Goodbaby IPO thrown out with China water

Hong Kong's first IPO marketed within the 2016 calendar ends in failure as Chinese growth worries take their toll and investors demand meatier discounts.

Goodbaby China’s decision to pull its HK$1.25 billion ($161 million) initial public offering in Hong Kong reflects deteriorating investor confidence towards consumer plays in China as the economy slows, two investors familiar with the company told FinanceAsia on Thursday.

Sources close to the deal said the Chinese maternity, baby, and children's products seller failed to price the offering as scheduled on Tuesday.

One fund manager who had expressed some interest in investing said he was surprised, citing the company’s solid fundamentals.

Still investors might have become more cautious about investing in Chinese companies in recent weeks after Beijing announced that the economy grew by 6.9% in 2015, the slowest pace in 25 years.

Such concerns over the weakening economy, the two fund managers said, outweighed the longer-term positives emphasised by Goodbaby China in its pitch, including looming support from China's new two-child policy, China's growing affluence and consumption, and the e-commerce boom, 

They also continue to weigh on the broader market. Despite a 1.5% gain on Thursday, the Shanghai Composite index of Chinese shares is trundling near its lowest levels since late 2014 and is 21% down so far this year and 46% down from its May 2015 peak.

Valuation issues 

Some analysts also questioned whether Goodbaby China was being priced at a big enough discount to other consumer companies already listed.

In a research note dated January 28, analysts at DBS described the IPO's valuation as no more than "fair relative to peers especially under the current market sentiment" and advised clients to wait for a better entry point rather than subscribe to the deal.

"While we like the company’s direct exposure to the children’s market, in particularly on kid’s sportswear products [for] which demand is expected to remain solid...there are some uncertainties on sustainability of its growth momentum which has been relying mostly on aggressive store expansion," DBS said in the note. 

One banker away from the deal said investment bankers would now have to be more careful in gauging investor interest following the failure of Goodbaby China’s IPO. “We will have to be very careful in bringing deals to the market because market sentiment changes very quickly,” he said.

According to data provider Dealogic, Hong Kong's total IPO volume before the Chinese New Year holiday this year amounts to $530 million from six deals, the second-lowest in four years.

Goodbaby China was spun off from Hong Kong-listed Goodbaby International in 2010. Goodbaby International manufacturers baby products for domestic and international brands, while Goodbaby China sells these products through its network of 3,293 stores spanning across 31 provinces in China.

Following its sister company’s decision to withdraw its Hong Kong listing, Goodbaby International's share price fell 6.2% in Hong Kong on Thursday despite a 1% gain in the benchmark Hang Seng Index.

Morgan Stanley was the sole sponsor of Goodbaby China’s IPO and also a joint bookrunner with BOC International.

Additional reporting by Jackie Horne

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