Tianhe tests investor reaction in HK

Tianhe Chemicals Group Ltd, the largest lubricant additives producer in China, began its initial public offering on Monday in Hong Kong, where it aims to raise as much as HK$6.34 billion ($818 million).

The Liaoning-based company will offer 2.8 billion shares at HK$1.75 to HK$2.25 each, its IPO document shows. About 27.48 percent of the shares are existing shares held by management, documents from the stock exchange of Hong Kong show.

About HK$1.54 billion, or 39.4 percent of the net proceeds assuming an offer price of HK$2 per share, will be used to repay a loan backed by Driven Global, a unit controlled by the Wei family, the founder and operator of Tianhe Chemicals.

The rest will be equally divided and invested in the development of lubricant additives and specialty fluorochemical products, the prospectus said.

The final offer price and the results of allocations are scheduled to be announced on June 19. Trading of the stock is expected to kick off the next day.

Morgan Stanley, UBS AG and Bank of America Merrill Lynch are joint sponsors.

"We suggest investors stay clear of this IPO," said Alvin Lao, senior officer of the investment and customer service department of Emperor Securities Ltd.

"Currently, the market is not strong enough to support an offering of this size. Even brand names such as China CNR Corp failed to trade well after their debuts. (Baguio Green Group Ltd), a small cap hundreds of times oversubscribed, hasn't performed well, either. "Tianhe is also likely to tumble beneath its offer price or trade poorly."

Lao also pointed out that management's choice to unload old shares during the IPO would spoil the appetite of investors. "It might not be a significant segment, but the image is not positive. That will affect investor confidence," he said.

Lao also expressed caution about the sustainability of Tianhe's "unusually high" profit margins, which he said hadn't been questioned much. As disclosed by its prospectus, Tianhe Chemicals recorded net profit margins as high as 52.2 percent in 2012 and 2013, compared with 28.2 percent in 2011.

For the years 2011 through 2013, the gross profit margins stood at 44.4 percent, 60.6 percent and 60.5 percent, respectively.

"Our gross margin may drop due to factors beyond our control," said Tianhe in its prospectus. "Our gross margin is expected to continue to be affected by a combination of factors ... There is no assurance that we could continue to command the existing level of prices for our existing or new products."

Separately, Tianhe Chemicals disclosed in the prospectus that "an immediate family member" of its chief executive officer and executive director, Wei Xuan, has been an employee in the capital markets division of UBS's Hong Kong branch since October 2013.

The company claimed the family member was "never involved" in the global offering, including "selection of sponsors and underwriters". Instead, they were selected "through a vigorous process" from late 2012 to October 2013, the prospectus said.