity, as of December 31st, 2016 was $634.3 million, an increase of a 9.7% as compared to $578 million as of the end of 2015. Inventory decreased by 4.7% as of fiscal year end 2016 as compared to fiscal year end 2015 due to the Company's ability to increase sales. PPAE net increased by 41.1% mainly due to the delivery of equipments to Dubai Xinda at the beginning of 2016. Prepayment to equipment suppliers decreased by 92.2% due to the delivery of equipments to Dubai Xinda. The aggregate short-term and long-term bank loans increased by 77.2% to $694.3 million due to the utilization of existing lines of credit and our taking out a $180 million syndicated loan to redeem our 11.75% guaranteed senior notes due February 4, 2019. We believe our current debt level is manageable. On August 29, 2016, the Company fully redeemed all of its 11.75% guaranteed senior notes due on February 4, 2019, plus accrued and unpaid interest to the redemption date. The aggregate amount paid to redeem the Senior Notes was $166.6 million, plus accrued and unpaid interest to the redemption date, which resulted in a one-time, non-operating charge of $19 million as loss on debt extinguishments in the third quarter of 2016. On August 22, 2016, a wholly owned sub of the Company, Xinda Holding Company Limited Hong Kong, entered into an agreement for a loan facility in an aggregate amount of $180 million with a consortium of banks and financial institutions led by Standard Chartered Bank. Pursuant to the agreement with Standard Chartered, the proceeds of the loan facility was applied primarily to the redemption of the Senior Notes. In terms of our recent events, we have disclosed relevant information, regarding the going private proposal by Chairman Jie Han and Morgan Stanley Private Equity Asia, the company received in a press release issued earlier today and also earlier released. If interested, please refer to press release for further details. Now, for the new bio-composite investment projects mentioned in our earnings release; after initial approval by the Board of Directors and Company's major investor on December 8, 2016, Sichuan Xinda entered into strategic investment agreements with Shunqing Governments, Nanchong City, Sichuan Province. On December 12, 2016, due to the uncertainty of securing the necessary land use rights for the project, the company waited until March 13, 2017 and entered into the Land Use Rights Transfer Agreements with the government agency. The company expects to sign official and definitive investment agreements with Shunqing Governments, Nanchong City, Sichuan Province on March 17, 2017 and we will make a necessary and appropriate disclosure in accordance with required rules and regulations. Pursuant to the agreements, Sichuan Xinda will invest RMB2.2 billion equivalent to $317.1 million in a bio-composite project and RMB300 million equivalent to $43.2 million in a 3D printing material projects and also a project relating to functional masterbatch. Now with that, we will now open the call to your question. Operator?

[Operator:]

Thank you. We will now begin the question and answer session. [Operator Instructions]Your first question comes from the line of Glenn Krevlin, GAC Capital. Your line is open. Please go ahead.

[Glenn Krevlin:]

I was wondering if you could give us what you expect capital expenditures to be this year and specifically where that capital is going to be allocated. And then maybe walk us through -- well, why don't we start there?

[Taylor Zhang:]

This is Taylor. So basically, we can put down the CapEx from two major regions. For Sichuan, the remaining CapEx for our 300,000 tons capacity, the remaining will be approximately $70 million, largely will be incurred in this year. For Dubai, we have remaining of $95 million CapEx. Also, in the press release, the new bio-plastic composite projects, that's a two-year project starting from later this year. So the projected CapEx -- obviously, the detail will be finalized with the government tomorrow on the 17. We estimate it's going to be approximately $300 million.

[Glenn Krevlin:]

$300 million is, I'm sorry, Taylor, is what? Is the bio plant or total -- I'm confused.

[Taylor Zhang:]

It's for the bio-composite projects and other than manufacturing i.e. 3D printing and also functional masterbatch, so it's all in one.

[Glenn Krevlin:]

That will be borne by the company or in a -- or will be split in some unknown way at this point?

