Fufeng prices IPO at the top of the range after heavy demand

The producer of food additives sees its retail tranche 630 times covered, while local brokerages pile into the institutional portion of the $114 million deal.
Hong Kong retail investors left nobody in doubt that they are still happy buying into new share offerings when they submitted orders for 630 times the amount of shares earmarked for them in Fufeng GroupÆs IPO.

The offer was quite small at only HK$892 million ($114 million) even after being priced at the top end of the range, but the size of the demand û which was well above that received for the IPOs of both Wuyi Pharmaceutical and PCB manufacturer Meadville last week - is likely to be encouraging to the growing pipeline of listing hopefuls that are lining up in the Hong Kong market.

These include Chinese juice maker Huiyuan Juice, and Malaysian hard wood timber company Samling, which are both pre-marketing their respective offers this week. Huiyuan is looking to raise about $250 million with the help of UBS, while Samling has enlisted Credit Suisse, HSBC and Macquarie to help it raise around $300 million.

The institutional tranche was also well covered, although one can suspect that some investors at least stayed away given the likelihood of allocations being very small. Due to the hefty retail demand, the public tranche was increased to 50% from 10% and with an additional 20% of the deal having been set aside for anchor investor Value Partners, there was only $34 million left for the remaining institutional investors to share.

According to sources this remaining share was more than 50 times covered when the books closed at the end of New York trading Tuesday (January 30), suggesting they had few concerns about the continuous rise in the price of corn, which is used as a raw material for the companyÆs various products.

Mainland-based Fufeng produces food additives such as monosodium glutamate (MSG), xanthan gum and other bio-fermentation products derived from refined corn. MSG in particular is big business in China, Japan and South Korea where it is widely used to improve the flavour of cheap food and snacks.

The company said during the roadshow that it believes that the upcoming expansion of its production capacity will allow it to outgrow the corn price increases.

Long-only funds and hedge funds were estimated to have accounted for about one third of the demand each, while the rest was said to have come from local brokers, who may have been buying either for their own proprietary trading desks or on behalf of clients. The latter type of orders isnÆt uncommon on ôhotö IPOs in Hong Kong, although typically they end up with very small allocations, if any at all.

Geographically, about 60% of the demand came from Asia, although this would have been skewed by the brokerage orders. The remainder was split fairly evenly between European and US investors, sources say.

The offer, which was jointly arranged by ABN AMRO Rothschild and Goldbond, comprised 400 million new shares that were sold at a price of HK$2.23, valuing the company at 9.7 times its 2007 earnings. There is also a 15% greenshoe, which could boost the total proceeds to $132 million. The shares were initially offered in a range of HK$1.72 and HK$2.23.

The valuation marks a slight discount to Hong Kong-listed Global Bio-chem and Xiwang Sugar, which both trade at 2007 PEs of around 10 times and are considered key comparables for the companyÆs glutamic acid and MSG business.

The discount to Vedan International Holdings û a leading producer of MSG in the region with most of its production in Vietnam û is even larger after that stock has gained 19% since the beginning of this year. The Hong Kong-listed company has come off 13% from its highs during the early part of FufengÆs roadshow, however, and currently trades at about 12.6 times 2007 earnings.

Fufeng will start trading on February 8.
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