Sinorgchem is the largest Chinese supplier of para-phenylenediames, better known as PPDs, which is a key chemical additive that is used as an antioxidant in the production of rubber products such as tyres. Its main purpose is to prevent premature aging of the rubber. The company has grown rapidly since it was set up in 1999 thanks to a strong focus on technology innovation and the increasing consumption of tyres in China, which is driven partly by growth in the domestic car manufacturing industry, partly by global tyre producers relocating their production plants to China. Sinorgchem currently employs 1,400 people and has an annual production capacity of 45,000 tonnes of PPD and 55,000 tonnes of 4-aminodiphenylamine (4-ADPA), which is an intermediary product that it supplies to other PPD manufacturers in Asia.
According to information on the companyÆs website, Sinorgchem has a 55% share of the domestic market for PPDs and a 20% share of the global market. About half of its production is sold overseas to clients in Europe, Japan, South America, the Middle East and Southeast Asia.
In the press release announcing the deal, Carlyle refers to Sinorgchem as a high-growth company that has the opportunity to expand its market position further.
ôCarlyle has a long history of working with Chinese companies to create value and is an experienced investor in the chemicals sector. We are confident that Sinorgchem will benefit from the operational expertise of our pool of senior chemical industry professionals, and from the partnership opportunities with our portfolio companies and global network,ö argues Yi Luo, managing director of Carlyle Asia Partners.
Meanwhile, SinorgchemÆs chairwoman, Liu Jing, who is also the controlling shareholder, says in a written comment that the tie-up with Carlyle will enable the company to take advantage of the growing demand for its product both in China and abroad. She further notes CarlyleÆs track record of enhancing the internal management of the companies it invests in and also of making them more competitive in the international market.
ôI look forward to working with them to improve our management standards and accelerate our global expansion,ö she says. The company states on its website that its aim is to become the largest rubber antioxidant producer in the world and adds that international cooperation will be a means to that end.
Indeed, the Carlyle investment appears to follow a familiar pattern of small, but fast-growing, entrepreneurial companies in China inviting investments by international investors as a way to get their hands on growth capital. While there was no confirmation that this is the case for Sinorgchem, many other companies of similar type and size are finding it difficult to get loans in the domestic bank market as the lenders prefer to lend to larger and more established names, which are considered ôsaferö in the sense that they are more likely to pay back the loan.
The lack of information about the size of the stake and SinorgchemÆs asset value and revenues makes it difficult to value the transaction. A minority stake would, however, be in line with other investments Carlyle has made in small entrepreneurial companies, where it has intentionally left the majority ownership with the founders to give them an incentive to continue to grow the companies into much bigger international ventures. The argument is that if they have already managed to build a name for the business in the international market, then they must be doing something right.
This is CarlyleÆs first investment in the chemicals industry in China, but the firm has numerous portfolio investments in the country, including China Pacific Insurance, real estate brokerage firm China Real Estate Network, online ticketing service Ctrip.com International, screen-based advertising firm Focus Media, drill rig manufacturer Honghua Group, and sportswear brand Xtep (China). Since Carlyle Asia Partners was established in 1998, it has invested more than $3.5 billion of equity in Asia.
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