Meng Niu milks investors

Momentum driven IPO enables pricing at very top of the range.

Mongolian milk producer Meng Niu Dairy priced a 350 million share IPO at the very top end of a revised range on Friday. Under the lead of BNP Paribas Peregrine and Morgan Stanley, the company priced its IPO at HK$3.925 per share compared to a revised range of HK$3.125 to HK$3.925 and initial range of HK$2.69 to HK$3.72.

Both the retail and institutional tranches closed more heavily oversubscribed than anyone originally anticipated, with a retail oversubscription rate of 206 times and institutional rate of 15 times (pre clawback).

Because of the large retail demand, full clawbacks will be instituted bringing retail up to 50% of the deal.

The oversubscription rates for Meng Niu are far higher than those for the previous two companies to list in Hong Kong - Nam Tai Electronics and Lifestyle International. The latter two companies are both mid-caps like Meng Niu, but only managed to achieve single digit oversubscription rates on each of their international and retail tranches.

Market conditions have clearly improved since April when Nam Tai and Lifestyle came to market. However, specialists say Meng Niu's success underlines that easily understood sectors generally have greater appeal particularly with retail investors. The deal's popularity would also appear to vindicate Meng Niu's expensive advertising campaigns, which have enabled it build up a very strong brand on the Mainland.

As one observer comments, "In the early days of marketing this deal there was a lot of price sensitivity from investors in Europe and the US, because they'd never heard of Meng Niu before. But a core number of Asian accounts were very, very keen on the deal from the outset. They've seen this company plastered everywhere in China: on advertising hoardings, TV and even space ships."

The leads were able to build a textbook, momentum driven deal. Having initially gone out with a wide and fairly generous valuation range, they were able to lift it by leveraging Asian demand.

"To start with there were a number of accounts that were not interested in a deal above 15 times earnings," says one observer. "But we made it quite clear they weren't necessary to this deal since it is quite small and there were plenty of accounts that were interested at a higher valuation. Once they saw the momentum building they started to change their minds and in the end there were hardly any price limits in the book at all."

A total of 330 accounts participated in total, with a split of 80% institutional and 20% corporate and private banking. By geography, 40% went to Asia, 25% to Europe, 20% to global accounts (one fund booking orders from two or three regions) and 15% US.

At 19 times 2004 earnings, many now believe the deal is fairly full valued relative to comparables. Hong Kong listed breweries are trading in the mid 20's range, but typically trade at a premium to most other consumer plays. Linhua Supermarket, a broader comparable, is trading in the low 20's.

Like many China plays, specialists say the key to the deal was whether investors believe the company will be able to continue maintaining high growth rates without coming under margin pressure. In 2004, analysts are forecasting a net profit of RMb300 million ($36.3 million) and Rmb436 million ($53 million) in 2005.

Meng Niu hopes to increase overall capacity from 1.26 million tonnes in 2003 to 2.04 million in 2004 and 2.758 million in 2005. The main concern is whether there will be a glut of excess capacity given that downstream processors like Meng Niu are expanding much faster than the country's upstream sector, the cow herds.

The IPO represents 35% of the company's issued share capital, with a split of 75% primary shares and 25% secondary shares. However, the existence of an pre-IPO convertible, which is heavily in-the-money, means the final split is likely to be management 45%, public 25% and financial investors 34%, of which MS Dairy (an offshoot of Morgan Stanley Capital Partners) will own 24%.

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