Avgol Nonwoven Industries Ltd. (TASE:AVGL), which manufactures nonwoven fabrics for diapers and the hygiene industry, has decided to add a third production line in China, which will raise Avgol's production capacity in China by 65% to 40,000 tons. According to company estimates, the new production line will commence operations in the first half of 2012.
Avgol's board of directors approved the company's entry into an agreement with Avgol's Chinese partner, Hubei Gold Dragon, under which Avgol will invest in an additional production line to manufacture non-woven fabrics, to be located in the partnership's Chinese factory, after reaching an understanding that this site has high potential to contribute to company revenue.
This line is part of an effort to expand production capacity through the purchase of two new production lines in the US and China for an investment of $80 million, which Avgol reported eight months ago. This expansion will raise Avgol's production capacity by 30%, or 30,000 tons of finished products a year, so that overall company production of finished products will reach 140,000 tons a year. This expansion will allow the company to meet increased demand of company products.
The cost of the additional Chinese production line will be financed mainly by investment in equity from the Chinese partnership, bank financing, and/or with a shareholders' loan. The investment required to set up the new Chinese production line includes an investment of between $10.2 million and $12.4 million by Avgol in the Chinese partnership equity, as well as a $1.1 million investment by the Chinese partner in the partnership equity. The Chinese partnership will raise the remaining $27 - $30 million of the investment through local bank financing and/or a shareholders' loan.
The investment amount needed to enlarge partnership equity is to be paid within two years from receipt of approval from Chinese authorities, and in accordance with construction progress of the new production line.
Avgol currently operates two production lines in China, which supply 24,000 tons of finished products a year. The second production line began operating in the third quarter of 2010. Following its investments and its the increase in its partnership equity, Avgol's stake in the partnership will rise to 83-84% of partnership equity and the Chinese partner's will hold 16-17%.
Avgol's share price fell 0.14% today to NIS 283.1, giving a market cap of NIS 844 million.
Published by Globes [online], Israel business news - www.globes-online.com - on August 3, 2011
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