WH Group: from dud to darling to dud

The Henan-based pork producer's shares have dropped below the IPO price just three months after it floated its shares, and a further decline is possible in coming weeks.

It went from dud to darling in just three months. But now, three months further down the line, the pendulum appears to have swung back in the other direction for WH Group, with shares in the Henan-based pork producer now trading well below its IPO price.

After a highly publicised, failed first attempt at coming to market, pork producer WH Group sliced its offering and valuation, fired 27 banks on the syndicate, and finally managed to float its shares in July, raising $2.05 billion in the process.

WH Group relied on better market conditions, a more attractive price range and the shrunken banking syndicate to get the deal across the finish line at the second attempt.

The immediate after–market performance suggested the new two-bank syndicate — Morgan Stanley and BOC International — priced the shares correctly at HK$6.20 per unit. This slimmed-down price reduced its valuation to 11.5 times expected 2014 earnings rather than the lofty 15 to 20.8 times earnings marketed at the first attempt.

The stock traded up 7.4% to HK$6.66 on its market debut to trade at 15.84 times its 2014 earnings.

However, WH Group’s shares have since plummeted, buffeted by a combination of troubling sales data, key shareholder worries and weak global markets.

From October 24 to end-October 27 they sank about 20% to HK$4.96 per unit and they have subsequently inched up to around HK$5.15 per unit, still well below its IPO price. WH Group's shares are down 23% from their market debut. 

Bankers and analysts expect the turbulence to continue for the foreseeable future.

It’s been a volatile few weeks for global equities generally, with institutional investors yanking billions from equity funds. Chinese equity funds alone experienced $1.5 billion in redemptions in the week of October 13, according to data provider EPFR Global, with outflows seen in six of the last seven weeks.

Weak investor sentiment has weighed on several other recently listed IPOs too, such as online payment company MOL Global, which plummeted 35% on its Nasdaq market debut, and Hua Hong Semiconductor, which fell 5% on its first day of trading.

That said, some recently listed companies have avoided the bloodbath. Alibaba’s share price, for example, has jumped 15% so far in October and is up 45% from its market debut.

Specific factors

Among the specific factors weighing on WH Group are its recent mixed results. Although the company’s Chinese unit, Shenzhen-listed Henan Shuanghui Investment & Development, reported a 10.5% year-on-year increase in net profits to RMb3.3 billion ($539.5 million) in the first nine months of 2014, its Chinese meat-packing sales have disappointed.

Analyst reports indicate that package sales grew just 0.9% for the first nine months, which suggests package sales declined 3.5% in the third quarter.  

“I think investors are disappointed [WH] missed their quota. Their reaction may have been blown out of proportion but the Chinese business [has disappointed],” one Hong Kong banker told FinanceAsia. “I think shares will be down for a while. People think it was a mistake for the company to remain quiet throughout the quarter, especially when [sales] were not looking good. Investors were caught off guard. That’s part of the reason for the price share drop.”

News on October 16 that Chinese private equity firm CDH Investments, which owns 38.1% of the pork producer, had mortgaged a portion of its stake to help secure a loan also appears to have hurt investor sentiment. The amount of the loan was not disclosed.

In the initial IPO plan WH Group’s existing shareholders — which includes Goldman Sachs, Temasek, New Horizons, as well as CDH — had intended to offload their stakes in a secondary tranche. They wanted top dollar for their stakes but found that institutional investors were wary of the stock overhang as soon as the shares went public.

And so, in an effort to remove the overhang, the secondary tranche was scrapped in the revised IPO deal. CDH was also locked in for a year.

The banker nonetheless noted that WH Group’s US business, Smithfield Foods, which it acquired in 2013 for $7.1 billion, is forecast to post a strong quarter. That could yet support WH Group’s share price.

“Smithfield is doing well. It will probably be a few weeks before confidence returns,” the banker said, noting that Smithfield reports third quarter earnings in 10 days.

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