PAG buys majority stake in China solvents business

The target business, Handsome Chemical Group, is a subsidiary of Yip Chemical’s solvents division that operates in mainland China. It operates one plant in Jiangsu province and two in Guangdong, primarily producing eco-friendly industrial organic solvents used in coatings, tannery, medicine, and adhesives. Handsome serves domestic and export markets.

The company generated HKD 13.9bn in revenue and HKD 490.9m in net profit last year, up from HKD 7.8bn and HKD 275.9m in 2020, following a surge in solvents raw materials prices and export volumes reaching a record high of nearly 400,000 metric tons. Average EBITDA for the past three years is around HKD 598m, which means PAG is paying a price-to-earnings multiple of about 8.8x, according to a filing.

The private equity firm is making the acquisition through its third pan-regional fund, which closed on USD 6.05bn in late 2018. A fourth fund is currently in the market with a target of USD 9bn.

Solvents are Yip’s Chemical’s principal business line and Handsome is its largest subsidiary. The Hong Kong-listed entity, which has a market capitalisation of around HKD 2.5bn, generated HKD 17.8bn in revenue and HKD 406.3m in net profit. Most of that came through its non-controlling interest in Handsome. The partial divestment helps the parent company address several challenges.

First, the company wants to pay down some of its debt, which stood at HKD 1.9bn as of June, with two-thirds of that due within 12 months. Second, there is a broad strategic desire to become more “environmentally-friendly, end-user oriented and service-oriented.” Yip’s Chemical is therefore making investments – including in funds – that offer exposure to new materials and technologies.

Third, Handsome requires approximately CNY 1.74bn (USD 257m) to build a new plant in Hubei, with an annual production capacity of 600,000 tons, that will enable it to push into the upstream raw material market for acetic acid. Handsome is the world’s largest producer of acetate solvents, with an annual production capacity of more than 1.6m tonnes, and acetic acid is a key component.

There are existing credit facilities with mainland lenders to cover this project, but these are mostly short-term in nature and unsuited to the estimated two years it will take to complete the plant. Moreover, these facilities are not guaranteed by the parent, and if Yip’s Chemical did assume responsibility, it would breach its maximum permitted gearing ratio.

Given the macroeconomic uncertainty driven by COVID-19 and other factors, the company decided to help ease the financial burden by bringing in a strategic investor.

Finally, PAG brings additional value through AirPower Technologies Group, China’s largest supplier of industrial gases, which was formed through the merger of Yingde Gases and Baosteel Gases last year. The company has 135 facilities across 24 provinces, including one close to the proposed new plant.

As part of the deal, Handsome will source carbon monoxide, one of the key feedstocks for acetic acid, from AirPower. Geographical proximity will reduce Handsome’s costs, while helping AirPower reduce its annual carbon emissions by more than 300,000 tonnes.

"This deal is very handsome for both parties. It further shows PAG’s ability to invest and create value in unique and industry-leading businesses by leveraging upon the capabilities of its portfolio companies. We are particularly excited about the positive impact on the environment that this investment will make,” said Weijian Shan, executive chairman of PAG, in a statement.

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• Topics
• Greater China
• Buyouts
• Industrials
• China
• PAG
• Chemicals
• ESG