Wuhan Youji: The leading benzoic acid chemical company, considering a speculative position.

Let me get straight to the point. Whether to subscribe to Wuhan Youji's IPO? Personally, I think Wuhan Youji's fundamentals are average, but with a small float, there might be some speculative opportunities for small-cap plays. You could consider taking a speculative position, depending on your risk tolerance. $WUHAN YOUJI(02881.HK) $晶泰科技(23083.HK) $CLOUD FACTORY(02512.HK)

1. Company Overview

Wuhan Youji is a well-known supplier of toluene derivatives in China and global markets, primarily focused on manufacturing toluene oxidation and chlorination products, benzamide products, and other fine chemical products through organic synthesis processes. The company's toluene derivatives are mainly used in food preservatives, household chemicals, animal feed acidifiers, and synthetic intermediates for agricultural and pharmaceutical applications. With strong product development and manufacturing capabilities, its products are sold in over 70 countries. Under the leadership of an experienced management team, the company aims to further enhance its market share and strengthen its industry position in China and globally through product development and manufacturing capabilities, as well as its global sales network.

As of the latest practicable date, the company's self-produced product portfolio mainly includes five toluene oxidation products, two toluene chlorination products, two benzamide products, and over 20 other fine chemical products with broad market applications. In 2021, 2022, and 2023, the company recorded product sales volumes of approximately 362,302 tons, 375,848 tons, and 346,147 tons, respectively.

Wuhan Youji's industry ranking and market share in China and global markets reflect its leading position in toluene oxidation and chlorination products. According to Frost & Sullivan's report, based on 2023 sales revenue, the group is China's largest manufacturer of benzoic acid and sodium benzoate and the second-largest manufacturer of benzyl alcohol, accounting for 62.0%, 37.9%, and 33.9% of China's total market revenue in 2023, respectively.

In the global market, the company ranked second among benzoic acid and sodium benzoate manufacturers and third among benzyl alcohol manufacturers in 2023, accounting for 37.0%, 22.4%, and 20.6% of global market revenue, respectively. The company's products are sold in over 70 countries and are widely recognized worldwide.

2. IPO Details

The subscription period runs from June 7 to June 13, with an expected listing on the Hong Kong Stock Exchange's main board on June 18 under the ticker 02881.HK. The offer price range is HK$5.5 to HK$8.5, with a board lot size of 500 shares and an entry fee of HK$4,292.86. The company plans to issue 18.3 million shares globally, with BOCOM International as the sponsor. There is a greenshoe option but no cornerstone investors.

Financial Overview

In terms of revenue, for the years ended December 31, 2021, 2022, and 2023, Wuhan Youji reported revenues of RMB 2.7895 billion, RMB 3.1338 billion, and RMB 2.6771 billion, respectively.

In terms of profit, the company recorded net profits of RMB 309.1 million, RMB 340.5 million, and RMB 72.9 million for the same periods, respectively.

Wuhan Youji generates revenue primarily from the sales of self-produced products, categorized as toluene oxidation products, toluene chlorination products, benzamide products, and other fine chemical products. Sales of self-produced products contributed 79.4%, 86.8%, and 83.0% of total revenue for the years ended December 31, 2021, 2022, and 2023, respectively.

Use of Proceeds

Regarding the use of proceeds, Wuhan Youji expects to raise approximately HK$53.3 million (based on the mid-point of the offer price range at HK$7.0). According to the prospectus, the company plans to allocate about 82% of the net proceeds to constructing new production facilities focused on toluene chlorination products and derivatives to increase capacity at its Hubei Xinxuanhong production base; about 3% for R&D activities; about 5% for sales and marketing to enhance brand awareness in China and overseas; and about 10% for working capital and general corporate purposes, including raw material procurement and inventory management.

3. Industry Development Prospects

Toluene is one of the most important commonly used chemical raw materials. It is a colorless, transparent, volatile liquid with a distinctive aromatic odor at room temperature, primarily used in gasoline blending and the production of toluene derivatives, explosives, dye intermediates, and pharmaceuticals. Toluene derivatives can be produced through various reaction processes, including toluene oxidation, chlorination, and benzamide ammoniation. Key players in the toluene and toluene derivatives supply chain include toluene suppliers (upstream), specialty chemical manufacturers (midstream), and intermediate manufacturers (downstream). Leading companies collaborate with upstream chemical firms to ensure a steady supply of raw materials.

Global benzoic acid capacity reached approximately 840,000 tons in 2023. Leading benzoic acid manufacturers have been expanding capacity to meet growing downstream market demand. Global capacity is expected to increase to about 906,000 tons by 2028. Global benzoic acid sales rose from about 246,700 tons in 2018 to about 265,000 tons in 2023, with a compound annual growth rate (CAGR) of 1.4%. Global benzoic acid sales revenue increased from approximately RMB 1,728.2 million in 2018 to about RMB 2,120.7 million in 2023, with a CAGR of 4.2%.

With increasing demand for downstream products such as phthalate-free plasticizers, global benzoic acid sales are estimated to grow from 286,500 tons in 2024 to 357,300 tons in 2028, with a CAGR of 5.7%. Global benzoic acid sales revenue is projected to rise from RMB 2.4058 billion in 2024 to RMB 3.153 billion in 2028, with a CAGR of 7.0%.

In China, benzoic acid sales are expected to reach 218,700 tons by 2028, with a CAGR of 6.9% from 2024, while sales revenue is projected to increase from RMB 1.4717 billion in 2024 to RMB 2.0193 billion in 2028, with a CAGR of 8.2%.

4. Personal Plan

1. From a performance perspective, Wuhan Youji operates in the chemical industry and is a global leader in the toluene derivatives sector. The company has solid capabilities, but its growth has been volatile in recent years due to the overall downturn in the chemical industry, with a noticeable decline in performance last year.

2. The sponsor is BOCOM International, which doesn't have much of a track record to reference.

3. Wuhan Youji's global issuance size isn't large. Based on the mid-point calculation, the float is around HK$128 million, making it relatively easier to manipulate—if there's any market control.

4. Recently, IPO sentiment has improved, with subscription multiples rising significantly regardless of the fundamentals. This is a positive trend in the long run, and hopefully, it continues. This one might be worth a try.

In the end, should you participate in Wuhan Youji's IPO? After analyzing multiple angles, Wuhan Youji's fundamentals are average, but with a small float, there might be some speculative opportunities for small-cap plays. You could consider taking a speculative position.

This article is a personal analysis of the IPO situation, reflecting my thoughts within my capabilities. I welcome criticism and corrections. Additionally, this article does not constitute investment advice, and readers are encouraged to think independently.