IPO Preview: Cathay Industrial Biotech

Aug. 9.11 | About: Cathay Industrial (CBIO-OLD)

Based in Shanghai, China, Cathay Industrial Biotech [proposed symbol (CBIO-OLD)] scheduled a $90 million IPO with a market capitalization of $611 million at the price range mid-point of $13 for Thursday, August 11, 2011. The full IPO calendar for the week of August 8 includes 12 scheduled IPOs trying to raise almost $2 billion.

OBSERVATIONS -- "China’s Stocks Decline to 6-Week Low on Manufacturing Slowdown, Inflation." (Bloomberg link).

CONCLUSION -- CBIO is losing money and has big expansion plans. However, in this uncertain market it may be best not to chase after Chinese IPOs.

CBIO Valuation Metrics

BUSINESS -- Each ADS represents three ordinary shares, par value US$0.001 per share. CBIO is a leading global industrial biotechnology company as measured by production capacity in key biochemical products and a pioneer in the commercialization of bioprocess technologies.

CBIO products address the specialty chemicals and biofuels markets. CBIO applies proprietary technologies to commercialize cost disruptive, environmentally sustainable, drop-in alternatives to products typically produced through petrochemical processes.

About Butanol -- Butanol may be used as a fuel in an internal combustion engine. Because its longer hydrocarbon chain causes it to be fairly non-polar, it is more similar to gasoline than it is to ethanol. Butanol has been demonstrated to work in vehicles designed for use with gasoline without modification.[1] It can be produced from biomass (as "biobutanol")[2] as well as fossil fuels (as "petrobutanol"); but biobutanol and petrobutanol have the same chemical properties. (Link)

Biobutanol or bio-based butanol fuel is second generation alcoholic fuel with a higher energy density and lower volatility vs. ethanol. Over a dozen companies are focused on developing biobutanol on commercial scale. (Link)

ABOUT LCDAs -- Long chain diacids (LCDAs) are used by the CBIO’s customers to produce polyamides, powder coatings, lubricants, corrosion inhibition, pharmaceuticals, fragrances and adhesives.

CBIO started manufacturing and selling LCDAs in August 2003 at its plant located in Shandong Province, People's Republic of China ("PRC"). CBIO sells LCDAs to international companies as well as to customers in China.

CBIO & BIOBUTANOL -- CBIO is the world's largest producer of biobutanol based on active production capacity in 2011, according to industry source CMAI. CBIO’s biobutanol is used as an industrial solvent and as a chemical intermediate for the production of polymers, paints, resins, coatings, plasticizers, herbicides, pharmaceuticals and food grade extractants.

CBIO & LCDAs -- Based on production capacity in 2010, CBIO is also a leading global producer of LCDAs, which are used as chemical intermediates primarily for the production of nylon, plastics, adhesives, fragrances, lubricants and powder coatings.

CBIO products are sold to a broad base of customers that includes both leading international companies, such as DuPont (NYSE:DD), Evonik Industries AG, IFF (NYSE:IFF), Arkema (OTC:ARKAF), Novo (NYSE:NVO) and major China-based customers.

The primary raw material used for the production of LCDAs is petroleum-based oil. Because petroleum-based oil is refined from petroleum, its price correlates to a high degree with the price of petroleum.

To mitigate rising prices and price volatility of petroleum-based oil and to capitalize on growing demand for renewable raw materials, CBIO plans to use vegetable oil and bio-based oil for the production of LCDAs. However, the price and availability of vegetable oil and bio-based oil may be influenced by general economic, market and regulatory factors, which in turn may affect production costs and profit margins.

CBIO & I+G -- In addition, CBIO is developing its I+G, which complements MSG as a food flavor enhancer, and CBIO expects to commence commercial sales of I+G by the end of the first half of 2012.

CAPACITY -- Capacity expansion has enabled CBIO to grow revenue and market share.

Biobutanol – CBIO plans to double biobutanol capacity. Annual production capacity for biobutanol and its co-products is 100,000 metric tons, including 65,000 metric tons, or 21 million gallons, of biobutanol.

CBIO plans to expand the annual production capacity at the biobutanol production facility in Jilin Province to 200,000 metric tons of biobutanol and co-products, including 130,000 metric tons, or 42 million gallons, of biobutanol, in the future.

LCDAs – CBIO plans to increase LCDA capacity by 60%. CBIO’s LCDA production facility in Shandong Province had an annual production capacity of 12,000 metric tons at the beginning of 2011, approximately 13,500 metric tons as of March 31, 2011.

CBIO is currently optimizing its production process to increase production capacity to 15,000 metric tons by the end of 2011. To meet the growing demand for LCDA products, CBIO plans to expand the annual capacity at its LCDA production facility in Shandong Province to 20,000 metric tons by the end of 2012.

I+G -- CBIO plans to complete construction of its I+G production facility in Jilin Province with an annual production capacity of 5,000 metric tons by the end of the first half of 2012.

OPERATIONS -- Cost of revenues is significantly affected by utility prices. In 2010 and the three months ended March 31, 2011, utility costs represented approximately 18.5% and 16.4%, respectively, of production costs. CBIO has experienced, and expects to continue to experience, increasing costs for electricity, steam and coal as a result of increasing energy prices in China.

COMPETITION -- CBIO competes in the biobutanol and the LCDS sectors.

Biobutanol sector -- Companies competing with and working on producing biobutanol include Gevo (NASDAQ:GEVO).

CBIO competes with chemical suppliers in China and importers from the U.S. and Taiwan, many of whom have long-term relationships with CBIO’s potential customers. The current major producers of butanol in China include CNPC Jilin Petrochemical Corporation, BASF-YPC Co., Ltd., Sinopec Qilu Petrochemical Corporation, CNPC Daqing Petrochemical Corporation and Beijing Dongfang Petrochemical Corporation.

CBIO also competes with overseas producers who export their butanol to China such as Dow Chemical (NYSE:DOW).

There are several companies that are working on the production of biobutanol such as METabolic EXplorer S.A., TetraVitae Bioscience, Inc., Cobalt Technologies, Inc., Green Biologics Ltd., and Jilin Jian New Energy Group.

LCDAs -- For LCDAs, CBIO primarily competes with U.S.-based Invista, which produces LCDAs from a multi-step chemical process for sale to external customers.

CBIO also competes with Germany-based Evonik Industries AG and Japan-based Ube Industries (OTC:UBEOF), both of which produce LCDAs from a multi-step chemical process, primarily for captive use in their polyamide manufacturing businesses. CBIO also compete with China-based LCDA producers who use bioprocesses similar to CBIO’s.

EMPLOYEES -- As of March 31, 2011 CHIO had 1,204 employees.

CONCURRENT PRIVATE PLACEMENT -- GSPS Asia Limited, HBM Biomed China, HBM BioVentures (Cayman) Ltd. and Medy Limited or their respective affiliates, have agreed to purchase an aggregate of US$30.0 million at the CBIO’s IPO price.

USE OF PROCEEDS -- CBIO expects to net $108 million (includes concurrent private placement), with funds allocated to:

  • US$40 million to further develop and commercialize biobutanol products and expand production capacity for biobutanol;
  • US$24 million to construct our production facility for I+G and commercialize I+G;
  • US$12 million to expand production capacity for LCDAs; and
  • US$4 million to expand and strengthen research and development infrastructure and activities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.