[Taylor Zhang:]

I believe mostly will be borne by the Company, but I think the government has many way and also strong incentive to support the project in terms of subsidy loan and land use rights. Obviously, we will provide further details tomorrow with, I believe, both a press release and also 8-K filing.

[Glenn Krevlin:]

But you expect to be breaking ground on that project and spending money this year?

[Taylor Zhang:]

Yes.

[Operator:]

Your next question comes from the lien of Matthew Larson, Morgan Stanley. Your line is open. Please go ahead.

[Matthew Larson:]

Hi, thanks for taking my call. Listen, congratulations on a great year. All this work you guys have put in and expanding your capacity is paying off and it looks as if things are only going to get better. I have to kind of wonder about the going private proposal. I mean for shareholders who have been involved in the company for many years, it seems like a very lowball offer considering the price to book, the earnings per share, the strong guidance, so on and so forth. Can I ask how you all arrived at $5.21 when that was actually below where the stock was trading just a few months earlier?

[Taylor Zhang:]

Hi, Matthew, thank you for attending the call and the question. So I think there's two angles we can look at this. Obviously as we discussed in the press release regarding the going private proposal, there's a premium to both 30 days and also I believe 90 days trading average. And I think more important is we have established a special committee comprised of independent directors and they will also engage independent financial advisor to provide a fairness opinion and also other important procedures to the finances.

[Matthew Larson:]

All right. No, I understand how it works, but in previous conference calls, you all have stated that your company has been valued at a fraction of what your peers are being valued at and so it's kind of an anomaly. I think the 30 day trading period prior to the offer was almost an anomaly. It was almost spooky how it traded at $4 to $4.05 for 30 some odd days, whereas the rest of the markets in general were ascending, particularly stocks in China. So I mean the $5.21 is just clearly a lowball offer relative to what the company's worth and I just kind of want to state that because now that things are starting to launch, expand, your revenues, your growth prospects, it just seems as if shareholders who have borne the brunt of really dead money for many years are not going to be able to participate in any sort of upswing that you'll most likely see if you're going to be expanding going forward and all the other work you've already done. It just seems as if a $5.21 level is -- it's almost unconscionable, so I have to state that because I've had some feedback from people who I represent and they're kind of dismayed, so I needed to pass that on to you.

[Taylor Zhang:]

I think, as I mentioned earlier, we just the Special Committee and also the advisor committee will engage, will do appropriate and proper work to -- basically to help the majority of the shareholders.

[Operator:]

[Operator Instructions] Your next question comes from the line of John Cooper, Stuyvesant Capital Management. Your line is open. Please go ahead.

[John Cooper:]

I just want to say that I'm in complete agreement with the previous speaker. Very disappointed and frustrated that the company's decided to go private at this point in the cycle after several years of slowing in the Chinese economy and going through a down phase in the auto cycle. Now things are bottoming out, looking up, the Chinese economy's recovering, Chinese markets both Shanghai A and H markets are rising, and it seems odd that this time -- at this point in time, after repeated management assurances that management was out to build long-term shareholder value, to build a global enterprise, to diversify away from automotive plastics into more exciting growth potential, everything is evident -- these strategies are evident and born fruit in the fourth quarter and full year results and in your forecasts. And so I agree with this previous speaker, it just seems odd to me, at this point in time, especially the offering price which is pennies on the dollar, as I see it, is kind of embarrassing for me to have to take this back to my investors. So I hope that the management reconsiders this private transaction and -- or this Special Committee takes note of our analysis.

[Taylor Zhang:]

I think your point is well received. There's not much we can comment on the offer price because as a management, that's not our role. But I think I can share the rationale of this going price reduction. So you have been for the company for many years, so you have seen we have proactively done a lot of activities to -- such as we engaged big for either in past clean eyes for various in a row. We also have world class private equity investor with us also for five years. So the variation has not changed in any material metric, so as a public company in the U.S. incurring pretty expensive listing expenses, but there's really not a viable capital raising platform for the company. So I think that's basically the rationale. But for the offer price, I think, as I mentioned, we trust this -- the independent financial advisor, we took a job on that.

