Chemspec IPO Opens Strong

During the past week, two China pharma-related companies successfully completed their IPOs, ending a long drought of new offerings. Guilin Sanjin Pharmaceutical Co, a traditional Chinese medicine company, will make its debut on the Shenzhen exchange. On the New York Stock Exchange, chemical company Chemspec (CPC), which produces APIs as well as other specialty chemicals, listed its shares. Both issues received an enthusiastic welcome.

Guilin Sanjin priced its IPO at 19.8 RMB per share, on the high side of its projected 17-21 RMB range. Because of the price and an expanded offering size, the 46 million shares placed in the IPO will generate 911 million RMB, about 44% more than the original projection. At the IPO price, the price/earnings multiple for the offering is 33, a sufficiently high number to discourage some investors from participating. Others, however, were more than willing to take their place. Among other products, Guilin Sanjin makes Watermelon Frost lozenges.

The IPO was oversubscribed by a huge factor of 584 in terms of online subscription from individual investors. Institutional investors, bidding offline, requested 165 times their allotment.

Previously, Guilin Sanjin had said it wanted to fund projects that need 634 million RMB. In its latest declaration, the company revealed it would use the remaining 276 million RMB to supplement cash flow and to repay bank loans if necessary.

China’s stock market regulators gave Guilin Sanjin permission to complete its IPO ten days ago. For the previous nine months, there had been a ban on IPOs in mainland exchanges, because regulators did not want to abet any draining of capital from existing companies. The Shanghai index fell 60% from its 2007 high to its September 2008 low, prompting the ban.

The only IPO action in China in the last nine months has been in Hong Kong. China Zhongwang raised $1.2 billion when it listed on the Hong Kong stock exchange in April.

Although Guilin Sanjin has been priced, it will not start trading on the Shenzhen Exchange until early July.

The other China-based company to IPO, Chemspec International Ltd., is the leading China-based contract manufacturer of highly engineered specialty chemicals, with a focus on fluoridated specialty chemicals in which it boasts a 25% market share. The company’s chemicals are used as building blocks for more advanced chemicals or to enhance the performance of the end products of its clients. It sells to electronics, pharmaceutical and agrochemical companies. Chemspec was founded in 1996.

The offering placed 8 million ADSs, each one worth 60 ordinary shares. Of the 8 million ADSs, 1.76 million ADSs were offered by shareholders; the remainder came from the company.

In 2008, the company produced net income of $45 million on revenues of $138 million, which were derived from 45 commercialized projects and 65 pipeline projects from 55 customers. Its pharmaceutical clients included Eli Lilly (LLY) and Merck KGaA (MRK). The company’s China production capacity is currently 1.1 million liters of reactor volume, which will expand to 2.8 million liters by the end of 2009. The company has a new R&D center in Shanghai currently under construction.

At the $9 price, Chemspec has a price/earnings ratio of just 6.

Chemspect’s IPO raised over $72 million, though only $56.7 million will go to the company. The company which has already begun open market trading, closed Thursday at $8.75, down 25 cents from the IPO price.

It’s a healthy sign for markets overall that investors are once again beginning to be attracted to IPOs, a marker that confidence is returning following the devastating downturn of Fall 2008.

Disclosure: none.