The listing candidate is a Mainland-based subsidiary of Taiwan-listed DaChan Great Wall Enterprise and ranked the largest chicken slaughterer in China in 2005, according to a source. Apart from being an exclusive sourcing agent for McDonaldÆs in China, DaChan is 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.
DaChan is offering 310 million shares, or 31% of its enlarged share capital, at a price between HK$2.20 and HK$3.0 per share. Of the total, 19.4% are existing shares sold by the Government of Singapore Investment Corporation (GIC).
The deal has a usual Hong Kong structure with 10% of the shares earmarked for retail investors and the remaining 90% going towards the institutional tranche. A full clawback, which is triggered when the retail portion is more than 100 times subscribed, will increase the retail portion to 50% of the deal. A 15% greenshoe could boost the deal size to as much as $137 million. Cazenove Asia is the sole bookrunner.
The price range values the company at a 2008 price-to-earnings multiple of 10.2 to 13.9. There are no direct comparables with the same product mix, but China Yurun Food Group, a Hong Kong-listed Chinese company that offers a wide range of raw pork and processed meat products, does offer some guidance on the valuation of a China-based food producer. Yurun Food is trading at 18.6 times its projected 2008 earnings, according to Bloomberg data.
Aside from a downturn in early August when global equity markets underwent a correction due to the US subprime crisis, YurunÆs share price has been on an upward track. It has risen more than 60% in the past 12 months to FridayÆs close of HK$10.30.
According to a source close to the deal, DaChanÆs net profits are projected to surge 77% to $23.6 million this year and reach $27.7 million in 2008. Last year the manufacturer recorded a net profit of $13.4 million which was up from $2.6 million in 2004.
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 this is expected to increase over the next few years.
ôThere are only a few substantial chicken meat producers in China, and most of them rely heavily on outsourcing. As a vertically integrated supplier, DaChan differentiates itself from its main competitors,ö says a specialist close to the deal. ôWhen it comes to the main growth driver, I think the expansion of the companyÆs processed food business is going to enhance its profitability,ö says the specialist.
The company aims to bolster its processed food business, which has higher profit margins than the other two divisions, to one-third of its total revenue, and have its source of income split equally between the production of chicken meat, animal feeds and processed food.
Processed meat typically delivers higher margins than the production of raw meet. According to YurunÆs 2007 interim report, its downstream business which produces high and low temperature meat (such as sausages and hams) has a gross profit margin of 25.9%, which compares with only 10.1% for its upstream production of chilled and frozen pork.
To achieve this, DaChan is going to spend more than half of the net IPO proceeds to expand its production capacity, especially within the processed food division. The company will also reserve funds for potential acquisitions, expansion of sales and marketing, as well as research and development.
DaChanÆs planned expansion and increased focus on the more profitable side of its business gives it a clear investment theme that should be helpful in attracting investors amid a growing line-up of companies seeking a Hong Kong listing.
Qunxing Paper Holdings and Sino-Ocean Land Holdings have already begun taking retail orders, while Chinese online games provider Kingsoft and commercial property developer Soho China will both launch their institutional roadshows today (September 17). They will be followed later in the week by another property developer, Aoyuan Corp, and consumption plays China Dongxiang, which owns the Kappa brand in China, and down-wear manufacturer Bosideng International. DaChan's offering is one of the smallest among the IPOs currently in the market.
GICÆs stake in DaChan will fall to 5.9% after the offering, while another pre-IPO investor, Conti Group, will hold 6%. DaChan Great Wall Group, the parent of the listing candidate, will own 52.9%. The final price will be determined on September 25 and the trading debut is scheduled for October 4.
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