Chemspec International Limited Announces First Quarter 2010 Unaudited Financial Results

SHANGHAI, May 14 /PRNewswire-Asia/ -- Chemspec International Limited (NYSE: CPC; "Chemspec" or the "Company"), a leading China-based contract manufacturer of highly-engineered specialty chemicals, today announced its unaudited financial results(1) for the first quarter ended March 31, 2010.

First Quarter 2010 Financial Highlights

-- Total sales were RMB220.2 million (US$32.3 million), an increase of

9.7% from the first quarter of 2009(2) and an increase of 24.3% from

the fourth quarter of 2009

-- Gross profit was RMB96.3 million (US$14.1 million), an increase of

24.2% from the first quarter of 2009(2) and an increase of 52.8% from

the fourth quarter of 2009

-- Income from operations was RMB59.8 million (US$8.8 million), an

increase of 17.2% from the first quarter of 2009(2) and an increase of

108.8% from the fourth quarter of 2009

-- Net income attributable to Chemspec International Limited shareholders

was RMB52.3 million (US$7.7 million), an increase of 60.0% from the

first quarter of 2009(2) and an increase of 50.5% from the fourth

quarter of 2009

-- Basic and diluted earnings per ADS(3) were RMB1.44 (US$0.21), as

compared to RMB1.09 in the first quarter of 2009(2) and RMB0.96 in the

fourth quarter of 2009

(1) Certain Renminbi (RMB) amounts in this press release have been

translated into U.S. dollar (USD) solely for the convenience of the

reader. The conversion of RMB into USD in this release is based on

the Federal Reserve Board certified exchange rate on March 31, 2010,

which was RMB6.8258 to USD1.00. The percentages stated are

calculated based on RMB.

(2) 1Q2009 financial data have been adjusted to reflect the retrospective

adjustment of the company's financial data due to the acquisition of

Jiangsu Kangpeng Nong Hua Limited on November 9, 2009, which

transaction is considered a combination between entities under common

control.

(3) 1 ADS=60 ordinary shares

Dr. Jianhua Yang, Chairman and CEO of Chemspec, commented, "The first quarter of 2010 turned out to be a particularly strong period that came in ahead of our optimistic expectations. We are pleased to report record first quarter revenue performance. As a result of the many internal changes and improvements that we made during the low points of the downturn, in addition to the extensive work we did to expand our customer base, we believe that we are well positioned to take advantage of the improved business conditions. Our leading position in chemical process research and development, and contract manufacturing capabilities in China gives our operations significant advantages compared to our global peers. While we still have fairly limited visibility looking out to the end of 2010, we are cautiously optimistic that we will be able to pick up momentum as the global economy continues to recover."

Mr. Bing Zhu, Chief Financial Officer of Chemspec, commented, "We are happy to see our gross margins recover following the dip that started in the first quarter last year. As we discussed in our fourth quarter 2009 earnings release, our inventory level increased, as expected, to RMB325.7 million at the end of the first quarter of 2010 because our products in the electronics chemical field are technically highly complex and involve a long in-house production cycle."

First Quarter 2010 Financial Results

Total Sales

For the three months ended March 31, 2010, the Company generated total sales of RMB220.2 million (US$32.3 million), an increase of 9.7% from the first quarter of 2009 and an increase of 24.3% from the fourth quarter of 2009. The increase in sales from the fourth quarter of 2009 reflects the strong recovery in demand in various end markets, particularly in the electronics chemical market.

Gross Profit and Gross Margin

Gross profit was RMB96.3 million (US$14.1 million), an increase of 24.2% from the first quarter of 2009 and an increase of 52.8% from the fourth quarter of 2009. Gross margin was 43.8% in the first quarter of 2010, as compared to 38.7% in the first quarter of 2009 and 35.6% in the fourth quarter of 2009. The increased gross margin in the first quarter of 2010 reflects the higher average unit selling price and the Company's continued efforts to improve manufacturing processes and cost control.

Operating Expenses

Selling expenses, general and administrative expenses was RMB23.3 million (US$3.4 million) during the first quarter of 2010, representing an increase of 36.1% from RMB17.1 million in the first quarter of 2009 and a decrease of 1% compared with RMB23.6 million in the fourth quarter of 2009. The year-over-year increase was caused primarily by an increase in administrative headcount due to the growth and personnel needs of the Company.

Research and development expenses increased by 56.24% to RMB13.7 million (US$2.0 million) during the first quarter of 2010 from RMB8.8 million in the first quarter of 2009 and RMB8.0 million in the fourth quarter of 2009. The increase compared with the same period in 2009 was due primarily to an increase in hiring of highly experienced scientists, especially from overseas, to enhance the Company's R&D capabilities to meet the growing needs of customers. The increase compared with the previous quarter was mainly due to the increase of R&D material consumption as the Company enhances its efforts in new R&D initiatives for future growth, the increase of personnel cost, and to some extent, the increased depreciation expense after the full completion of the Company's new R&D center in Shanghai.

