Small-cap Chinese chemical company seeks US listing

While the US stockmarket appears to have run out of steam over the past three weeks after rallying 34% since early March, Chemspec International will be hoping that some of the investor cash that is arguably still waiting to be put back into equities will find its way into its initial public offering this week. The company is aiming to raise between $56.6 million and $72.8 million, although approximately 22% of that will go to a group of existing investors who will be selling a portion of their holdings as part of the IPO.

Aside from the fact that the offering comes with the customary IPO discount -- giving investors the potential for a quick pick-up in the value of their holdings -- the deal is also riding on the back of an extremely strong performance of the most recent Chinese company to list in the US. As of Friday, online gaming company Changyou.com had risen 140% since its listing on April 2, so even if Chemspec does only half as well, it would make it worthwhile for investors. However, compared to Changyou, Chemspec operates in an industry that is significantly less well-known and it also doesn't have the benefit of being spun-off from a parent company that investors are already familiar with. Chemspec is also a small-cap stock -- it will have a market capitalisation of no more than $327 million at the time of listing -- which is bound to keep many investors away amid concerns about after-market liquidity.

Sources say the investors most likely to participate in the offering are funds specialising in either small-caps or China, and potentially a few dedicated to the chemical sector, which have put in the work to understand the business. That in mind, joint bookrunners Citi and Credit Suisse spent two weeks on investor education before the management roadshow kicked off on June 11. The deal is due to close at the end of US trading tomorrow and the shares will debut on the New York Stock Exchange on June 24, becoming only the second Chinese company to list in the US this year.

According to its listing prospectus, Chemspec is a leading Chinese contract manufacturer of highly engineered fluorinated specialty chemicals used mainly for the production of electronics, pharmaceuticals and agrochemicals. Most of its products are customised and, as a result, it has a loyal customer base with its top 10 customers in 2006 all returning to place orders for existing or new products in 2007. Nine of its top 10 customers in 2007 returned in 2008.

Revenues expanded at a compound annual growth rate of 60% between 2004 and 2008, reaching Rmb944.9 million ($138.3 million) last year, and according to Frost & Sullivan, the company had a 25% share of the Chinese market in terms of sales. And the top-line has the potential to continue to grow as Chemspec is in the process of increasing its maximum production capacity to 2.8 million litres of reactor volume by the end of 2009 through the opening of new production facilities as well as the expansion of its existing ones. As of the first quarter this year, the company had four production facilities and a maximum production capacity of 1.1 million litres of reactor volume.