[Operator:]

There are no further questions at this time. Thank you. Your next question comes from the line of George Mayer, Manhattan Realty Group. Your line is open. Please go ahead.

[George Mayer:]

Hi, Taylor, it's George Mayer. I agree with the two earlier calls, I think that the price that's been proposed is ridiculously low, but you've already commented on that so I won't ask for further comment. But as a long time shareholder, I share their earlier opinion. But I am also curious with all the investment that has recently been made, your forecasting for next year, very little in the way of sales growth. For a long time we've been capacity constrained, that's no longer the case. Recent sales increase have been far higher than you're projecting for 2017, so I'd appreciate it if you could comment on that.

[Taylor Zhang:]

Sure, George. So basically, we do have additional capacity coming online both internal and also out of China. But, however, I think there's two reason to the perceived growth and the projected growth in 2017. Number one has to do with the timing of contribution from those additional capacity because we expect them to be producing later this year; and secondly, the required ramp up time for them to unleash their potential. So I think this year, in terms of capacity, we probably in a ramp up stage and later years, we will see more contribution after we pass through the ramp up periods.

[George Mayer:]

Well, I understand you're continuing to ramp up, but you can just look at the fourth quarter and I mean you had some production capacity online and producing, your sales growth in the new Sichuan area was dramatic. You didn't have that capacity in the first two quarters of 2016, so I don't know. I know you like to be conservative, but it seems overly conservative.

[Taylor Zhang:]

Sure. I think one distinction is Sichuan, the new additional capacity from Sichuan, which was 60,000 metric tons. So they were -- they started producing since July of 2016. So they were part of the contributing growth factor in 2016, and we will continue being so in 2017. So, we do expect additional capacity on top of the 60,000 tons to be operational later this year. Does it make sense?

[George Mayer:]

Just a change, another question. In the past, I think you used to report your earnings based on the conversion of the preferred stock, which you're not doing in this recent report. Is that because the stock prices below the conversion offer?

[Taylor Zhang:]

You mean our earning based on conversion of the preferred stock?

[George Mayer:]

Well, you're using you're using 49 million shares, but that does not include the shares that would be issued if the.

[Taylor Zhang:]

Yes, that's right, because it's anti dilutive.

[George Mayer:]

Because as I recall, that converts at $6 a share.

[Taylor Zhang:]

That's the starting quarter.

[George Mayer:]

Yes. So, if that were if that were to convert, there would be 60 some million shares outstanding, is that correct?

[Taylor Zhang:]

Yes, that would be yes, yes, the post conversion would be 60 million.

[George Mayer:]

I mean in the past, I thought you had reported earnings per share based on that $60 million figure, 60 million shares.

[Taylor Zhang:]

There's [Indiscernible] two class calculation. So I think it in simple explanation is because the conversion part is higher than the stock price, so no rational investor will convert. That's why it is anti dilutive, not included in the calculation. But we're going to have the detailed calculation in accordance with the two class methods in the 10-K. So basically the earnings will be attributed on a pro rata basis to post common and also preferred shares. And then use a similar weighted average shares to the calculation. But that's just according to what the SEC rule. I think the investor will also do their own have their own practice to come up with the earnings per share as well.

[George Mayer:]

Thank you. Do you have any idea of what the timing is going to be on the independent directors' evaluation of this offer? When do you expect they will issue a report?

[Taylor Zhang:]

I think if they are they have been in the process of screening, selecting, interviewing very similar advisors, and I believe the once they have reach an agreement for engagements, there will be further announcements.

[George Mayer:]

So you don't know at this time have any estimates?

[Taylor Zhang:]

I don't know exactly when, but I would be surprised if they're going to take too long.

[Operator:]

Your next question comes from the line of [Peter Cyrus]. Your line is open. Please go ahead.

[Unidentified Analyst:]

Hi, Taylor. I have just three simple questions first. I see the receivables are way up. Is that seasonal or is there some reason such a big jump in receivables?