Income from operations and earnings before income taxes

As a result of the factors mentioned above, income from operations was RMB59.8 million (US$8.8 million) and earnings before income taxes was RMB 60.2 million (US$8.8 million) in the first quarter of 2010, representing increase of 17.2% and 25.6%, respectively, from the first quarter of 2009, and increase of 108.8% and 107.2%, respectively, from the fourth quarter of 2009. In addition, the year-over-year increase of earnings before income taxes was caused by the decrease of interest expenses as a result of repayment of bank borrowings and the decrease of foreign exchange loss due to the elimination of the Company's foreign exchange exposure to currencies other than US Dollars.

Income tax expenses

Income tax expense was RMB7.72 million (US$1.13 million) for the first quarter of 2010 as compared with an income tax benefit of RMB6.17 million for the fourth quarter of 2009 and an income tax expense of RMB11.3 million for the first quarter of 2009. Our effective income tax rate was 12.8% for the first quarter of 2010. The 2009 annual effective income tax rate was 14.0%.

The income tax benefit in the fourth quarter of 2009 was due to a reversal of withholding tax accrued for undistributed earnings of our PRC subsidiaries as we plan to indefinitely reinvest a portion of such earnings in the PRC.

Net income attributable to Chemspec International Limited shareholders

Net income attributable to Chemspec International Limited shareholders was RMB52.3 million (US$7.7 million), an increase of 60.0% from the first quarter of 2009 and an increase of 50.5% from the fourth quarter of 2009. The increases in net income attributable to Chemspec International Limited shareholders were mainly caused by the increase in sales.

Basic and diluted earnings per ADS were RMB1.45 (US$0.21), as compared to RMB1.09 in the first quarter of 2009 and RMB0.96 in the fourth quarter of 2009.

Cash Flows

As of March 31, 2010, the Company had RMB240.5 million (US$35.2 million) of cash, as compared to RMB351.1 million as of December 31, 2009. Significant cash outflows for the three-month period ended March 31, 2010 include capital expenditure payments of RMB 78.5 million (US$11.5 million) for the production facility expansion, partial payments for the Company's acquisition of the remaining shares of Jiangsu Wei Er, and the increase of inventory to RMB325.7 million due to the change in the Company's product mix.

Changes in Management

Chemspec today announced the resignation of Mr. Bing Zhu as Chief Financial Officer ("CFO") of the Company, effective June 30, 2010. Mr. Zhu has decided to leave for personal reasons. Mr. Zhu will continue to serve as the CFO until June 30th, 2010 to facilitate a smooth transition. The board of directors of the Company has appointed David Yunhung Tang, our Executive Vice President, as interim CFO while the Company searches for a suitable replacement. Additionally, Mr. Zixin Wang has been appointed as the Vice President of Finance, effective today.

Dr. Tang will oversee the Company's financial operations and investor relations, and will be supported by the Company's strong finance and IR team. Dr. Tang received his MBA degree from the State University of New York at Buffalo, and a Ph.D in Chemistry from Indiana University. Before he joined the Company, Dr. Tang served at Occidental Chemical Corporation (USA) for more than 20 years, including as general manager of its joint venture business from 1990 to 1995.

Mr. Wang will manage the company's day-to-day financial operations. Mr. Wang worked as financial controller for the Company from 2006 to 2007 then the Vice President of Human Resources and Administration since 2008. He played important roles in the acquisition of JiangSu Wei'er Chemical Company and the Company's initial public offering on the NYSE, and helped upgrade the financial management system. He obtained his bachelor's and master's degrees in international accounting from Shanghai Jiaotong University.

"We greatly appreciate the contributions Bing made during his tenure at the Company," said Dr. Jianhua Yang, Chemspec's Chairman and Chief Executive Officer. "He played a significant role in completing our initial public offering, improving Chemspec's financial management and internal control systems, communicating effectively with our analysts and investors, as well as in shaping the Company's growth strategy. We thank him and wish him and his family the very best for the future."

Mr. Zhu said, "It has been my pleasure to serve at Chemspec over the past few years. I am proud of the progress that has been made during my tenure and believe that the Company's is well positioned to continue its growth into the future."

Dr. Yang added, "We have initiated our search for a new CFO. Meanwhile, Dr. Tang's appointment will ensure a smooth transition and help us maintain transparent communications with our investors. We have a strong management team and a solid balance sheet, and we will continue to execute according to our growth strategy."

