Bird flu outbreak takes shine off DaChan IPO

The chicken meat producer draws modest demand relative to other Hong Kong IPOs and sets the price below the top of the range.
DaChan Food, a China-based producer of chicken meat, animal feeds and processed food, was unable to benefit fully from the current frenzy for initial public offerings in Hong Kong amid concerns of another bird flu epidemic. The offering was priced below the top of the indicative range.

The level of demand was well in excess of the shares on offer, but in light of the latest news, sources say the company wanted to leave a bit more on the table for investors and ensure a better aftermarket performance. The price was fixed at HK$2.90 per share, versus a range of HK$2.20 to HK$3.00, which allowed the company to raise HK$899 million ($116 million).

Last week, ChinaÆs Ministry of Agriculture confirmed an avian flu outbreak at Panyu in the Guangdong Province, which began with the mass death of ducks on September 5. The National Avian Influenza Reference Laboratory has identified the outbreak as a sub-type of H5N1 bird flu. The Hong Kong government temporarily suspended all imports of chilled and frozen ducks and geese as well as duck and goose eggs from Guangdong Province, but resumed the imports earlier this week.

DaChan derives a substantial amount of revenue from the production of chicken meat and while no chickens were directly affected, the outbreak did put the spotlight on one of the potential risks for the companyÆs business. Retail investors in particular appear to have treated it with caution and focused instead on the multitude of other Hong Kong IPOs in the market at the moment.

The retail tranche ended up 35 times covered, which triggered a partial clawback that increased the size of this tranche to 30% from 10% originally. Among deals greater than $100 million, this was the first Hong Kong IPO since Chinese hypermarket and supermarket operator TimesÆ $113 million offering (priced on July 6) that wasnÆt more than 100 times covered on the retail side. Times still priced its IPO at the top of the range, however.

DaChanÆs institutional tranche was 14 to 15 times oversubscribed and included more than 150 orders.

ôInvestors think the management is solid, with clear objectives and good understanding about future growth strategies. With Kentucky Fried Chicken and McDonaldÆs as its clients, investors are also confident about the business,ö says a source close to the deal. ôBut they are also concerned about avian flu and rising material costs.ö

One source says the food producer could have priced the deal at the top, as the institutional book was still at least six times oversubscribed at that level.

The final price values DaChan Food at a 2008 price-to-earnings multiple of 13.4. This compares with China Yurun Food GroupÆs 19 times, although the two companies arenÆt directly comparable as Yurun focuses on pork rather than chicken. However, it does offer a wide range of raw and processed meat products.

Hong Kong-listed but China-based Yurun has seen its share price gain 3.5% since the beginning of DaChanÆs roadshow on September 14. It closed at HK$10.66 on Tuesday before the Mid-Autumn festival holiday.

The source close to the deal says DaChanÆs net profit is projected to surge 77% to $23.6 million this year and reach $27.7 million in 2008. Last year the chicken meat producer recorded a net profit of $13.4 million, which was up from $2.6 million in 2004.

DaChan Food is a Mainland-based subsidiary of Taiwan-listed DaChan Great Wall Enterprise and ranked the largest chicken slaughterer in China in 2005, according to China Meat Association.

In addition to being an exclusive sourcing agent for McDonaldÆs in China, DaChan is also responsible for one-third of the supply of chicken meat to KFC in China and is the largest processed food exporter for Ito-Yokado and 7-Eleven in Japan. It is also one of the top 10 animal feed producers in China, the second largest supplier of animal feed in Malaysia and the third largest in Vietnam.

In 2006, 59% of the companyÆs revenue came from the production of chicken meat, while the production of animal feeds contributed 35%. Processed food accounted for only around 6% of its income, but the company aims to increase this to one-third over the next few years to benefit from the fact that processed food has higher profit margins than the production of chilled or frozen chicken meet and animal feeds.

The earnings growth potential associated with this expansion was one of the key investment themes touted by the company as it tried to attract attention it its deal among the 10 other IPOs that were at various stages of marketing in Hong Kong at the same time.

ChinaÆs decorative paper manufacturer Qunxing Paper and property developer Sino-Ocean closed their IPOs at the end of last week, raising $206 million and $1.5 billion respectively. Both deals were priced at the top and saw maximum clawbacks. Two other developers - China Aoyuan Property and Soho China - will close their offerings today (September 27), while Chinese software and online game developer KingsoftÆs IPO will stay open till the end of the week.

DaChan offered 310 million shares, or 31% of its enlarged share capital, with Cazenove Asia acting as the sole bookrunner. Of the total, 19.4% were existing shares sold by the Government of Singapore Investment Corporation (GIC). The deal size can increase to $133 million if the 15% greenshoe is exercised in full.

GICÆs stake in DaChan will fall to 5.9% after the offering, while another pre-IPO investor, Conti Group, will hold 6%. Parent company DaChan Great Wall Group will own 52.9%.

The trading debut is scheduled for October 4.
¬ Haymarket Media Limited. All rights reserved.
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