YST Dairy fixes IPO price in bottom half of the range

The Chinese raw milk producer raises $426 million at a valuation of 17 times forward earnings, while investors look ahead to the larger offerings from Cinda Asset Management and Qinhuangdao Port due next week.

YuanShengTai Dairy Farm, better known as YST Dairy, has priced its Hong Kong initial public offering at HK$2.70 per share, resulting in a total deal size of HK$3.3 billion ($426 million).

The price was fixed in the lower half of the HK$2.49-HK$3.18 range despite sources saying the deal was multiple times subscribed. There is also a lot of positive momentum in China’s dairy sector at the moment on the back of the government’s announcement last week that it plans to relax its one-child policy.

The thinking is that this may increase the demand for baby formula, which is a key product for China’s milk producers.

YST Dairy focuses on the production of premium raw milk, which it sells to downstream or integrated milk producers such as Yili, Mengniu and Feihe Dairy. According to its listing prospectus, it owns and operates two mega-scale farms and two large-scale farms. It is planning to build another five farms in the next three years and to increase the size of its herd to 100,000 dairy cows by 2017 from 38,788 cows at the end of June this year.

The low-end pricing of the IPO suggests there was quite a bit of price sensitivity in the order book, but it is also encouraging to see the issuer show some restraint in terms of valuation and not try to push the price too much.

According to sources, there was good investor support at the final price, which translates into a 2014 price-to-earnings ratio of 17 times, while the company would have lost some institutional investors had it chosen to price higher. The deal was marketed at P/E multiple of 15.7 to 20 times.

China Huishan Dairy, which completed a Hong Kong IPO in September, also priced at 17 times forward earnings, although that was based on the bookrunner consensus for the fiscal year to March 2014, making YST Dairy look slightly more aggressive.

YST Dairy is coming at a discount to Hong Kong-listed China Modern Dairy, though, which is also focusing on the upstream, raw milk part of the market. China Modern has seen its share price double since early July and it is currently trading at 22.6 times its projected earnings for the fiscal year to June 2014 and 16.8 times for fiscal 2015.

At the time of the deal, sources said that some top-quality long-only funds chose not to participate in the Huishan Dairy IPO as they felt the price range did not give enough compensation for the execution risks related to the expansion of its downstream business. Some also argued that the tight discount versus the key comparables did not leave any upside.

Huishan Dairy’s share price fell 6% in the first two days of trading, but then started to edge higher, supported by the favourable sector bid. On Thursday it closed 15.4% above the HK$2.67 IPO price at HK$3.08.

There was little information available about the types of investors that participated in the YST Dairy offering, but bankers close to the deal said it attracted a large number of institutional accounts, including international ones.

Industry leader China Mengniu Dairy, which is one of YST Dairy’s top-five customers, came in as a cornerstone investor and bought $60 million worth of shares.

The 10% retail offering was 14.8 times covered, which means it ended up just below the threshold for a first-level clawback that could have increased the retail portion of the deal to 30%.

The company sold approximately 1.22 billion shares, or 31.25% of the company. Of the total number of shares, 80% are new, while the rest were secondary shares sold by a group of initial shareholders and pre-IPO investors.

The deal comes with a 15% greenshoe that could increase the total proceeds to about $490 million.

The stock is due to start trading on November 26. Credit Suisse and Macquarie were joint global coordinators and also acted as joint bookrunners together with China Securities (International).

Next in line in the Hong Kong IPO market are Dongpeng Holdings, Hengshi Mining Investments and Phoenix Healthcare Group, which are all due to price today after finishing the bookbuilding on Thursday.

Dongpeng, which is the largest manufacturer of ceramic tiles in China and backed by private equity firm Sequoia, is looking to raise between $118 million and $146 million through the sale of 20% of its share capital.

Iron ore miner Hengshi is trying to raise between $150 million and $164 million, while Phoenix Healthcare, an operator of hospitals and healthcare clinics in Beijing, is aiming to raise between $152 million and $191 million by selling 25% of the company.

And then on Monday next week, China Cinda Asset Management and coal-focused Qinhuangdao Port are due to start taking orders from institutional investors after two weeks of investor education. Cinda is expected to raise about $2 billion to $2.5 billion, while Qinhuangdao Port is looking for between $500 million and $700 million, according to sources.

Elsewhere in Asia, bankers will continue the investor education for an infrastructure fund backed by True Corp for a second week. The Thai telecom operator, which is controlled by the country’s richest man, Dhanin Chearavanont is aiming to raise between $1.2 billion and $1.6 billion by spinning off part of its network infrastructure and selling at least 49% of the new fund to public investors through an IPO.

True is planning to start the roadshow and bookbuilding on December 2, which as per the drawn-out timetable for Thai IPOs will enable it to start trading on December 27.

¬ Haymarket Media Limited. All rights reserved.

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