Silver Base tests market for $100 million IPO

Chinese liquor distributor, Silver Base Group, started pre-marketing yesterday for a Hong Kong initial public offering that is expected to raise around $100 million, says a source. This is the second time that the company has tested the market: last summer it looked into the possibility of a larger deal, only to pull out due to unenthusiastic investor sentiment.

The company is one of the largest distributors of Wuliangye, a famous brand of the Chinese distilled white liquor, baijiu. Silver Base has been selling the product to the international market, including Hong Kong, since 1997 and in China since 2006. International sales of Wuliangye accounted for 61.6% of the company's revenue in the first half of the 2009 financial year (which ends on March 31), while domestic sales accounted for 33.4%. The remaining revenues come from cigarettes, which made up 4.6%, and a small 0.4% from selling Dimple Scotch Whisky in China for the Diageo Group.

The company's association with Wuliangye is a strong selling point. Baijiu is a powerful drink which is an essential ingredient to any Chinese business meal. It is also a popular gift. Although sales of the drink have decreased during the financial crisis, this is only a temporary setback to what is generally an upward trend, according to one syndicate research report.

"When the impact of the Chinese government's Rmb4 trillion ($585 million) stimulus package begins to be felt, sales of high-end liquor, which are positively correlated to the gross domestic product, will be the first to recover," the report says.

It goes on to say that the Chinese spirits market has become the largest in the world in terms of sales volume and in 2007 made up 20.5% of the global market. Baijiu is a small but important part of the Chinese market -- while it only accounts for 12% of alcoholic drink sales in terms of volume, it amounts to 50% of sales value.

New products will be a significant driver of future growth for Silver Base. In addition to the Wuliangye products with alcohol strengths of 45% and 68% that the company has been distributing, it was appointed a distributor of Wuliangye "soy" in February this year. Marketing of this product will start in the second quarter of 2009, with an initial annual volume of 500 tonnes.

Silver Base will use the money from the IPO to ramp up its current distribution network. It will also take advantage of the current times and make acquisitions on the cheap.

Sources predict that valuations will be around 7 to 10 times projected earnings for the 2010 financial year.