China Agri-Industries prices IPO at the top

The biofuel producer pulls off Hong Kong's largest IPO this year as tumbling stock markets fail to upset demand.
China Agri-Industries has raised $410 million after pricing its initial public offering at the top of the range following hefty demand from both institutional and retail investors. The strong interest came despite the Hang Seng Index shedding more than a thousand points last week.

Hong Kong retail investors submitted orders for 607 times the shares earmarked for them through the 10% retail tranche, tying up a total of $25 billion and triggering a full claw-back. The institutional tranche was 100 times covered post the claw-back, which increased the retail portion of the deal to 50%.

The amount of retail orders makes this the second most popular IPO with the Hong Kong public this year after China Huiyuan Juice, which drew $27.7 billion worth of retail demand.

According to sources, the institutional tranche attracted about 500 individual orders, of which 70% came from institutions and 30% from corporates and high-net-worth individuals. Among the buyers were some Scandinavian, German and Middle Eastern players interested specifically in this sector, as well as most of the usual Hong Kong tycoons and all the big US global funds, they say.

Including Asia-based global accounts, two-thirds of the demand came from Asia, 25% from Europe and the rest from the US.

Effectively a spin-off from Hong Kong-listed Cofco International (although the two have become sister companies following a group restructuring), China Agri is ChinaÆs largest processor of agricultural products. It was, however, its recent move into the production of biofuels that attracted most of the attention.

ôBiofuel really was the story,ö says one source close to the offering. ôPeople were buying on the back of the increase in production capacity and because they believe the government will continue to provide subsidies to support the sector and to reward more operating contracts to this company.ö

The price was fixed at HK$3.72, which marked the top of an indicative range starting at HK$3.10, allowing the company to raise $410 million. If the greenshoe option is fully exercised, this will increase to $460 million but even at the base size the deal ranks as the largest IPO in Hong Kong this year û exceeding the $345 million (including greenshoe) raised by Huiyuan Juice in mid-February.

BOC International and Goldman Sachs were joint bookrunners for the offering.

The total deal comprised 860.9 million shares, or 24.7% of the company, after being increased by 23% from an original plan to sell 697.8 million shares. The income from the additional shares, which were all secondary paper sold by the controlling shareholder, is to be used to cover cash payments related to a preferential offer of China Agri shares to shareholders of Cofco.

The Cofco shareholders were able to either receive shares in the listing candidate on a one-for-one basis or to get the equivalent amount in cash. According to an earlier announcement, 77% of the shareholders elected to take shares while 23% opted for cash.

Aside from the 163.1 million shares sold to cover that cash option, all the shares were new. Japanese conglomerate Mitsubishi Corp. bought about $65 million worth of shares in the IPO as a strategic investment.

The company will list at 17.4 times its 2007 earnings, which pitches it at a 30% premium to American counterpart Archer Daniels Midland, which is also active within the processing of agricultural products û mainly oil seeds û as well as the production of biofuels and biochemical products. The latter was quoted at a 2007 price-to-earnings multiple of 13.3 times at the time of pricing after falling 4.4% during China AgriÆs roadshow, according to Bloomberg data.

China AgriÆs biofuel and biochemicals division accounted for no more than 7% of revenues and 25% of earnings before interest and tax in 2006, according to syndicate estimates, but is expected to increase to 18% of revenues and 51% of Ebit by 2008 as new capacity comes on stream.

The company plans to spend around Rmb4.3 billion ($556 million) to expand the division. By 2008 it plans to have four more biofuel plants that will boost its production capacity to 1.08 million tones from 180,000 tons now and three new plants for the production of corn-based biochemical products.

Apart from the biofuel and chemicals business, China Agri is active within oil seed processing, rice trading and processing, brewing materials and wheat processing. Its largest division now is oil seed processing, which generated 59% of the companyÆs revenues and 41% of Ebit in 2006. While revenues are expected to remain high at 62%, the profit contribution of the division is expected to fall to 29% by 2008 as the biofuel production becomes more prominent.

Together with the Cofco group, the company has stakes in three of the four existing fuel ethanol plants in china and a license to construct a fifth, putting it in a strong position even as the sector may become more competitive. The management believes that the governmentÆs aim to develop both the agricultural sector and alternative energies will ensure that at least for the foreseeable future any changes to current policies will continue to benefit the existing players and make sure they are profitable.
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