THE Industrial Development Corporation (IDC), National Pension Scheme Authority (NAPSA) and the Workers Compensation Fund Control Board (WCFCB) have paid two Chinese Investors by the name of Zhang Lingling and Huang Yaochi amounts totaling US$44.8 million as consideration for the purchase of a minority stake in their tile-making company.

The named Chinese are the two shareholder of a company called Marcopolo Tiles which was officially opened by IDC Board chairman President Edgar Lungu in December 2017.

The directors of the company are chairman and non-executive director – His Royal Highness Chief Chikwanda (Henry Kasonde Bwalya), Chief Executive Officer and Executive Director – Huang Yaochi, Chief Operations Officer and Executive Director – Zhang Lingling, chairperson and non-executive director: investments and business development – Roy Chisanga Mwamba.

“When you look at this list of directors of this Chinese company and then you scrutinize the list of IDC directors, you will see and understand what motivated this questionable transaction and who is behind it. There is no way that a company incorporated in 2016 can have a share value of more than US$2,000 dollars. What have they invested, how profitable are they? There is something fishy here,” said Ministry of Finance sources close to the transaction.

According to page 8 of the sale and purchase agreement entered into between IDC and the two named Chinese nationals, this transaction was never to be disclosed by either party; however, after News Diggers sent a press query enquiring into the questionable investment, IDC issued a media statement admitting buying 49 per cent shares in Marcopolo Tiles at a purchase price of US$44.8 million in partnership with NAPSA and WCFCB.

IDC contradicted itself in a press statement issued Thursday, stating that the Corporation partnered with the two other government parastatals “to acquire shareholding of 49 per cent in Marcopolo Tiles Company Ltd at a cost of US$44.8million, when in fact, according to a News Diggers investigation, the IDC and the two Chinese signed the sale and purchase agreement on June 3, 2020 two days before money was paid to the named Chinese investors.

“In August 2020, the IDC, NAPSA and Workers Compensation Fund Control Board (WCFCB) partnered to acquire shareholding of 49 per cent in Marcopolo Tiles Company Ltd at a cost of US$44.8million following a comprehensive due diligence and independent valuation. IDC’s shareholding in Marcopolo Tiles Company Ltd is 22.61 per cent, while NAPSA and WCFCB acquired 16.39 per cent and 10 per cent respectively,” read the press statement in part.

The contract showed that IDC alone bought 22,600 ordinary shares at US$20.6 million, money which Ministry of Finance sources say was paid to the shareholders’ personal accounts.

“Consideration for this transaction is US$20,679,000 (the “Purchase Price”) for the sale of shares particularly set out in schedule I. The consideration is calculated at share price of US$915 per share for 22,600 ordinary shares,” read the contract in part.

“The sum of US$8,271,600 being 40 per cent of the purchase price is payable immediately, by way of deposit, upon execution of this agreement to the vendors in a bank account to be advised by the vendors at execution. The sum of US$12,407,400.00 being 60 per cent per cent outstanding balance of the purchase price, shall be payable within 60 calendar days of the execution of this agreement or such earlier date that the vendors satisfy the condition precedents. The Purchase Price will be remitted to the vendors’ designated bank account in united states dollars.”

And responding to a press query, the IDC stated that it had paid the entire amount due to the Chinese investors, and was hopping to recoup the investment in five years time.

According to IDC, the investment was worthwhile and the share purchase price was also fair, as it was against the original net asset valuation price of US$2,071 per share.

Asked who chaired the board meeting that approved the transaction, IDC opted not to answer the question.

Below is the press query sent to IDC and the responses from the Corporation:

1. How did IDC identify this particular investment and who introduced the vendor to the purchaser?

A: This investment opportunity was received by the IDC by way of direct invitation to consider the Prospectus that was offering up to 49% shares of Marcopolo Tiles Company Limited (“MTCL”).
The IDC receives invitations to consider investments in various sectors by virtual of the Corporation being the commercial investment arm of the Government of the Republic of Zambia. Specifically, the Prospectus invited IDC, ZCCM-IH, NAPSA and Workers Compensation Fund Control Board (“WCFCB”). IDC, NAPSA and WCFCB worked in partnership to consider the investment opportunity.

2. Our findings indicate that Marcopolo Tiles Company Limited is not a publicly listed company on the stock exchange. What motivated IDC to invest in a private company that has no public listing security guarantee?

A: The IDC is not precluded from investing in Companies that are not publicly listed. The IDC was motivated to consider this particular investment due to its fit with the strategic aspiration of industrialisation, job creation, value addition, import substitution and desire to support the Zambian economy’s Balance of Payment position by exploiting the export potential of the sub-Saharan Africa market. The investment opportunity was also within the priority sector of manufacturing where the IDC has strategic intention of enhancing its investments.

3. How did IDC arrive at US$20,679,000 as the purchase price for 22.6 per cent stake in this private company?

A: The purchase consideration was arrived at through a process of rigorous negotiations. The starting point was the independent valuation that was incorporated in the Issue Prospectus. This valuation was subjected to Due Diligence and thorough analysis which saw the final negotiated price end at 28.24% lower that the Prospectus valuation.

