Silver Base to raise up to $133 million

The roadshow for Silver Base Group's initial public offering will start today, kicking off what looks set to become only the second Hong Kong listing of size in 2009. The Chinese liquor distributor expects to raise between HK$690 million and HK$1.03 billion ($88 million to $133 million).

The price range has been set at HK$2.30 to HK$3.45. A total of 300 million H-shares, representing 25% of the company, are on offer; 270 million for the global offering and the remaining 30 million for Hong Kong retail investors. There is a 15% greenshoe that, if fully exercised, will bring another 45 million shares into the deal, thereby increasing the maximum possible deal size to HK$1.19 billion ($153 million).

The company is one of the main distributors of Wuliangye, a popular brand of baijiu, a Chinese spirit. In the first half of the 2009 financial year, sales of Wuliangye accounted for 95% of its turnover, with the remaining money coming from cigarettes and the distribution of Dimple Scotch Whiskey for the Diageo Group. Distributing Wuliangye to international markets accounts for 61.6% of revenues, while Chinese sales make up 33.4%.

In 2007, China was the world's largest spirits market with a 19.5% share of global sales. Traditional drinks, like baijiu, make up only 12% of the sales volume, but 50% of the sales value. One research report says that "the Chinese liquor industry is on a long-term uptrend, and producers are enjoying a boom". While the financial crisis has had an unfavourable effect on the market, the general trend since 2003 is that the number of loss-making liquor companies has fallen sharply.

Silver Base will use around 65% of the money raised for business development: expanding its current distribution network; advertising and marketing; and mergers and acquisitions. Another 25% will be used to boost its inventory levels, which will help the company profit from the recent hike in Wuliangye prices due to scarcity. The remaining 10% will be used as working capital.

The company's revenues for financial year 2010, which starts on April 1, are expected to rise by 16.5% to HK$1.5 billion ($192 million), and its core net profit is estimated to go up by 10%.

BOC International (BOCI) and UBS are joint bookrunners on the deal. According to BOCI estimates, the price range values the company at a price-to-earnings ratio of between six and nine times its estimated earnings for fiscal 2010; while UBS's estimates put it between 5.1 and 7.6 times. There are no other listed liquor distributors to compare Silver Base to; but the Wuliangye A-share is trading at around 22 times its estimated earnings for 2009.

One source says institutional investor interest has been positive and encouraging in the run-up to the launch of the IPO and notes that since the roadshow will last for only one week, the bookrunners must feel confident about the demand for the transaction. Other sources say there are already some indicative orders from investors, primarily from Hong Kong and China, who are familiar with the Wuliangye brand.

With just one week of premarketing and a one-week roadshow that runs parallel with the Hong Kong public offering, the deal is on a tight schedule to take advantage of the current window of opportunity. The Hang Seng Index has gained 9.2% since the beginning of this month in a sustained rally that could reassure potential investors.

The deal is due to price on Friday and the trading debut is scheduled for April 8.