Chemspec second-quarter total sales increase to record RMB266.8 million

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 for the second quarter ended June 30, 2010.

Second Quarter 2010 Financial Highlights -- Total sales increased to RMB266.8 million (US$39.3 million), which was a new second-quarter record in the Company's history and represented increases of 15.4% from the second quarter of 2009 and 21.2% from the first quarter of 2010 -- Gross profit was RMB98.7 million (US$14.6 million), an increase of 4.3% from the second quarter of 2009 and 2.5% from the first quarter of 2010 -- Income from operations rose to RMB69.6 million (US$10.3 million), an increase of 5.7% from the second quarter of 2010 and an increase of 16.5% from the first quarter of 2010 -- Net income attributable to Chemspec International Limited shareholders improved by 9.8% to RMB57.5 million (US$8.5 million) from the second quarter of 2009 and 10.0% from the first quarter of 2010 -- Both basic and diluted earnings per ADS were RMB1.59 (US$0.23), as compared to RMB1.72 (US$0.25) in the second quarter of 2009 and RMB1.44 (US$0.21) in the first quarter of 2010 First Half Year 2010 Financial Highlights -- Total sales rose 12.7% from the first half year of 2009 to RMB487.0 million (US$71.8 million), which was a record for first half year performance in the Company's history -- Gross profit increased by 13.3% to RMB195.1 million (US$28.8 million) from the first half of 2009 -- Income from operations was RMB129.4 million (US$19.1 million), an increase of 10.7% from the first half of 2009 2 -- Net income attributable to Chemspec International Limited shareholders was RMB109.8 million (US$16.2 million), an improvement of 29.1% from the first half of 2009 -- Both basic and diluted earnings per ADS were RMB 3.04 (US$0.45), as compared to RMB 2.81 (US$0.41) and 2.80 (US$0.41), respectively, in the first half of 2009 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 noon buying rate in the City of New York for cable transfers in RMB per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York on June 30, 2010, which was RMB6.7815 to USD1.00. The percentages stated are calculated based on RMB. 2009 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. The transaction was considered a combination between entities under common control. Dr. Jianhua Yang, Chairman and CEO of Chemspec, commented, "I am pleased to announce our better-than-expected second quarter financial results. After a very challenging period in the second half of 2009 and the start of 2010, we were able to set new records for second quarter performance in terms of total revenue and gross profit. While this significant upturn in our performance reflects a continued recovery in demand in a number of our end markets, especially in the electronics sector, and better economic conditions around the world, it also validates a number of our recent corporate initiatives, including a relentless focus on improving our business development capabilities, enhancing technical processes, and expanding customer relationships. During the first half of 2010, total revenue and gross profit also rose compared to the first half of 2009. We will continue to focus on improving our operational efficiency and building on this momentum over the remainder of the year."

Dr. David Tang, Executive Vice President and interim Chief Financial Officer, commented, "We are pleased to see the significant improvement in our business and the strong financial results. In response to the challenging market environment, we actively adjusted our product mix and pricing of certain commercial products in order to capture business from faster growing markets. The efforts clearly helped our top-line performance and we were able to maintain our gross margin at 37%. In the third quarter of 2010, we believe we will see a similarly competitive market environment. However, as long as the global economy continues to recover, we are cautiously optimistic that our total sales will exceed that of the second quarter of 2010 and our gross margin will remain at a similar level as the second quarter of 2010."

Second quarter of 2010 Financial Results

Total Sales

For the three months ended June 30, 2010, the Company generated total sales of RMB266.8 million (US$39.3 million), representing an increase of 15.4% from the second quarter of 2009 and 21.2% from the first quarter of 2010. The increase in sales from the first quarter of 2010 reflects the strong recovery in demand in various end markets, particularly in the electronics chemical market.

Gross Profit and Gross Margin

Gross profit was RMB98.7 million (US$14.6 million), representing an increase of 4.3% from the second quarter of 2009 and 2.5% from the first quarter of 2010. Gross margin was 37.0% in the second quarter of 2010, as compared to 40.9% in the second quarter of 2009 and 43.8% in the first quarter of 2010. The decrease in gross margin in the second quarter of 2010 was due to a shift in the overall product mix and price adjustments for some commercial products.

Operating Expenses

Selling expenses and general and administrative expenses were RMB15.9 million (US$2.3 million) during the second quarter of 2010, representing a decrease of 24.3% from RMB21.0 million in the second quarter of 2009 and a decrease of 31.8% as compared to RMB23.3 million in the first quarter of 2010. The decrease was primarily caused by a reversal in share-based compensation expenses due to forfeiture of options granted to our former employees.

Research and development expenses increased by 109.3% to RMB14.8 million (US$2.2 million) from RMB7.1 million in the second quarter of 2009 and by 7.7% from RMB13.7 million in the first quarter of 2010. The increase in R&D expenditure, compared with the same period in 2009, was primarily due to the depreciation of the Company's new R&D center in Shanghai as well as the hiring of experienced scientists and engineers. Compared to the previous quarter, the increase in R&D expenses was mainly due to the expansion of business activities and an increase in technical support headcount in the Company's plants.

Income from operations and earnings before income taxes

As a result of the factors mentioned above, income from operations rose to RMB69.6 million (US$10.3 million) in the second quarter of 2010, representing increases of 5.7% and 16.5%, respectively, from the second quarter of 2009 and the first quarter of 2010. Earnings before income taxes totaled to RMB68.8 million (US$10.1 million) in the second quarter of 2010, representing increases of 3.4% and 14.3%, respectively, from the second quarter of 2009 and from the first quarter of 2010. The increases in income from operations and earnings before income tax were due to the improvement of the sales as well as the decreases in the general and administration expenses.

Net income attributable to Chemspec International Limited shareholders

Net income attributable to Chemspec International Limited shareholders grew to RMB57.5 million (US$8.5 million), an increase of 9.8% from the second quarter of 2009 and 10.0% from the first quarter of 2010. The increase in net income attributable to Chemspec International Limited shareholders was primarily due to the increase in sales.

Both basic and diluted earnings per ADS were RMB1.59 (US$0.23), as compared to RMB1.72 (US$0.25) in the second quarter of 2009 and RMB1.44 (US$0.21) in the first quarter of 2010.

Cash Flows

As of June 30, 2010, we had RMB169.4 million (US$25.0 million) of cash, as compared to RMB 479.1 million as of June 30, 2009. Significant cash outflows for the six-month period ended June 30, 2010 included capital expenditure payments of RMB127.3 million (US$18.8 million) for the expansion of the production facilities and the increase of inventory to RMB393.6 million due to the Company's sales increase. In particular, the higher inventory was due to a rise in production and sales of more complex products, primarily for the electronic end-markets. These products typically require longer production cycles, and the Company often needs to hold higher levels of inventory to be able to quickly respond to customer orders that require fast turnaround.

Business Outlook

The market environment is expected to remain competitive in the second half year of 2010. The Company will continue to focus on improving its operational efficiency and building on its momentum for the rest of the year. As long as the global economy continues to improve, the management team is cautiously optimistic that total sales in the third quarter of 2010 will exceed that of the second quarter of 2010, and that the gross profit margin will remain at a similar level as the second quarter of 2010.