Strong demand for Mengniu Dairy shares

The dairy products manufacturer sets the price of its placement at the top of the range. The deal piggybacks on strong annual results published last week.
China Mengniu Dairy shares worth HK$2.71 billion ($347 million) changed hands at the end of last week through a placement of existing shares. The deal was priced at the top of the offering range, or at a 3.4% discount to the latest market price.

The main vendor was Yinniu, a substantial shareholder of Mengniu, which sold 98.1 million of the 112.9 million shares on offer. Yinniu then bought back 57.5 million new shares at the same price, ensuring that the dairy product manufacturer was also able to raise HK$1.38 billion ($177million) in fresh cash from the transaction. Mengniu is held mainly by members of its senior management

The shares were offered at a price between HK$23.6 to HK$24, which marked a 3.4% to 5.0% discount to ThursdayÆs closing price of HK$24.85.

This was the first follow-on issue of new shares by the company since its listing in June 2004, although there have been several previous placements of secondary shares as some pre-IPO investors, including Morgan Stanley, have cashed in their profits.

The placement, which was arranged by BNP Paribas and completed last Friday, was four times covered with no price sensitivity in the book even though the shares were trading at a seven-week high at the time of the deal, according to a source. The buyers were mainly long-only funds and existing shareholders. About 60% of the demand came from Asia, 25% from Europe and 15% from the US.

The enthusiasm for the offering was likely a direct result of a strong earnings report which was published during the lunch time break on Thursday and which sent the share price 3.8% higher on that day.

The company said its net profits surged nearly 60% over the previous year to Rmb727 million ($94 million), well above market expectations of an approximate 33% increase. Based on sales volumes, the company had also grabbed a 33.3% share of the liquid milk market, excluding milk beverages and yogurt, last year, accounting for a 4.7 percentage point increase from the previous year.

ôThe companyÆs annual results released last week generally met the market expectation. The top line growth is strong and there is a margin improvement, which showed that apart from strong volume growth, the company is capable of launching new products to improve its margins,ö says an analyst who follows the company.

ôThe growth momentum is still there, and comes mainly from strong demand for dairy products in the Greater China area, capacity to grow its market share and to launch new products with high profit margins,ö she says.

The momentum continued yesterday in the wake of the deal, with the share price adding another 4.2% to a record high close of HK$25.90. At this price the company is valued at 37 times its estimated 2007 earnings and at 29 times its 2008 earnings. This compares with its Shanghai-listed competitor Inner Mongolia Yili Industrial Group, which trades at 2007 and 2008 price-to-earnings multiples of 35 and 30 times respectively.

Aside from the shares sold by Yinniu, which accounted for 6.9% of the enlarged share capital, another company owned by the senior management û called Jinniu - divested 14.8 million existing shares, or about 1.04% of the enlarged share capital. Jinniu did not subscribe to any new shares.

As a result of this transaction, YinniuÆs stake in the company will fall to 12.4% from 15.8%, while Jinniu will see its holdings decrease to 9.6% from 11.1%.

Mengniu Dairy has been following an aggressive line with regard to the expansion of its business. Late last year it agreed with French dairy product manufacturer Danone to set up equity joint ventures in Mainland China aimed at beefing up its yogurt business.

And earlier this month it announced it will pay Rmb134 million to buy the remaining 48% of Mengniu Wuhan from its joint venture partner. The acquisition is meant to enhance its development and competitiveness in central China by further integration of the distribution network and internal resources, and to increase its market share in the region.

The company will receive net proceeds of approximately HK$1.36 billion ($175 million) from the top-up placement, of which it plans to deploy 50% to an expansion of its production capacity. Another 35% is reserved for potential mergers and acquisitions, while the remainder will be used for general working capital.
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