China Yurun prices at top of the range

Investors buy into growth and brand as subscription levels soar.

China's third-largest pork processing company ended up pricing IPO last Friday (September 23) at HK$3.70 per share - the top end of a HK$2.85 to HK$3.70 indicative range.

The company will raise $198 million pre-greenshoe, or $228 million if the greenshoe, comprising 62 million shares, is exercised. In the latter case, the Goldman Sachs led IPO will rank as the largest flotation by a food and beverage company on the Hong Kong Stock Exchange.

The company, listing as a red chip, saw its Hong Kong retail portion over-subscribed around 156 times, thereby triggering the claw back provision upping the retail portion of the base offering to 50% from 10%. The international portion was around 21 times oversubscribed, with participation by about 100 investors.

Geographically about 50% of the orders came from the US, 30% from Europe and 20% from Asia. The Asian element comprised a number of Hong Kong companies and private banking clients, while the US and Europe included a number of long-only money funds, as well as some long money hedge funds with an appetite for decent fundamentals.

Most orders came in the $50 million to $60 million range, or around 5% of the deal size, with almost no orders under $20 million or above $70 million.

Specialists were pleased with the P/E valuation of the company - 15.03 times 2005 earnings. This represents a discount to Hong Kong-listed Mengniu Dairy, which is currently trading around 19 times 2005 earnings and Shuanghui, a Shanghai-listed pork processor on around 16 times.

However, Yurun priced at a substantial premium to Hong Kong-listed People's Food, which is trading at just 7.6 times as of Friday, despite its stock price improving by 10% over the past few days. Specialists believe this resulted from fund managers taking a closer look at China's food and beverage sector in the wake of the Yurun's roadshow.

"The company's higher P/E ratio shows that it clearly managed to differentiate itself from People's Food and close the gap on Mengniu," notes one observer.

Specialists say the company was not a market momentum play, but attribute high demand to its rapid growth profile and the attractiveness of China's food sector overall. China already consumes three times as much pork as the US and five times as much as Europe, with the numbers only set to grow, say analysts.

Like Mengniu in the milk segment, Yurun is the market leader in both low temperature meats and brand appeal. Low temperature meat refers to the quality, pricier meats which customers keep in the fridge.

"International institutional investors liked the management's experience, the company's forecast 109% jump in net earnings in 2005 and its brand appeal," notes one specialist.

Investors also approved of the company's corporate governance structure, with one non-executive director each from private equity investors Goldman Sachs, GIC and CDH respectively sitting on the company's board alongside three independent directors, out of a total of 12.

In addition, the company has been ring-fenced from the other businesses owned by the founder, Zhu Caiyi.

Pre-greenshoe, Goldman Sachs' stake falls to 6.75% or 6.46% post-shoe, Chinese private equity company CDH falls to 3.65% and 3.50% respectively, Singapore's GIC falls to 3.46% and 3.31%.

Chairman Zhu and his wife's combined stake fall to 53.47% or 51.19% post-shoe. Pre-shoe, the free float will amount to 30%, while 84% of the shares issued were new and 16% old.

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