4. Was there any company valuation done?, if so, who did the valuation to arrive at US$915 per share, considering that Marcopolo Tiles Company Limited is not listed on the stock exchange.

A: The MTCL Prospectus (which is the document that contains the details that aid investment decisions) included a valuation that was undertaken by independent professionals. The Prospectus included standard valuation methods used to value a going concern entity including Discounted Future Cashflows and Earnings Multiple bases of valuation as per best practice. The assumptions that supported the foregoing were subjected to further scrutiny by the IDC, NAPSA and WCFCB teams that also included an additional Net Asset basis of valuation to ascertain the minimum company valuation of floor value (as referred to in convention).

Having challenged the assumptions and discounted some of the proposed growth rates to factor in uncertainty, a final price was arrived at, representing a 28.24% discount from the initial offer price. This price was against a Net Asset valuation price of US$2,071 per share, representing a floor discount of 56%.

It should be noted that there subsists convention and best practice that spells out methodologies that are utilised to value companies that are not listed on any public exchange from which a market price can be derived.

5. If valuation was done, can IDC avail the valuation report to the public for scrutiny?

A: The valuation and accompanying assessments are all documented and verified, and cross checked against independent sources such as audited accounts and asset valuations. Unfortunately, it is not the practice of the IDC to share such information with third parties.

6. According to IDC’s investment assessment, when does the Corporation envision to recoup the US$20,679,000 back.

A: The investment of the IDC is expected to be recouped within a period of five (5) years according to the constitutive agreements. At the end of five (5), the agreement of all shareholders, including IDC, NAPSA, WCFCB and the original promoters of MTCL is that the Company will be taken to the stock market to allow for wider public participation in a successful Zambian company.
It should also be noted that part of the programme for divestment was to fuel the growth of the Company to include an additional line that manufactured sanitaryware (lavatories, bathtubs, sinks and related products). This expansion has now been completed and is to contribute an incremental 20% to the revenues of the business from the second half of 2021 from the 2020 annual revenue of US$24 million to approximately US$28.8 million.

7. What is IDC’s long term vision for this investment and what prevailing economic challenge does the corporation particularly wish to solve by manufacturing tiles?

A: The long-term vision of the IDC is to continue to encourage the growth of the domestic manufacturing base. By doing so, the IDC will support job creation, reduce demand for foreign exchange that is required to import products from abroad and consequently support the valuation of the Kwacha. It will also ensure that the products manufactured by MTCL benefit from free trade protocols that subsist in the COMESA and SADC region thereby supporting the flow of foreign exchange in the economy and support expansion into other lines of products that are commonly imported when the country has the raw materials required for these products to be manufactured locally.
You will note that in sub-Saharan Africa, only South Africa has a tile manufacturing company with MTCL being the second in the region. This presents an enormous opportunity for export and foreign exchange earnings.

8. Considering that key consumers of tile products import the commodity, what measures will IDC put in place to ensure that the Corporation survives the competition in this manufacturing industry?

A: There is currently no local competition as MTCL is the only company manufacturing tiles, part from companies in South Africa, in sub-Sharan region. Currently the customers of MTCL include those in DRC, Zimbabwe, Malawi, Rwanda, Tanzania and Kenya with a lot more regional demand that is in the process of being mined as the Company seeks to establish more robust export sales and marketing structures. In terms of imports, the company is well able to compete with foreign goods as it has significant production cost advantages since it relies on locally sourced materials.

9. Did IDC conduct due diligence to understand why the investor decided to sell the company?

A: As per IDC policies, detailed Due Diligence was conducted over a period extending 3 months to understand the business, its value drivers and risks. The promoters were seeking new investors in order to support the new level of growth which included plans to set up a sanitaryware manufacturing plant.

10. Does IDC know how much required resource still remains in reserve underground for Tile manufacturing under the mining license which was issued to this Chinese investor?

A: The IDC placed assurance on the mining exploration licences that the Company has. It must be noted that 95% of the materials in the manufacturing process are derived from local natural resources. The resources secured to date are sufficient to support the Company’s operations for the foreseeable future.

11. Did the IDC hold a board meeting to approve this transaction, and if yes, who chaired the said board meeting?

A: As per IDC policy, all investments are subjected to the approval of the respective governance structures, including the Investments Committee of the Board and the Board of Directors.

12. How much has IDC paid for this transaction?

A: The total consideration has since been fulfilled.

13. Was the payment made to the company (Marcopolo Tiles Company Limited) or to the personal accounts of individual shareholders?

A: Payment was made to the company and to the original shareholders to the extent that they were selling down to accommodate the entry of new shareholders.

14. If the money was paid to individuals, how will property transfer tax be settled?

A: The PTT is settled by the vendors as per standard practice and this was done prior to effecting the changes in shareholding at PACRA.