Mengniu investors milk market for $78 million in secondary share sale

Anticipated sell-down meets strong demand on a day when the local stock market rebounds; shares sold at 5.6% discount.
The two largest shareholders in China Mengniu Dairy on Friday (June 30) sold a 4.9% stake in the company for HK$610.9 million ($78 million) after the end of a one-year lock-up that was imposed after their previous sale.

The placement came on a day when the Hong Kong stockmarket added just over 400 points or 2.5% to finish at 16,267 points - its highest level in six weeks. Market watchers said this was a sign investors are getting more confident about putting money into equities again.

The combined offer comprised 66.4 million existing shares in the dairy products manufacturer which were sold at the top of the HK$9 to HK$9.20 price range after a Morgan Stanley-led bookbuilding that lasted only one hour, sources say. The final price marked a 5.6% discount to the latest market price of HK$9.75 before the shares were suspended from trading Friday afternoon.

Demand for the stock, which is up 48% year to date, was strong with the order book said to have been nine times covered. About 40 investors participated, including a couple of the companyÆs biggest shareholders who took the opportunity to add to their positions.

Hedge funds that had been building up short positions in the stock since the lock-up ended on June 13, took a portion of the deal to cover those shorts, said one observer close to the offering.

About three quarters of the shares went to Asian-based investor, while the rest ended up with European-based accounts.

ôMengniu is considered one of the best companies in the China space and is a direct play on consumption in the mainland,ö the observer says with reference to the investor interest. ôIt is benefiting from the rising affluence that is enabling people to switch from UHT and powered milk to fresh milk and the company has had a very steady performance.ö

The company posted a 43% increase in net profit last year to Rmb456.9 million on sales of Rmb10.8 billion as an increased contribution from higher-margin milk beverage products offset a moderate increase in raw milk prices.

Since the listing in June 2004, the share price has surged 148%. It is up 105% since the sell-down a year ago, which was down at HK$4.95 per share, or a 3.9% discount to the market price at the time. Mengniu is also one of the few stocks that held up reasonably well during the six-week sell-down in global equities markets that began in the second week of May. As of Friday last week the share price had returned to its pre-correction levels after dipping to a low of $8.55 on June 13.

The sellers were Jinniu Milk Industry and Yinniu Milk Industry, which hold shares owned by senior management of the company as well as other employees, business contacts and associates. The sale - the third by pre-IPO shareholders since the listing - will reduce their combined stake to 26.9% from 31.8%.

Sources say the fact that the sell-down was done by the management was unlikely to hurt the current upbeat outlook for the stock since it had been clear pretty much from the time of the IPO that these investors intended to continue to monetise their holdings at an orderly pace.

After the latest sale, they have agreed to a 90-day lockup. The companyÆs chairman and chief executive, Niu Gensheng, who is also one of the 10 founders of the company, didnÆt sell any of his shares and still holds about 3.3%, according to one source.

¬ Haymarket Media Limited. All rights reserved.
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