Ausnutria and Yingde Gases raise a combined $564 million

The pricing power of key investors, combined with some investor fatigue, forces the companies to price well off the top of the range.

Baby milk producer Ausnutria Dairy Corporation raised HK$1.2 billion ($154.8 million) and Yingde Gases sold HK$3.17 billion ($409 million) worth of shares ahead of their listings in Hong Kong on October 8. Both companies kept the final price well below the top due to price sensitivity among key accounts and signs that investors are becoming fatigued by IPOs.

Meanwhile, in the US, Chinese solar power company Renesola on Wednesday priced its fully marketed follow-on at a substantial discount -- for the US -- of 10.7% versus the latest close, raising $74 million.

The IPO market has turned somewhat sour over the past week, with several deals performing badly in secondary market trading. For example, Shanda Games and China South City Holdings both priced at the top of their indicative ranges, only to dip by 14% and 23% respectively in their debuts on Nasdaq and the Hong Kong main board. Metallurgical Corp of China, China Lilang and Peak Sport Products are also trading below their IPO prices. As a result, investors are showing signs of fatigue, and are becoming more selective when choosing which IPOs to invest in.

Yingde Gases, which produces various gases that are used for the production of steel and chemicals, saw price limits being attached to orders from the beginning of the week, after the poor debuts started to stack up. In the first week of marketing there were very few limit orders, according to sources, but by the time the deal closed at the end of New York trading on Tuesday there was a concentration of price sensitive orders from high-quality accounts around the mid-point of the range.

The company, which is being brought to market by Goldman Sachs and Morgan Stanley, chose to price just above there, at HK$7.00, after marketing the deal in a range between HK$6.03 and HK$7.91. Like many of the other listing candidates, the company is likely hoping that a lower price will support the secondary market trading. However, not all the companies that have had a miserable debut so far priced at the top, which suggests a modest price may not be enough to ensure a good first day of trading.

The price values the company at 14.9 times its projected 2010 earnings, on a post-money, post-shoe basis. This is a higher valuation than for Hong Kong-listed XinAo Gas and China Gas Holdings, which trade at 12.7 times and 12.3 times respectively, but analysts argue that this is warranted because of Yingde Gases' larger size and market leading position. International peers like Linde or France's Air Liquide also trade at lower multiples due to their slower growth profiles. 

Deeming from the level of demand, investors seemed to understand Yingde Gases qualities as a sector play. According to a source, the institutional tranche, which accounted for 90% of the deal initially, was about 10 times covered and attracted about 140 investors. The retail tranche was 36 times covered, which triggered a clawback that increased the size of the retail tranche to 30% of the deal from the initial 10%.

Among the institutional investors, there was a bias towards Asia, but with good support both from global and US funds. The allocation was supposedly quite heavily skewed towards the top quality names.

Although it has been in operation for only six years, Jingde Gases is the largest domestic Chinese company in its industry, and the second largest producer of industrial gases in China behind Germany's Linde. This puts it in a good position to take advantage of the fact that China's steel and chemicals industries are expected to continue to grow strongly -- thus needing more of its gases. There is also a growing trend towards outsourcing, whereby steel and chemicals companies that used to produce their own gases are streamlining and choosing to buy from external suppliers. Yingde Gases typically services its customers through production facilities that are constructed on site, next to the steel or chemicals plant.

The company currently has several projects under construction and according to sources, is expected to grow faster than the industry as a whole in coming years.

Yingde gases sold 452.31 million shares, of which 75% were new. The rest were secondary and sold by a series of pre-IPO investors, including Barings Private Equity and Deutsche Bank. A 15% greenshoe may increase the deal size to a maximum of $470 million.

The Ausnutria deal consisted of 300 million shares, offered at an indicative range between HK$3.70 and HK$5.10 per share. The deal priced at the bottom half of the range, at HK$4.00.

The price was set to acknowledge strong interest from a small group of global funds, which had HK$4 as a cut-off point. This left the management with a decision between taking a slightly lower price and having a stronger institutional investor base, or holding out for more money at the cost of a mixed bag of investors. In the end, the company chose the former option and the top five investors took 40% of the deal.

Overall, the order book contained about 100 accounts. The demand was evenly split between Asia and the US, with fewer orders coming from Europe. Investors were also heavily skewed towards long-only funds, which one source said was the current trend as hedge funds are showing little interest in IPOs at the moment.

With the retail tranche only seven to eight times covered, there was insufficient demand to trigger a clawback.

Ausnutria is a baby milk producer. Its selling point is that it imports its milk powder from Australia and then packages it in China. The company offers a high-end product aimed at middle-class parents who are concerned about food safety in China -- issues that became very real last year when thousands of children were hospitalised as a result of a number of domestic dairy companies selling milk products contaminated with melamine.

The IPO values the company at 12.6 times its projected earnings for 2010, according to joint bookrunner estimates. Among Hong Kong-listed companies, the most obvious comparison is China Mengniu Dairy Company, which is currently trading at around 22 times its projected earnings for the same year. But Mengniu is a more diversified dairy company compared to Ausnutria -- to find a company that is similarly focused on milk powder, one needs to look to the US, where one company, American Dairy, is trading at about nine times next year's earnings.

More than half of the IPO proceeds will be used for two purposes: to invest in upstream milk powder-related assets and to strengthen its distribution network. The remainder will be used for research and development, launching new products and increasing production capacity.

BOC International and Macquarie were joint bookrunners for the deal. Macquarie is also a bookrunner on the IPO for Chinese property company Powerlong Real Estate Holdings, which is expected to announce its final price today.

In the US, Renesola priced its fully marketed follow-on at $4.75 per American depositary share, a 10.7% discount to Tuesday's close of $5.32. The shares dropped by 9.6% to $4.81 on Wednesday, the first day of trading after the deal.

The company, which makes wafers that are used to produce solar cells, raised $74 million by selling 15.5 million shares, an increase of 1.1 million shares from an initial base deal of 14.4 million shares.

The New York Stock Exchange-listed company launched the deal on September 24. It is raising money to repurchase and redeem 1% convertible bonds that are due in 2012. Holders of the bonds, of which there are $99 million outstanding, can redeem them next March at 103.4% of the principal value plus interest.

Credit Suisse and UBS organised the Renesola deal.

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