Kangtai IPO Draws Scrutiny


Chinese additives manufacturer Jinzhou Kangtai published an updated prospectus in March, hoping to gain approval from Chinas securities regulatory commission for an initial public offering at the Shenzhen Stock Exchange.

The filing triggered some questions from Chinese local media, including state-run Xinhua, about one of Kangtais largest suppliers, the additive companys high inventory levels and whether it is overbuilding on production facilities.

The filing identified Shanghai-based Aoyou as a major supplier that sells mostly packaged additives to Kangtai. In 2017, Aoyou sold 18.9 million (U.S. $3 million) in products to Kangtai, to rank second-largest on the latters list of suppliers, just behind Lubrizol and just ahead of CNPC.

Chinese news organizations questioned the validity of the business, reporting that Aoyou is a five-year-old trading company with little background in chemicals, no production facilities and no offices.

In response to questions from Lube Report, Kangtai officials insisted that Aoyou is a legitimate supplier.

Aoyou is a trading company which sells finished additives and raw materials to Kangtai, said Kangtai spokesman Gan Miao. In Chinas lube industry, trading companies often play an important role in the supply chain.

Kangtais prospectus showed its inventory levels rising the past three years, from 85.8 million in 2015 to 86 million in 2016 and 95.8 million in 2017. Those inventories accounted for 64 percent of the companys total assets in 2015 and 70 percent in 2017. News reports suggested these numbers could indicate that the business is not healthy, but Kangtai countered that the inventory levels are a result of its supermarket-style business model.

With such a model we need to keep inventory to provide a variety of additives to meet our clients fluctuating demand, Gan said. It is also a way to help us save costs as some materials tend to have wild price fluctuations.

Kangtais existing production facilities have capacity to make 46,000 metric tons per year of materials including lube additives, sulfonic acid and intermediate products, and it plans to use proceeds from the IPO to construct an additional 90,000 of capacity. Press reports questioned the soundness of such a strategy, noting that the Chinese market already has a surplus of medium-quality lube additive components.

The company said the 279.9 million it has proposed to invest in production facilities is not only about expansion.

New technologies will be adopted to make us more efficient, more competitive as a supplier for global clients, Gan said. He added that the company produces high quality individual additives, which are in high demand now in the global market, rather than oversupplied.

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