China Feihe’s $1.1b IPO goes for prudent pricing strategy

Listing against the backdrop of social unrest in Hong Kong, China’s largest infant milk formula maker stays cautious with pricing and leaves something on the table for prospective investors.

Infant milk formula manufacturer China Feihe is poised to give the Hong Kong stock exchange another boost following the revival of two billion-dollar flotations earlier this year, assuming it completes an initial public offering of up to HK$8.9 billion ($1.1 billion) next week.

Beijing-based China Feihe, which claims to be the country’s largest infant milk formula seller, is set to start retail bookbuilding for its 893.3 million-share deal on Wednesday. It will accept orders within the HK$7.5 to HK$10 indicative price range, the company announced on Tuesday.

China Feihe’s upcoming flotation will follow the likes of Budweiser APAC and ESR Cayman, which both revived their billion-dollar deals after failing to get through at the first attempt. The beer manufacturer raised $5 billion in September in what was Hong Kong’s largest IPO this year, while warehouse operator ESR priced its $1.6 billion late last week.

More importantly, China Feihe is poised to become Hong Kong’s fifth billion-dollar listing this year after Hansoh Pharmaceutical, Topsports International, Budweiser APAC and ESR Cayman. That will put the year on a par with 2018, when the city hosted the same number of mega listings in China Tower, Xiaomi, Meituan-Dianping, Ping An Healthcare and Jiangxi Bank.

That could be something to cheer for the stock market operator. After all, Hong Kong has been marred by a series of anti-government protests since June, casting doubt over the city’s ability to continue attracting international investor interest.

Intriguingly, the investment environment appears to be insulated from the city’s social unrest thus far. Hong Kong’s benchmark Hang Seng Index is little changed since the protest first broke out in early June and has mostly hovered in the 26,000 to 28,000-points range.

It hasn't been flawless though. In the latest setback for the city, Chinese household appliance retailer JS Global shelved a $462 million listing late last week citing unfavourable market conditions.

With total IPO fundraising volume standing at $17.6 billion and less than three months to go to the end of the year, Hong Kong looks unlikely to match last year’s volume of $33.4 billion.


Against such a backdrop, China Feihe is being extremely cautious over pricing and is pitching its deal at a fairly steep discount to most peers – a scenario little seen in Hong Kong’s IPO market in recent years.

By setting the price range at HK$7.5 to HK$10, China Feihe is pushing for an implied market capitalisation of HK$8.5 billion to HK$11.4 billion, or about 12.2 times to 16.2 times the firm’s projected earnings this year, according to syndicate analysts.

By contrast, Ausnutria Dairy and Yashili – the other two Hong Kong-listed Chinese milk formula sellers – are trading at a forward price-to-earnings of 18.1 times and 31.7 times, respectively. This is despite the fact both are significantly smaller in scale, with respective market sizes of only $2.1 billion and $530 million.

China Feihe's projected valuation also looks favourable in comparison with major dairy producers, such as China Mengniu Dairy, some analysts have suggested. The state-owned dairy product producer trades at a price-earnings multiple of 24.2 times on a rolling twelve-month basis. 

Milk formu la manufacturers typically enjoy stronger growth and higher profit margins than dairy product makers. Last year, China Feihe achieved a 43.3% year-on-year revenue growth and a gross profit margin of 66.3%. Mengniu achieved growth of 14.1% with a 37.4% margin.

Beijing-based China Feihe leads the country’s infant milk formula market with a 7.3% market share, and 15.6% if only local manufacturers are accounted for. It sells infant milk formula and other nutritional supplement products under multiple brands, including super-premium Astrobaby and Zhenzhi.

It is set to close bookbuilding on November 5 and make its debut on the HKEx on November 13.

Joint sponsors and global coordinators of the IPO are JP Morgan, China Merchants Securities and CCB International.

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