Huiyuan Juice proves consumption stocks are still hot

The IPO is priced at the top end of the range for a total deal size of $308 million after attracting more than $57 billion of demand.
China Huiyuan Juice Group has priced its initial public offering at the top end of the range for a total deal size of HK$2.4 billion ($308 million) after overwhelming demand ensured it became not only the largest Hong Kong IPO year to date, but also the most popular.

The demand shows that Chinese consumption-related stocks remain in favour as the Mainland economy continues to churn out impressive growth figures. Sources said the smallish deal had attracted more than $57 billion worth of demand.

The retail tranche was more than 900 times covered, which meant that it alone tied up HK$216 billion ($27.7 billion) worth of cash, putting it just behind last yearÆs much larger offers from Industrial and Commercial Bank of China, which saw $55 billion of retail orders, Bank of China - $37 billion - and China Merchants Bank with $32 billion in terms of popularity.

The strong demand led to a full claw back which boosted the retail portion of the deal to 50% from an initial 10%. The 50% left for institutional investors was about 197 times subscribed, sources say,

Not surprisingly therefore, the price was fixed at HK$6 after being offered in a range that started at HK$4.80. The final price translates into a 2007 PE of 30 times, which is well above the valuations of Hong Kong-listed Yantai North Andre Juice and China Haisheng Juice Holdings. The pair, which produce juice concentrates that they supply to other juice makers in China and abroad, trade at 2007 PEs of about 13 and eight times respectively.

Some fund managers had noted that Huiyuan wasnÆt cheap at the top end of the price range, but acknowledged that the company should trade at a premium to the juice concentrate makers which lack their own brands.

By comparison, Huiyuan was marketing itself as ChinaÆs leading juice brand in the high end of the market, comparing itself to other leading food and beverage producers in China, such as China Mengniu Dairy, instant noodle and beverage producer Tingyi (Cayman Islands) Holdings, or even Tsingtao Brewery.

The final price offers a discount versus those, but given the hefty oversubscription rates, markets watchers were questioning yesterday how long that discount will be remain. Based on consensus forecasts, Mengniu trades at about 55 times this yearÆs earnings, Tingyi at 36 times and Tsingtao at 45 times.

According to sources, about 40% of the demand came from long-only funds and the order book also contained a significant amount of interest from private banking and high-net worth investors as well as from Hong Kong retail brokerages. Aside from Asia-based investors, accounts from Australia, Europe, the Middle East and the US were also well represented, they say.

Huiyuan sold 400 million new shares, or about 26% of the company. There is also a 60 million share greenshoe could boost total proceeds to $354 million.

Meanwhile, strategic investor Danone Asia will buy enough new shares outside the IPO to maintain its stake in the company at 22.2%, allowing Huiyuan to raise an additional $100 million or so.

Investors liked the sector as the consumption of juice is still much lower in China than in the rest of Asia, which is seen to leave plenty of room for growth, and sales are also expected to increase as the producers extend their presence from high- to low-tier cities and customers upgrade to drinks with a higher juice content.

Meanwhile, analysts argue that Huiyuan will be able to grow significantly faster than the industry as a whole û projections are for a sales revenue CAGR of 25.4% and a net profit CAGR of 31% between 2006 and 2008 û due to capacity expansion, product mix upgrades and more effective cost controls from improving economies of scale.

The company currently has a 42% market share for 100% juices and 40% for nectar.

HuiyuanÆs offer was also seen to have benefitted from the fact that investors werenÆt that keen on the IPO for China Properties Group, which was in the market at the same time but saw significantly lower subscription rates, according to sources. The developer of residential and commercial properties was believed to have suffered because the controlling shareholder chose to privatise and delist these same assets as recently as 2003.

China Properties, which is being brought to market by Cazenove and Merrill Lynch, is expected to fix the price of its up to $271 million offer towards the low end of the HK$3.50 to HK$4.70 price range today.

Huiyuan is scheduled to start trading on Hong KongÆs main board on February 23.

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