Saturday, January 9, 2010

Chemspec International (CPC) - A Chinese Stock With All The Right Chemistry

In recent times there has been a lot of focus in looking at overseas markets for superior gains and as a hedge against the falling dollar. One country which has received a huge amount of attention and investment dollars is obviously China, however, it appears to me that finding value in China is getting increasingly more difficult. There has been somewhat of a herd mentality with many people rushing out to buy stock in Chinese companies, with little or no regard to whether or not it represents a good investment. Some people who would normally spend hours when researching a domestic company as a potential investment seem to throw caution to the wind when it comes to overseas investments. To some extent "a rising tide floats all boats", but there are excellent opportunities in China and there are, how do I put it, "less than stellar" opportunities in China. When the inevitable correction comes we will see which companies are the real deal and which are just playing with smoke and mirrors.

One company that I believe is the real deal and represents true value for the investor is Chemspec International, Ltd. (CPC).

Chemspec is a contract manufacturer of highly engineered specialty chemicals and the largest manufacturer of fluorinated specialty chemicals in China. The company is headquartered in Shanghai, with four additional facilities in surrounding provinces. The company’s chemicals are used as building blocks for more advanced chemicals or to enhance the performance of the end products of its clients. It sells primarily companies in the electronics, pharmaceutical and agrochemical sectors. Chemspec was founded in 1996 and underwent IPO in June of 2009, with a price of $9.

The area of contract manufacturing has grown immensely in recent years, both domestically and overseas, with many companies choosing to outsource what would have normally remained in-house. Chemspec's blue-chip end-users include major global TFT Liquid Crystal suppliers, one of the world's top global agrochemical companies and four of the world's top ten pharmaceutical companies by sales.

Chemspec trades at a P/E of 7.1 and a price/book of 1.51 with a current ratio of 2.99. The company has demonstrated excellent profitability in the past, however has been affected a little by the economic downturn, resulting in reduced earnings. The management appear to be making all the right moves to navigate through these difficult times, focusing on R&D and expanding facilities. The stock currently trades at $7.31, up significantly from the 52 week low, but still well below the IPO price. I would anticipate a 12-month target price of $9-10.

Disclosure: At the time of writing the author held shares in Chemspec International, Ltd. (CPC).

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