IPO cooking for Fu Ji Food

Shanghai''s largest catering firm prepares to list in Hong Kong.

Shanghai-based Fu Ji Food and Catering Services, the Shanghai region's largest domestic catering services provider is hoping to raise up to HK$275 million ($35.2 million) from a Hong Kong IPO scheduled to price on December 10.

The CAF Securities and SBI E2 Capital-led deal comprises 100 million new shares and is being marketed on a 2005 P/E ratio of 8.2 times and 10 times earnings (fully diluted).

The main valuation benchmarks are said to be two international food services groups - UK listed Compass and Sodexho of France. The former is currently said to be trading on a historic P/E of 27 times earnings and a forward P/E of 24 times. The latter is at 19.7 times historic and 16.7 times forward.

Total sales in China's food services industry are said to have totaled RMB607 billion ($73.5 billion) duirng 2003. Fu Ji saw year-on-year sales almost double to RMB252.90 million ($30.6 million) as of March 2004, while net profit jumped 125% to RMB83.61 million ($10 million) over the same period.

Profits for 2005 have been forecasted at Rmb127 million ($15 million), up 50% year-on-year.

Fu Ji opened its first restaurant in Suzhou in 1999 and then in 2002 began providing outsourced catering services in Shanghai. It followed this up earlier this year by launching its own range of convenience food products. Marketed under the Home Kitchen label, the products are sold in restaurants and targeted at the "modern Chinese working class".

According to Dennis Ng, financial controller of Fu Ji, expansion into provinces surrounding Shanghai and Suzhou is also on the cards, as the group looks to expand its catering services towards institutional in-house and on-site dining, event-based services and the delivery of business lunches.

The group says it has met with considerable success since the launch of the catering services business, capturing increased market share and a slew of well-capitalized clients in the process. Since moving into this services segment, the company has challenged international catering rivals Compass and Sodexho, although the three combined only control 1% of overall market share.

Fu Ji now counts the China bases of international manufacturers such as Panasonic and BenQ as clients and has also won outsourcing business from local ventures such as the Shanghai police force, the Jin Mao Tower and the Sino-Singapore joint venture, the Suzhou Industrial Park.

Fu Ji is also confident of China's food safety and monitoring prospects. In light of recent scandals surrounding Chinese food manufacturers adding dubious and potentially fatal additives to products to enhance commercial appeal, Ng stresses the issue is being fully addressed by the appropriate bodies and that the worst appears to be over.

"The bad press surrounding the food industry and potentially poisonous nature of some products in the China food industry has been drastically cleaned up," he states. "Although the problem won't change overnight, China is falling further into line with and adapting to WHO and internationally recognized standards like Hazard Analysis Critical Control Points (HACCP)."

The company itself also prides itself on its hygiene record, stressing that it was amongst the first batch of Chinese food services companies to receive HACCP certification and that it has employed international tester, Intertek, to ensure adherence to the highest standard of quality and safety.

Post IPO, the company will have a freefloat of 25%. During the IPO process, the private equity arm of CLSA will also convert a $4 million convertible bond that will give it an 8.39% stake in the company.

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