Fufeng signs Value Partners as anchor IPO investor

The producer of food additives aims to raise $114 million from a Hong Kong IPO while TPV Technology drops sharply after placement by major shareholder.
Fufeng Group, which kicked off the institutional roadshow for its upcoming Hong Kong listing on Thursday, has signed Value Partners as an anchor investor to help boost sentiment for the stock as it competes with two other similarly-sized IPOs, sources say.

The Hong Kong-based asset manager will buy 80 million shares, or 20% of the IPO, and has agreed to a six-month lock-up. The investment is expected to instill confidence among retail investors in particular on the basis that anyone who is willing to buy such a sizeable stake will have been pleased with the outcome of their due diligence. The message will be even clearer as Value Partners û being a value investor - specialises in identifying stocks that they feel are undervalued.

Fufeng, which produces food additives such as monosodium glutamate (MSG) and other bio-fermentation products derived from refined corn, will be brought to market by ABN AMRO Rothschild and Goldbond and aims to raise up to HK$892 million ($114 million) from the sale of 25% of the company.

It is offering 400 million new shares at a price between HK$1.72 and HK$2.23. There is also a 15% greenshoe, which could boost the total proceeds to $132 million if fully exercised at the top end of the price range. The deal has the usual 90-10 split between institutional and retail investors, although the stake bought by Value Partners will come out of the institutional tranche.

The price range values the company at 7.5 to 9.7 times its 2007 earnings, based on consensus syndicate estimates which suggests a net profit of about Rmb370 million this year, one source says. That would represent a more than 50% increase from last yearÆs bottom line, which is projected to be at least Rmb240 million, according to the preliminary prospectus.

The price range pitches the company at 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. Vedan International Holdings, which is a leading producer of MSG in the region with most of its production in Vietnam, currently trades at close to 14 times 2007 earnings after soaring 32% since the beginning of this year. Analysts following the sector say the gains are due to a combination of improving corporate fundamentals, investors chasing laggards and a heightened focus on the sector leading up to FufengÆs IPO.

Fufeng is ChinaÆs largest producer of glutamic acid, which is used to make MSG, and derives about 65% of its revenues from this product. MSG 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 is looking to boost its production capacity of glutamic acid over the next few years through the construction of a new plant in Inner Mongolia. Fufeng currently has four plants in the Mainland provinces of Shandong, Shaanxi and Inner Mongolia.

Adding to its attraction, Fufeng also makes an additive called Xanthan gum, which has numerous uses within the food industry as well as other industrial applications. For example, it can be added to cold dressings to make them pour better, to hot sauces to prevent separation and keep the temperature, to ice cream to prevent the formation of ice crystals and to pastry fillings to prevent them from going watery and damaging the crispiness of the crust. It can also be used as a substitute for fat as it adds that ômouth feelö of fat without the calories.

It can also help prolong the life of certain products and can be used as a thickener and stabiliser in medicine, cosmetics and hygiene products, or to make products like pesticide and porcelain. The printing and dying, paper-making and mine drilling industries are also big users.

ôWith so many applications there are obviously a lot of opportunities to grow,ö says the source, while noting that xanthan gum currently accounts for only 6% of the companyÆs revenues. The new plant in Inner Mongolia will be able to produce xanthan gum as well.

One potential worry is the corn price, which has gone through the roof in the international market over the past year, driven by a strong demand from producers of bio-fuels. The price of corn in China hasnÆt kept pace with the price gains in the wider market, however. One reason is that it is difficult to export this product from the Mainland, partly due to government regulations, partly because of the high transport costs, which means mainland producers are somewhat sheltered from the soaring prices globally.

ôFufeng believes that by expanding its capacity it will be able to outgrow the corn price increases,ö one of the sources say.

However, KGI Asia analyst Alex Kao, who covers Vedan among other stocks, notes that there is an overcapacity of MSG in the domestic Chinese market and the quality of the product produced by the local companies is also often too low to win overseas orders.

In addition, he argues that there is a real possibility that the government regulations that are keeping down the price of corn in China may change. This would have a negative impact on the earnings of the Mainland companies that use corn as raw material, while companies like Vedan, which are already exposed to the higher international prices, would see no change.

ôI think investors feel less confident about pure China plays in case the price protection in China is cancelled in the future,ö Kao says

The involvement in the food industry makes Fufeng essentially a play on consumption in China, which has been one of the ôhotö investment sectors over the past 12 months. This could give the company an edge over the other two IPOs in the Hong Kong market at the moment - printed circuit board manufacturer Meadville Technologies and drug maker Wuyi Pharmaceuticals û which launched their institutional roadshows one day before Fufeng on Wednesday last week.

However, the retail portion of these three offers wonÆt be going directly head to head as Meadville and Wuyi will launch theirÆs today, while Fufeng wonÆt open its order book to retail money until Thursday (January 25).

Fufeng is expected to determine the final price on January 31 û the same day as the institutional and retail offers close û while the trading debut is scheduled for February 8.

Separately, there were suggestions at the end of last week that investors may be getting more cautious about the sustainability of the current high market levels after TPV Technology plummeted 11% on Friday after a sale of $138.5 million worth of existing shares the night before.

According to sources, the offer of 200 million shares was about 1.3 times covered with long-only funds taking the bulk of the deal. But either they changed their minds about holding on to the stock, or existing investors not involved in the placement decided to dump the stock as one of the major shareholders cashed in û either way the stock dropped 5.4% below the placement price of HK$5.40 in the wake of the trade.

The sale, which was led by UBS, saw BOE Technology reduce its stake in the manufacturer of LCD TVs and computer monitors to 11.55% from 21.85%. Unlike most of the other existing shareholders who have been selling stock in various Hong Kong-listed companies since the beginning of this year, BOE was not selling at the top of the market. In fact the share price has been on a gradually declining trend and has lost 44% in the past 12 months.

The placement price was fixed in the middle of the HK$5.30 to HK$5.50 range for a 6.1% discount to ThursdayÆs closing price of HK$5.74.
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