Tenwow raises $203 million from IPO

The Chinese producer and distributor of food and beverages attracts strong demand and will be the first company of size to list in Hong Kong after the summer.

Tenwow International Holdings has raised HK$1.58 billion ($203 million) from its Hong Kong initial public offering after fixing the price at the top of the range. The pricing was in line with expectations after sources had been saying the deal was multiple times covered both by retail investors and institutions.

There was also virtually no price sensitivity, with sources saying that fewer than five investors submitted limit orders.

The company, which according to US consulting firm Frost & Sullivan is one of the largest producers and distributors of packaged food and beverages in China, will be the first issuer of size to go public in Hong Kong after the summer when it starts trading on September 17. In fact, it is the first Hong Kong IPO above $100 million to be completed since Macau Legend’s down-sized $283 million transaction in the first week of July.

The strong demand is encouraging for other listing candidates in the pipeline, and, as noted on our website earlier in the week, the initial response to milk producer China Huishan Dairy’s up to $1.3 billion IPO has also been good. However, market watchers note that Chinese consumer retail is probably the one sector that can attract investors even if the broader Chinese market is poor so perhaps one shouldn’t draw too big a conclusion from these two transactions.

Still, the fact that the institutional order book was not dominated by private wealth accounts, but rather was made up mostly by money from actual institutions, is positive. One person close to the transaction said the buyers included a good mix of long-only investors and hedge funds as well as a couple of sovereign wealth funds.  

In all, about 150 institutional investors participated in the transaction. This made the allocation process quite a challenge for the bookrunners – particularly since the strong demand from the Hong Kong public triggered a clawback that resulted in 40% of the deal going to retail investors. After adjusting for that and deducting the $92.3 million worth of shares that had been set aside for three cornerstone investors, including Carlyle, the banks had only about $29 million left to allocate to other institutions before including the 15% greenshoe.

The source said that this remaining institutional portion was more than 50 times covered. The original retail tranche, which accounted for 10% of the deal before the clawback, was said to have been about 55 times covered. While that was not officially confirmed, the subscription ratio would have had to be at least 50 times in order for the retail tranche to be increased to 40%.

Tenwow sold 500 million shares, or 25% of its enlarged share capital. The price was fixed at HK$3.15, which translated into a price-to-earnings multiple of 16.4 times for 2013 and 13.3 times for 2014. The shares were marketed in a pretty tight range of HK$3.00 to HK$3.15.

The deal comes with a 15% greenshoe that can increase the total proceeds to $233 million if exercised in full.

The valuation put the company at a significant discount to Want Want and Tingyi, which are two of the most well-known Chinese food and beverage producers that are listed in Hong Kong. However, both of these are much larger than Tenwow, so a discount is definitely warranted. At the end of trading on Wednesday, Want Want was quoted at a 2014 P/E ratio of 24.4 times, while instant noodle and snack food manufacturer Tingyi was trading at 2.6 times next year’s earnings.

Among the smaller comparables, Uni-President China and China Foods are trading at 2014 P/Es of 21.6 times and 19.5 times respectively, the source said.

But investors were supposedly not just picking up Tenwow because of the pretty generous valuation. They also liked the company because of its strong product line-up, experienced management, and well-established distribution network, as well as its good track record of strategic acquisitions.

The cornerstone support from Carlyle may also have helped convince other investors to come into the deal. The US private equity firm agreed to buy $47.1 million worth of shares. The other two cornerstones were funds managed by European private equity firm Milestone and Chinese private equity firm Orchid Asia. Based on the final price, the three cornerstone investors bought a combined 45.5% of the transaction.

The company sells four product categories under its own brands (mainly “Tenwow”): food and snacks; non-alcoholic beverages; alcoholic beverages; and others, which include sauces and flavourings. Close to 30% of its sales come from its own brands and, according to Frost & Sullivan, it is the largest producer of pistachios and almonds in China in terms of retail value, and among the top three producers of dried pork slices and fruit flavoured ready-to-drink teas.

But it also distributes branded products for third parties, including international brands such as Nestle, Martell and Hennessy and Chinese brand Wahaha. Its third party portfolio includes 76 different brands and more than 4,300 products.

Tenwow said it will use 45% of the net IPO proceeds to expand its production capacity, 39% to strengthen its distribution network and expand into new regions in the northeast and southwest of China as well as for research and development and marketing; and 6% to refinance existing bank loans.

Deutsche Bank and HSBC were joint global coordinators and joint bookrunners for the offering. CICC, which is a pre-IPO investor in Tenwow, was also a bookrunner. The Chinese investment bank will own 4.7% immediately after the IPO.

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