PE-backed Tianhe sees marginal gain after $658m HK IPO

Tianhe sold 2.82 billion shares, including 2 billion new shares, at HK$1.80 apiece, after pricing the offering near the low end of the indicative range. After reaching HK$1.85 during morning trading, the stock ended the session unchanged.

Founded in 1992 in Liaoning province, Tianhe is China's largest manufacturer of lubricant oil additives (LOA) that perform functions including friction reduction, cleansing and heat dissipation in motor oil and other lubricants. It also supplies specialty fluorochemicals (SFC) - commonly used in waterproofing and solvents - to customers around the world.

MSPEA committed $300 million to the company in 2012 - its largest investment to date - and held a 9.35% stake ahead of the offering. PAG subsequently invested $35 million in exchangeable bonds issued by Tianhe and owned 1% prior to the IPO. They now hold 8.6% and 0.9%, respectively.

The company is majority-controlled by the chairman, Qi Wei, and his brother and daughter. While Qi Wei is responsible for product development, the brother, Xuan Wei, was brought in as a shareholder and CEO and tasked with sourcing the capital required to keep the Tianhe R&D machine running.

The proceeds of the offering will be used to develop new production facilities for LOA and SFC, as well as to pay down debt. Tianhe reported revenue of RMB5 billion ($803 million) for 2013, up from RMB4.2 billion in 2012, with LOA accounting 41% of business and SFC 59%. Net profit for 2013 came to RMB2.6 billion, up 19.9% year-on-year.

The global market for LOA is dominated by Lubrizol, Infineum, NewMarket Afton and Chevron Oronite. Tianhe has a 2.2% global share but its domestic market share is larger than the next three players combined. The company is developing its technical expertise in order to boost exports and capitalize on China's desire to reduce its reliance on imports in this area.

A longstanding relationship with China National Petroleum Corporation - the largest domestic petroleum refiner and owner of many of the gas stations through which lube oil is distributed - has helped Tianhe consolidate its position at home. According to Frost & Sullivan, China's LOA consumption will reach 767,000 tons by 2018, up from 611,000 tons in 2013.

Tianhe's SFC business is already export-oriented. The leading global players are DuPont, Solvay, Asahi Glass, Daikin and 3M, while Tianhe is larger than its next four domestic rivals combined in revenue terms. China accounted for approximately one third of the $3 billion global market in 2013. By 2018, the market is expected to be worth $6.1 billion, with China on 43%.

Bank of America Merrill Lynch, Goldman Sachs, UBS and Morgan Stanley were joint global coordinators for the IPO.

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