[Taylor Zhang:]

The receivable is we believe is not a it's not going to be a repeating [pattern]. So if you look at our domestic receivable level, they're pretty steady, stable and healthy. So the receivable mostly centered on the collection from overseas customer, but we have a lot of communication with the customer. So you are looking at the yearend number. So far, we have pretty much collected majority of the receivable announce. I think the remaining will be received by the end of March.

[Unidentified Analyst:]

I see this huge increase in R&D, which I actually like to see. Could you sort of talk for a second about what all the new R&D is about?

[Taylor Zhang:]

The R&D -- so I think the way I look at it, obviously, I can ask my R&D team to share more color on it. There's a three-tiered R&D structure. One is our traditional automobile R&D initiatives, and we have done that and doing very well in the past. And the second tier is the new growth frontiers, including a high speed rail, airplanes and the 3D printing, biodegradable plastics, medical grade plastics, et cetera. I think the R&D increase in the fourth quarter of last year was mostly due to the third tier, which are -- for example, in electronics, electrical devices, the application of those areas, the power devices, and also bio-plastics. So, I think even though R&D is an expense, but we view it as investments for the future.

[Unidentified Analyst:]

No, I think it's very -- I mean I like to see that kind of R&D. So, I have one more question and I don't know if it's a really a question -- well it's a question, and I don't think it's a question that you can answer, but I'm going to ask it anyway. I just want to make sure I'm understanding something here. The Board of Directors and the major -- according to the press release, the Board of Directors and the major shareholders approved the new development in Nanchong City in December. Is that correct? December 8th?

[Taylor Zhang:]

Yes, there was a discussion at the core level, and also with our strategic major shareholder about the conversation communication with the Sichuan Governments and Nanchong City, basically, they have been kept briefed of the scope of the investments and also the expected steps. So that was in…

[Unidentified Analyst:]

But this is the first time, that -- I know you and I have had some discussions about this offline. But this is the first time you've made discussed this project -- you've discussed this project publically, is that correct?

[Unidentified Company Representative:]

Yes, sure. I think, Peter, maybe I can -- if I may, to walk you through the timeline. So in December, there's a discussion with the Board Members and also with our strategic investor. Basically, there's a potential project. However, at a time, there's a significant uncertainty, mostly centered -- the land use rights. We're not sure if the governments will be able to get the land we need and also for our purpose. So that was a risk. So any premature announcement by that time, just in case for arguments sake, if the governments cannot pay off, the land use rights cannot be provided. Then we'll be in a situation where we're premature, and that is something that is going to be probably misleading. So fast forward, early March, the land went through the process which is auction and also other procedures. We have a pretty good assurance from the governments that the land will be available for us at our terms. And that's why we are planning to sign a definitive agreements on the 17, which is tomorrow, with the governments of the investment agreements.

[Unidentified Analyst:]

As I've told you before, I love this project. I think it's a really good move. My question is this, the management -- Chairman Han and MSPEA knew about this project in December. When they made their offer to buy -- to take the company private, they were in possession of information that the rest of the shareholders were not in possession of. And what I'm wondering is how the other -- if that puts the other members of your board committees in a difficult legal position, and if you guys have looked at that.

[Taylor Zhang:]

I think, Peter, in our view, companies who are into the situation like this, very similar to a lot of intense -- pretty much on a daily basis. So I think the materiality of this event is when we have the land use rights agreements in place, basically the government say, We can deliver. So I think back in December is pretty much a lot of the Company probably having like, if not on a daily basis, but a pretty frequent basis. I think the material level is once the government has showed their good faith that the project is a go in March.

[Operator:]

There are no further questions at this time. Thank you.

[Anna Bin:]

On behalf of China XD Plastics, we want to thank you all for your interest and participation in this call. If you would like to speak with us further, please call either myself or Taylor in China XD's New York office or our Investors Relations firm. The contact numbers for all of us are listed at the end of the press release. Thank you.

[Operator:]

That does conclude our conference for today. Thank you for participating. You may now disconnect.