China Huishan Dairy Holdings has raised HK$10.11 billion ($1.3 billion) from its initial public offering after fixing the price at the top of the indicated range. The vertically integrated milk producer will start trading on the Hong Kong stock exchange on September 27.
The deal is the second largest IPO in Hong Kong this year after Sinopec Engineering’s $1.8 billion offering in May and benefited from a more favourable view towards China and Chinese equities in recent weeks. Sources said the institutional order book was multiple times covered across the price range and noted that the company missed out on only a handful of accounts by pricing at the top as most long-only funds came in at strike, or migrated towards the top during the bookbuilding.
As a domestic consumption play, Huishan Dairy operates in a sector that is one of the key focus areas for global institutions as they increase their exposure to China. And Hong Kong retail investors have always favoured this sector as it is easy to understand and includes numerous companies and brands that they are already familiar with.
According to bankers close to the transaction, retail investors subscribed to more than 10 times the number of shares available to them, which triggered a clawback that increased the retail tranche to 15% of the total deal from the original 10%. There was no exact retail subscription number available but the bankers estimated it would end up being slightly above 12 times. In any case it was well below the 30 times that would have been needed to trigger a second-level clawback to bring the retail tranche to 20%.
Meanwhile, well over 250 institutional investors submitted orders in addition to the three cornerstones that will invest a combined $214 million based on the final price. After deducting the cornerstones’ share and taking the clawback into account, there was about $890 million worth of shares left to allocate to institutional investors.
The sources said the allocations were heavily skewed towards long-only funds that had come into the deal on day one and added that about one-third of the accounts got no shares at all. Particularly among hedge funds and private banks (other than those linked to the global coordinators) there were a lot of zeroes, one person said.
The buyers also included a few sovereign wealth funds. This was in addition to Norges Bank, the Norwegian central bank, which had agreed to take up 360.2 million shares as part of the cornerstone tranche. Based on the final price that meant it invested about $124 million.
The other cornerstones were Inner Mongolia Yili Industrial Group, a customer of Huishan Dairy that took up $50 million worth of shares, and Bao Hua, the private equity arm of state-owned food-industry group Cofco, which bought $40 million worth.
The interest in consumption plays was also evident in the much smaller IPO of International Housewares Retail Company. The Hong Kong-based company, which sells items for the home ranging from pots, pans and brooms to plants and air conditioners through its Japan Home Centre stores and four other retail chains around the region, priced its offering at the top on Wednesday after sources said the retail offering was more than 140 times covered and the institutional portion more than 30 times covered after clawback.
At $78 million, this deal was significantly smaller than Huishan Dairy but one source said it still attracted a lot of big name investors and had a good mix of global long-only funds, pension funds and qualified domestic institutional investor (QDII) funds out of China. BOC International was the sole bookrunner.
Meanwhile, Tenwow International, the food and beverage producer and distributor that raised $203 million from a Hong Kong IPO last week, had a very strong debut, which acted as an incentive for investors to put money into both Huishan Dairy and International Housewares towards the end of the bookbuilding.
Tenwow’s share price jumped 16.5% from its IPO price of HK$3.15 when it started trading on Tuesday before easing back slightly the next day. By the end of trading on Thursday, the stock was 1.1% lower at HK$3.55, but still up 12.7% from the issue price.
Huishan Dairy sold approximately 3.79 billion shares, or 26.3% of its enlarged share capital at a price of HK$2.67 apiece. The shares were marketed in a range between HK$2.28 and HK$2.67.
The final price valued the milk producer at 17 times its forecast earnings for the fiscal year to March 2014, based on the bookrunner consensus, which puts it at a sizeable discount to Hong Kong-listed China Mengniu Dairy. As of Wednesday’s close, Mengniu was quoted at a price-to-earnings multiple of 23 times for the 2014 calendar year.
