China Glass II

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	26826
Company name	China Glass Holdings Limited
Country	China
Sector	Nonmetallic Mineral Product Manufacturing
Environmental category	B
Department	Global Manufacturing & Services
Status	Active

Date SPI disclosed	April 10, 2008
Projected board date	May 12, 2008
Previous Events	Invested: July 31, 2008 Signed: June 4, 2008 Approved: June 2, 2008

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The project is to help an IFC existing client, China Glass Holdings Limited (CGH or the company):

- improve its energy efficiency and other aspects of its environmental performance; and
- manufacture more energy-efficient products.

The project consists of three main components:

- build a 3MW heat-recovery generation system and a centralized water recycling system in Suqian, Jiangsu province;
- transform three lines (Suqian, Weihai and Beijing) to produce energy-efficient products such as low-E glass; and
- enhance furnace energy efficiency by revising design and applying new combustion technology and increasing capacity during cold repair.

The total project cost is estimated at up to $52 million and IFC proposes to provide an A loan of up to $30 million to support the project.

Project sponsor and major shareholders of project company

China Glass Holdings:

CGH is a major flat glass producer with a capacity of 5,110 tons per day (tpd), with 13 lines spread across China. The company is the result of the consolidation of a number of smaller glass producers bought between 2004 and 2007 by Hony Capital (Hony), a China-focused private equity fund. During the subsequent two years, Hony managed to:

- undertake an initial public offering of CGH’s shares in Hong Kong;
- expand through acquisitions the company’s production capacity; and
- forge an alliance with Pilkington, one of the largest global producers of flat glass.

In February 2006, continuing its strategy of growth through acquisition, CGH announced the acquisition of 7 smaller glass companies that combined had 11 glass lines (8 float glass lines, 1 rolled glass line, and 2 sheet glass lines) and a combined melting capacity of 3,280 tpd. In March 2007, all the acquisitions were completed and CGH became the largest listed flat glass manufacturers in China.

The company is listed on the Main Board of the Hong Kong Stock Exchange (HKSE). It is currently owned 32.8% by Hony, 29.9% by Pilkington, 8.1% by IFC, 9.6% by senior management, and 19.6% by the general public. The company’s market capitalization as of March 13, 2008 was $184 million.

Pilkington:

Pilkington, a global glass producer which is part of the Nippon Sheet Glass (NSG) group, is a key strategic investor in CGH and an existing client of IFC. Pilkington has a strong track record of providing technology, management and other assistance in implementing projects, including those financed by IFC in Brazil, Mexico, Poland and Russia.

Hony:

HONY is a mid-market private equity fund with a SOE buyout focus in China. It specializes in buying medium-sized state-owned enterprises and restructuring them into private companies that are among the leaders in their sectors. HONY’s founding sponsor is Legend Holdings, the parent company to, among others, Lenovo, one of the largest personal computer makers in the world.

Total project cost and amount and nature of IFC's investment

The total project cost is estimated at $52 million. IFC has been requested to finance up to $30 million of the project cost while the balance is expected to be financed by the company’s internal cash generation.

Location of project and description of site

CGH has 13 lines across the East, North, South and West regions of China. The project will take place at the following sites:

- Beijing Qinchang Glass Co., Ltd. in Beijing (cold repair);
- Jiangsu SHD New Materials Co., Ltd in Suqian, Jiangsu (cold repair, heat recovery generation, and water treatment); and
- Weihai Blue Star New Technology Glass Co., Ltd. in Weihai, Shandong (cold repair).

Anticipated development impact of the project

The project’s significant development impacts include:

Assisting a market leader to improve market competitiveness:

The project is consistent with the Chinese Government’s efforts to consolidate the industry by supporting a competitive producer and create a strong, efficient leader in the glass industry. The Project will support CGH in strengthening its market competitiveness and enhancing its long term sustainability by improving energy efficiency and diversifying into green glass products like low-E glass.

Promoting energy efficiency:

The Chinese Government is encouraging the glass industry to pursue cleaner production practice to address the rising environment and energy concern in the country. The project will help the Company produce more energy efficient products and enhance furnace energy efficiency, thereby reducing its energy costs and CO2 emissions. This is further expected to help CGH set good cleaner production standards and become a role model for its peers in the industry.

IFC's expected development contribution

IFC will have a strong role in this project and has identified a number of energy efficiency and cleaner production opportunities that are necessary to be addressed in the near term and will bring significant returns to the company in the medium and long term.

In particular, IFC will support the company’s initiative of adopting new energy efficiency technology/practices and applying higher level environment standards. IFC's experience in the Chinese glass industry coupled with its global expertise in glass and cleaner production make IFC well-equipped to provide additional advice and know-how to help the company in its pursuit of further potential cleaner production. Furthermore, IFC is uniquely qualified to support the company to implement these energy efficiency focused projects with long term financing, which will in turn support the company’s efforts to rationalize its capital structure and reduce its overall financing risk, allowing China Glass to better weather any cyclical downturns in the future.

Environmental and social issues - Category B

The key environmental and social issues associated with this project are CGH’s management of social and environmental issues, in compliance with local regulatory requirements and with the Action Plan agreed with IFC in 2007, environmental assessment and planning processes for the new line, use of energy and water and air emissions.

The project’s principal objectives to conserve use of energy and water in manufacturing, manufacture of glass products which promote energy efficiency and secondary control of emissions to air are unambiguously environmentally beneficial.

Potential adverse impacts arising from the move of the Weihai line from the city center to out-of-town location are reversible and readily mitigable, and the net effect of the project is positive. This is therefore a social and environmental Category B project.

IFC PROJECTS