Consumption theme underscores Citic Pacific spin-off

Citic Pacific's food and auto subsidiary, Dah Chong Hong, prices its IPO at the top to raise $589 million.
Dah Chong Hong Holdings (DCH) has priced its Hong Kong initial public offering at the top of the range at HK$5.88 for a total deal size of HK$4.6 billion ($589 million) following strong demand.

Apart from a two-day correction last week, the auto and food distribution business that is being spun off from Hong Kong-listed conglomerate Citic Pacific has conducted its entire roadshow against a steady rise in the secondary market and the price fixing yesterday coincided with a new record close for the Hang Seng Index at 28,569 points. The index has now gained 40% since August 17, which marked the bottom of the subprime induced correction.

Most of the companies that have completed Hong Kong IPOs over the past few weeks have also seen sharp gains on their trading debuts. This has encouraged investors to get into the next deal in the hope that it too will deliver handsome returns in a matter of days. Among the newcomers this week, China Dongxiang, which owns the Kappa brand in China, gained 36.4% on its first day yesterday, while property developers Aoyuan Property Group and Soho China added 43% and 17%, respectively, since their debuts two and three days ago.

In light of this û and DCHÆs exposure to the China consumption story - the solid interest was no great surprise. According to a source, the retail portion of the deal was approximately 230 times covered, which triggered a full clawback that boosted the size of the retail tranche to 50% from the original 10%.

The institutional tranche was about 58 times covered post clawback and excluding the $105 million cornerstone tranche. Shareholders of Citic Pacific were able to participate in the IPO through a preferential share offering, which accounted for 5.7% of the entire deal, but this portion was included into the retail tranche and therefore didnÆt dilute the number of shares available to institutional investors any further.

About 70% of the institutional demand came from Asia with the rest split fairly evenly between Europe and the US.

The company, which has operations in Hong Kong, Macau and China, sold 781.2 million shares of which 180 million, or 23%, were new. The remaining 601.2 million were existing shares that were sold by Citic Pacific, which will see its stake diluted to 56.6% (from 100%) after the IPO. If the 15% greenshoe is also exercised in full, its holdings will fall further to 50.1% and the maximum deal size will increase to $677 million.

BNP Paribas was the sole bookrunner for the offering.

The final price at the top end of the HK$4.55 to HK$5.88 range values DCH at 20 times its projected 2008 earnings. This puts it at a discount of 44% versus China Resources Enterprise (CRE) which trades at close to 36 times next yearÆs earnings based on yesterdayÆs closing price. The conglomerate is viewed as a reasonable comparable to DCH given it is also active within trading and retail businesses. However, CREÆs retail business is significantly larger than that of DCH, which suggests it should trade at a sizeable premium to the newcomer.

Other comparisons include the Chinese supermarket stocks, which according to Bloomberg data trade at an average 2008 price-to-earnings multiple of about 26 times, and the food and beverage producers at an average 34 times. However, the fact that DCH also has auto dealership and logistics operations means it isnÆt entirely comparable to companies in these sectors.

The key reason why investors were interested in DCH was the companyÆs aim to continue to expand its operations in China. According to investors, the portion of revenues derived from China is forecast to increase to 55% in 2009 from 43% in 2006. Despite the slightly lower margins on the Chinese businesses, this should become a major driver of bottom-line growth and the recurring net profit is expected to grow at a compound annual growth rate of about 25% in 2006-2009, they say.

Among the themes that are expected to boost revenues is ChinaÆs low penetration rate in terms of car ownership with only 28 of every 1,000 people having a car. The food distribution business is also seen to have significant upside potential as ChinaÆs young generation has more spending power and is also more keen to buy foreign-branded products.

The bulk of the companyÆs earnings come from the auto distribution business, which accounted for 59% of its total revenues in 2006. The food and consumer trading and distribution business accounted for 39% and the logistics business for 1%.

The stock is scheduled to start trading on October 17.
¬ Haymarket Media Limited. All rights reserved.
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