An initial public offering by China Shengmu Organic Milk priced three days later than expected on Thursday after struggling with a rich valuation. The BOCI and Goldman Sachs-led deal raised HK$1.06 billion ($137 million) by selling 444.8 million shares at HK$2.39 per share, the very bottom of its indicative price range.
Both the retail and institutional tranches were covered. However, the lead managers' decision to leave the greenshoe unallocated shows how the deal was pushed across the finish line from behind rather than pulled over by investor demand.
Most of the shares were placed with Chinese companies and high net worth individuals in Hong Kong and on the mainland, with little participation by institutional investors, according to one observer close to the deal.
This was not really that surprising given the issuer's pricing expectations. While Shengmu is undoubtedly an interesting, fast-growth story, its valuation was pricey relative to other Hong Kong-listed dairy stocks.
The company hoped to be viewed as Mengniu's mini-me, with a number of its senior management team hailing from China's leading dairy company. And at HK$2.39 per share, Shengmu has been valued at 17 times estimated 2014 earnings, a discount to Mengniu, which closed Thursday at 26.5 times, according to Bloomberg data
What Shengmu's deal has nonetheless done is draw attention back to the dairy sector, benefiting other Hong Kong-listed stocks, which have traded up strongly since the beginning of July. The biggest beneficiary has been China Modern Dairy, which owns the country's largest dairy herd and has risen 16% since the beginning of the month.
Shares in Huishan Dairy and YST Dairy have also been re-rated upwards, with the former rising 4.1% to 11.7 times 2014 earnings and the latter up 7.3% to 9.03 times 2014 earnings. Mengniu itself has been fairly range-bound.
Having only set up operations in 2010, Shengmu has a short track record, which will not have played well with some investors. But it does have a highly experienced management team, which have created an extremely profitable niche for themselves.
The company is now the largest organic dairy company in China with a 54.2% market share in terms of organic raw milk production volume, according to Frost & Sullivan. It also has a 25.2% share of retail sales of organic liquid milk and is the country's eighth-largest producer of non-organic raw milk with a 2.6% market share.