Analysts believe that a discount is warranted given that Mengniu is significantly larger, both in terms of sales volumes and market capitalisation. Huishan Dairy is much more vertically integrated, however. Investors viewed the latter as a key attraction as it should give the company better control of the quality of its products – a key issue in the Chinese dairy industry, which has been plagued by a number of scandals in the past few years.
Huishan Dairy also comes at a slight discount to China Modern Dairy, which is also listed in Hong Kong and trades at 17.4 times its projected earnings for the fiscal year to June 2014, according to Bloomberg data.
About 76.9% of the base deal was made up of new shares, while the rest were secondary shares sold by a number of existing investors including chairman Yang Kai. There is also a 15% overallotment option of all secondary shares that could increase the deal size to 30.3% of the company and the total proceeds to as much as $1.5 billion, if fully exercised.
Huishan has grown rapidly since it started in 2009 and currently has more than 112,800 cows – the second largest herd of dairy cows in China – and 50 standardised dairy farms. It also grows its own alfalfa and supplementary feeds and, according to the listing prospectus, the company is self-sufficient both with regard to animal feed and raw milk.
In the fiscal year to 2013, 66.9% of its revenues came from liquid milk products, including fresh milk, UHT milk and yogurt, while raw milk sold to outside customers accounted for 26.7% and milk powder products made up 3.4%. The rest came from grain processing and trading, a business that has since been discontinued.
The strong interest for Huishan Dairy is encouraging for other IPOs in the pipeline and could lead to more deals being pushed out in the near-term, especially given the rally in US and Asian stocks after the Federal Reserve decided in the early hours of Thursday morning (Asia time) to hold off on its expected tapering for now. Together with Larry Summers’ withdrawal as a candidate for Federal Reserve chairman earlier in the week, the Fed decision led to a renewed appetite for riskier assets, which could include IPOs.
It definitely had a positive impact on Asean markets, which soared on Thursday after being largely out of favour in the past month. By 4:30pm Hong Kong time, Thailand’s benchmark index was up 3.6% and Indonesia had added 4.7%, while Singapore was up 1.9%. The Philippines closed 2.8% higher.
Other deals in the works
As reported earlier, Malaysian ports operator Westports Holdings kicked off the institutional roadshow on Thursday for an IPO of up to M$2.03 billion ($626 million). As expected, the company kept the maximum price of M$2.50 that ethnic Malay investors and the cornerstones had already agreed to and set the price range at M$2.30 to M$2.50 for a pre-greenshoe deal size between $575 million and $626 million.
That deal was already more than 80% taken up by ethnic Malay investors (also referred to as the Bumiputera tranche) and cornerstones at launch and hence is expected to do well. All but two of the nine cornerstones are domestic accounts.
Also, sources said that bankers started pre-marketing of Malaysia’s UMW Oil & Gas on Thursday after a restructuring of the company. According to a source, UMW Oil & Gas, which is a unit of state-backed industrial conglomerate UMW, already had an oversubscribed Bumiputera tranche and commitments from eight cornerstone investors when it decided last month to remove one of the subsidiaries from the entity about to go public.
The restructuring meant it had to re-file its listing documents with the regulators and it is expected to launch the deal in October after a couple of weeks of pre-marketing and reconfirmation of earlier orders. A source said the company is now seeking to raise up to $750 million, compared to earlier expectations of an $850 million deal.
And in Hong Kong, Nexteer Automotive Group is getting ready to re-launch its IPO, which was pulled in late June amid “adverse market conditions and significant market volatility.” The Michigan-based steering and driveline supplier will launch both the institutional and retail offerings on Tuesday and according to a source, the deal will be largely similar to the previous attempt, both with regard to the structure and the price. BOC International and JP Morgan are joint global coordinators and bookrunners.
Deutsche Bank, Goldman Sachs, HSBC and UBS were joint global coordinators and bookrunners for the Huishan Dairy IPO, while CIMB, Investec Capital Asia and Jefferies were joint bookrunners.