Business Outlook

The Company's management believes that the second quarter of 2010 will be a better quarter in terms of total sales with a similar gross profit margin as compared to the first quarter of 2010.

Conference Call Details

The dial-in details for the live conference call are as follows:

U.S. Toll Free Number: 1-866-590-5622

International Dial-in Number: +65-6723-9381

Mainland China Toll Free Number: 800-819-0121 (land line)

400-620-8038 (Mobile)

Hong Kong Toll Free Number: +852-2475-0994

Conference ID: CPC

A live and archived webcast of the conference call will be available on the Investor Relations section of Chemspec's website at http://www.chemspec.com.cn .

A telephone replay of the call will be available two hours after the completion of the conference call through midnight, May 20, 2010.

The dial-in details for the replay are as follows:

U.S. Toll Free Number: +1-866-214-5335

International Dial-in Number: +61-2-8235-5000

Conference ID: # 69664745

Statement Regarding Unaudited Financial Information

The financial information set forth above is based on the Company's unaudited interim consolidated financial statements and is subject to adjustments that may be identified by us and/or our auditors during the audit of our annual consolidated financial statements.

About Chemspec

Chemspec is a leading China-based contract manufacturer of highly engineered specialty chemicals and the largest manufacturer of fluorinated specialty chemicals in China based on sales. In manufacturing specialty chemicals, Chemspec also provides process design and process development services, which enable efficient and rapid production of specialty chemicals that are incorporated into the products of Chemspec's end users. Chemspec's customers and end users include electronics, pharmaceutical and agrochemical companies. For more information, please visit http://www.chemspec.com.cn .

Safe Harbor Statements

This announcement contains forward-looking statements. These statements constitute "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks is included in Chemspec's filings with the U.S. Securities and Exchange Commission, including its registration statement on Form F-1, as amended from time to time. Chemspec does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

For further information, please contact:

Chemspec International Ltd.

In Shanghai

Bing Zhu

Chief Financial Officer

Tel: +86-21-6363-8108

Email: ir@chemspec.com.cn

Christensen

In New York

Kathy Li

Tel: +1-212-618-1978

Email: kli@christensenir.com

In Hong Kong

Tip Fleming

Tel: +852-9212-0684

Email: tfleming@christensenir.com

Chemspec International Limited

Unaudited Consolidated Balance Sheets

December 31, March 31, March 31,

2009 2010 2010

RMB'000 RMB'000 USD'000

ASSETS

Current assets

Cash 351,097 240,534 35,239

Pledged bank deposits 37,919 65,625 9,614

Accounts receivable, net 94,154 114,118 16,719

Bills receivable 1,327 48 7

Inventories 271,434 325,719 47,719

Prepayment and other receivables 38,738 46,910 6,872

Amounts due from related parties 64 64 9

Deferred income tax assets 3,424 5,777 846

Total current assets 798,157 798,795 117,025

Investment in an affiliate 13,296 13,198 1,934

Property, plant and equipment,

net 699,181 719,506 105,410

Land use rights 56,064 56,149 8,226

Intangible assets 839 811 119

Goodwill 7,446 7,446 1,091

Deferred income tax assets 300 200 29

Total assets 1,575,283 1,596,105 233,834

LIABILITIES AND EQUITY

Current liabilities

Accounts payable 81,870 103,942 15,228

Bills payable 49,738 60,288 8,832

Amounts due to related parties 23,659 22,659 3,320

Accrued expenses and other

payables 183,266 124,068 18,176

Deferred income -- 2,555 374

Income taxes payable 1,298 1,596 234

Total current liabilities 339,831 315,108 46,164

Bank borrowings 10,000 5,000 733

Deferred income tax liabilities 18,056 18,658 2,733

Deferred income 15,136 13,582 1,990

Total liabilities 383,023 352,348 51,620

Equity

Ordinary shares: HK$ 0.01 par

value; 20,000,000,000 shares

authorized as of December 31,

2009 and March 31, 2010;

2,167,620,000 shares issued and

outstanding as of December 31,

2009 and March 31, 2010; 21,686 21,686 3,177

Additional paid-in capital 326,948 327,055 47,915

Statutory reserves 63,422 63,422 9,292

Accumulated other comprehensive

income 6,803 6,788 994

Retained earnings 767,393 819,706 120,089

Total Chemspec International

Limited shareholders' equity 1,186,252 1,238,657 181,467

Non-controlling interests 6,008 5,100 747

Total equity 1,192,260 1,243,757 182,214

Total liabilities and equity 1,575,283 1,596,105 233,834

Chemspec International Limited

Unaudited Quarterly Consolidated Statements of Income

Three-month periods ended

March 31, December 31, March 31, March 31,

2009 2009 2010 2010

RMB'000 RMB'000 RMB'000 USD'000

(As

adjusted)

