Mengniu shareholders cash in $165 million

The deal marks the fourth sell-down by the same two investors since the IPO and the first Hong Kong placement above $100 million since mid-June.
China Mengniu DiaryÆs share price fell 3.4% yesterday after its two largest shareholders sold HK$1.28 billion ($165 million) worth of shares through a placement, their fourth such sell-down since the company went public in 2004. However, the stock finished 20 HK cents above the placement price, which suggests that some of the investors who didnÆt receive full allocations in the block trade may have continued buying in the market. The Hang Seng Index lost 1.5% on the day.

Mengniu also has a history of positive share price performances after each of the sell-downs by the two shareholders, meaning there would be little reason for other shareholders to take the transaction as a sign for them to cash in too.

The placement, which was launched after the market closed on Friday and completed in just one hour, saw Jinniu Milk Industry and Yinniu Milk Industry sell a combined 57 million shares, representing a 3.65% stake in the producer of fresh dairy products. The two companies, which hold shares owned by senior management of the company as well as other employees, business contacts and associates, still own 16.4% after this transaction and have agreed to a 90-day lock-up. Mengniu CEO Niu Gensheng and other parties acting in concert with the selling shareholders own a further 8.1%.

The shares were offered in a range between HK$22.15 and HK$22.60, which translated into a 4.2% to 6.1% discount versus FridayÆs close of HK$23.60, and priced at the maximum HK$22.60. Morgan Stanley was the sole bookrunner. The investment bank was a pre-IPO investor in Mengniu but sold the last of its shares in June 2005. It also helped arrange MengniuÆs IPO and has now acted as a bookrunner on three of the four sell-downs by the controlling shareholders. However, this particular mandate was said to have been awarded after competitive bidding with one other bank.

One source says the top-end pricing became possible since the deal was fully covered within 30 minutes, prompting many of the participating investors to remove their price limits. The narrow spread between the bottom and the top of the range also may have helped, as a tight range makes it easier for a bookrunner to move investors towards the top. The deal ended up close to three times covered with just under 60 investors in the book.

There was good participation from hedge funds as a well as large mutual funds, some of which were already shareholders in the company. Not surprisingly, given that the books closed at 5.30pm Hong Kong time, 90% of the demand came from either Asian investors or global accounts based in Asia.

ôThis shows that there are still large guys out there with a lot of cash to invest and few options of where to put it,ö says one observer. Indeed, this was the largest block trade in a Hong Kong-listed company since mid-June when coking coal processor Fushan International Energy Group raised $252 million through a follow-on offering. Since then only four Hong Kong placements have been completed, each of which has been smaller than $100 million.

Aside from being a consumption play in the eyes of investors, Mengniu is also the ôright kindö of consumption play for todayÆs inflation-ridden market.

ôWhat investors want at the moment,ö says the source, ôare companies that can pass through costs to the consumers and maintain their margins.ö

The stock is also quite liquid û the sale represented about eight to 10 days trading volume û and has delivered good returns to its investors since it went public. At the time of the placement on Friday, the share price was up close to 500% from the IPO price of HK$3.95, having recovered nicely from this yearÆs closing low of HK$16.34 in mid-March. However, the placement price was slightly below the HK$24 that Jinniu and Yinniu achieved in their most recent sell-down in April 2007. That sale, which was arranged by BNP Paribas, was priced at a 3.4% discount to the market price.

Mengniu hit a record closing high of HK$35.70 in October last year.

The sale shows the benefits that can be reaped for companies and investment banks that can quickly take advantage of the brief moments of strong market momentum as they appear amid the day-to-day volatility. A Friday in August, one-week ahead of the Olympics, when turnover is typically thin and many investors are already on holiday, may not seem the best time to launch a block trade of this size, but a 550-point rally in the Hang Seng Index in afternoon trading (for a 0.6% gain on the day) actually made it an ideal time. Mengniu itself ended the day 2.2% higher.

The bounce came after Chinese President Hu Jintao said Beijing remains committed to maintaining growth and controlling inflation.
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