Modern Dairy's Hong Kong IPO covered on day one

Modern Dairy’s $571 million IPO is fully covered already, despite the fact that two recently listed Chinese milk companies are trading at least 12% below their IPO prices.

Despite a poor secondary market performance by two newly listed Chinese dairy companies, another mainland milk producer is in the market testing investor appetite.

China Modern Dairy, one of the largest dairy farming companies in China, kicked off the institutional bookbuilding yesterday for a Hong Kong initial public offering of between HK$3.47 billion and HK$4.43 billion ($448 million to $571 million).

Demand for the offering was strong from the outset and the deal was fully covered on the first day. There was also good feedback from investors who are attracted to the company’s good profit margin, rapid expansion and strong development prospects, according to sources.

People are also interested in the company because it has a big client -- China Mengniu Dairy Company -- which has pledged to buy large quantities of products from it in the next couple of years, one source said.

Modern Dairy is offering 1.2 billion shares, of which 67% are primary and 33% secondary. The indicated price range is HK$2.89 to HK$3.69 per share.

Based on the company’s 2012 forecast earnings, the price range translates into a price-to-earnings (P/E) ratio of 17 to 21.7 times. By comparison, Mengniu is currently quoted at around 17 times 2012 earnings.

The deal comes with a 15% greenshoe option which, if fully exercised, will allow the company to sell an additional 180 million shares and raise up to $657 million.

Modern Dairy is the third mainland milk company to seek a listing in Hong Kong in the past month. Starting from the first day of trading, the two other stocks fell substantially from their IPO prices and the negative trend continued in the first couple of weeks. The declines compare with a close to 6% increase in the benchmark Hang Seng Index during the same period.

Yashili International has dropped 15.7% from its IPO price and closed at HK$3.54 yesterday. The Chinese baby formula producer raised $349 million ahead of its November 1 trading debut. It sold 644 million shares at HK$4.20 each, compared with an indicated price range of HK$3.55 to HK$4.80.

Meanwhile, Global Dairy's share price has dropped 12.3% from its IPO price to a close of HK$3.85 yesterday. The company raised $204 million by selling 361 million shares at HK$4.39 apiece, the mid-point of an indicated range between HK$3.60 and HK$5.20. Global Dairy listed on the Hong Kong stock exchange on October 28.

In 2008, Yashili's products and those from 21 other Chinese domestic paediatric milk formula producers were found to be contaminated with melamine, an industrial chemical used for making plastic.

Global Dairy’s chief executive officer Zhao Yu said at a listing ceremony that his company wasn’t implicated in the tainted milk scandal.

Products from Modern Dairy’s largest customer Mengniu was also found to be contaminated with the toxic substance at the time.

Modern Dairy says in its preliminary IPO prospectus that “we believe our raw milk is amongst the highest quality and safest milk in China”.

According to the China Dairy Association, Modern Dairy is the largest farming company in terms of herd size as well as the largest raw milk producer in China. As of June 30, it had approximately 72,000 dairy cows at 11 large-scale dairy farms across China.

Each of its standardised farms is designed and constructed with a capacity to raise up to 10,000 dairy cows, the company said. It will use the proceeds from the transaction to increase its production capacity.  

The shares are expected to be priced on November 20 and a listing is scheduled for November 26. Citi and UBS are joint bookrunners for the transaction.

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