Sales 200,694 177,050 220,151 32,253

Cost of sales (123,113) (114,022) (123,813) (18,139)

Gross profit 77,581 63,028 96,338 14,114

Selling expenses (2,950) (2,817) (2,503) (367)

General and administrative

expenses (14,143) (20,792) (20,761) (3,041)

Research and development

expenses (8,772) (8,012) (13,705) (2,008)

Other operating expenses (1,084) (3,380) (551) (81)

Other operating income 194 236 509 75

Government grants 200 362 450 66

Income from operations 51,026 28,625 59,777 8,758

Other income (expenses):

Equity in loss of an

affiliate -- (91) (98) (14)

Interest income 663 482 558 81

Interest expense (1,070) (309) (80) (12)

Foreign currency exchange

(loss) gain, net (2,740) 230 (47) (7)

Other income 23 91 48 7

Earnings before income

taxes 47,902 29,028 60,158 8,813

Income tax (expense)

benefit (11,261) 6,169 (7,718) (1,130)

Net income 36,641 35,197 52,440 7,683

Net income attributable to

non-controlling interests (3,951) (433) (127) (19)

Net income attributable to

Chemspec International

Limited shareholders 32,690 34,764 52,313 7,664

Basic earnings per share RMB 0.02 RMB 0.02 RMB 0.02 USD 0.00

Diluted earnings per share RMB 0.02 RMB 0.02 RMB 0.02 USD 0.00

Basic earnings per ADS RMB 1.09 RMB 0.96 RMB 1.45 USD 0.21

Diluted earnings per ADS RMB 1.09 RMB 0.96 RMB 1.45 USD 0.21

Chemspec International Limited

Unaudited Consolidated Statements of Cash Flows

Three-month periods ended

March 31, March 31, March 31,

2009 2010 2010

RMB'000 RMB'000 USD '000

(As

adjusted)

Cash flows from operating activities

Net income 36,641 52,440 7,683

Adjustments to reconcile net income

to net cash provided by operating

activities:

Depreciation and amortization of

property, plant and equipment 8,577 17,358 2,543

Land use rights 269 315 46

Amortisation of intangible assets 27 28 4

Loss on disposal of property, plant

and equipment 674 188 28

Equity in loss of an affiliate -- 98 14

Inventory writedowns 847 (1,938) (284)

Unrealized foreign exchange

(gain) loss, net (215) 32 5

Share-based compensation 5,296 1,872 274

Deferred income tax expense

(benefit) 1,517 (1,651) (242)

Changes in operating assets and

liabilities:

Pledged bank deposits

related to purchase

of inventory (8,367) (26,164) (3,833)

Inventories (4,866) (52,347) (7,669)

Accounts receivable 37,881 (19,992) (2,929)

Bills receivable (500) 1,279 187

Prepayment and other

receivables (1,221) (8,172) (1,197)

Accounts payable (13,662) 22,072 3,234

Bills payable related to

purchase of inventory (8,772) 17,904 2,623

Accrued expenses and

other payables (7,562) (3,370) (494)

Income taxes payable 3,277 298 44

Net cash provided by

operating activities 49,841 250 37

Cash flows from investing activities

Capital expenditures, including

interest capitalized (58,435) (76,552) (11,215)

Non-interest bearing advances repaid

by related parties 2,500 -- --

Payments for land use rights (643) (400) (59)

Pledged bank deposit related to

purchase of property, plant

and equipment -- (1,542) (226)

Net cash used in investing

activities (56,578) (78,494) (11,500)

Cash flows from financing activities

Acquisition of additional equity

interests in subsidiaries -- (26,300) (3,853)

Payments for initial public

offering costs (30) -- --

Proceeds from bank loans 15,000 -- --

Repayments of bank loans (20,000) (5,000) (732)

Proceeds from non-interest bearing

borrowings from related parties 3,000 -- --

Repayments of non- interest bearing

borrowings from related parties (5,367) (1,000) (147)

Net cash used in financing

activities (7,397) (32,300) (4,732)

Effect of foreign currency exchange

rate changes on cash 188 (19) (3)

Net decrease in cash (13,946) (110,563) (16,198)

Cash at beginning of period 180,602 351,097 51,437

Cash at end of period 166,656 240,534 35,239

Supplemental disclosures of cash

flow information:

Income taxes paid 6,467 9,071 1,329

Interest paid, net of amounts

capitalized 1,070 80 12

Noncash investing and financing

activities:

Payable for purchase of property,

plant and equipment 33,207 86,848 12,723

Payable for acquisitions of

non-controlling interests in

subsidiaries -- 25,000 3,663

Bills payable for purchase of

property, plant and equipment 1,671 20,751 3,040

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