After an unremitting diet of financial services companies, the Hong Kong initial public offering market is finally getting a taste of another sector with the flotation of Dali Foods.
The Chinese food and beverage manufacturer is the first of a slew of companies hitting the market before the end of year, which hope to re-energise investors’ appetite.
The Fujian-based group kicked off its global roadshow on Wednesday with a deal that could generate proceeds of up to HK$10.4 billion ($1.34 billion) pre greenshoe.
The transaction comprises 12.4% of the group’s enlarged share capital and constitutes all primary shares. This means existing shareholders including chairman Xu Shihui and Chinese private-equity firm CDH Investments are not selling out through the IPO, a decision that may signal a vote of confidence for prospective investors.
The shares are being offered on an indicative price range of HK$5.00 to HK$6.15, giving Dali Foods an implied market capitalization of $8.8 billion to $10.9 billion on a pre-shoe basis.
Similar to other jumbo offerings, Dali Foods will offer 95% of the 1.69 billion share deal to institutional investors and 5% to retail investors, subject to clawback.
The most noticeable difference between Dali Foods and other recent IPO’s is the absence of large numbers of cornerstone investors. This may signal a second vote of confidence in a deal, which is being pitched as a true global institutional transaction rather than a Chinese-style friends and family offering.
The biggest cornerstone investment is a $150 million ticket from JIC Dessert Laboratory, a special purpose investment vehicle related to China Investment Corporation, the country’s sovereign wealth fund. The other two investors are emerging markets consumer specialist fund Arisaig Partners and Dubai-based Longbow Securities, which have committed $80 million and $75 million respectively.
The $305 million cornerstone tranche will account for only 23% of the overall deal assuming it prices at the top end of its range and excludes the greenshoe.
By comparison, cornerstone investors subscribed to 1.407 billion shares of the 1.74 billion on sale during China Railway Signal’s flotation in August according to S&P Capital IQ figures. This represented 80.8% of the overall deal including the greenshoe and set a new record for the highest cornerstone subscription to a Hong Kong IPO.
Valuation
Based on the indicative price range, Dali Foods has a valuation of 16.2 to 20 times consensus 2016 earnings estimates. This represents a maximum 9% discount to the fair value assumptions of joint sponsor Bank of America Merrill Lynch and 18% to 24% of the deal’s second joint sponsor, Morgan Stanley.
This puts the deal at a discount to major Asian food and beverage names, which are trading at roughly 20 times earnings on a rolling twelve-month basis.
An exception is Want Want China Holdings, which trades on a p/e multiple of 17.8 times, although it is not a direct comparable because of its different product range.
During the first six months this year, Dali Foods generated 35% of its revenues from its bread, cake and pastry division and 17% from its herbal tea business. The majority of Want Want’s revenues come from rice cracker and dairy sales.
Likewise, Tingyi is also not a direct comparable since instant noodles and soft drinks are its major products.
Korean biscuit maker Orion Corp is arguably the best comparable not only because of its similar business mix to Dali Foods, but also because it generates most of its revenues from China. It is trading at 26.2 times earnings on a rolling twelve-month basis and has a market cap of $5.2 billion, roughly 40% smaller than Dali Foods’ implied market cap.
Dali Foods’ valuation rests on an assumption of net profit growth of 37.3% in 2016 and 20.4% in 2017.
These numbers are fairly conservative compared to its 71.9% net profit growth in 2013 and 74.4% in 2014. However, they are high compared to mature players in the food and beverage sector.
Key for investors will be whether they believe the company can deliver the growth rates that underpin its valuation.
One investor pointed out that Dali Foods 28.9% return on assets is high compared to Want Want’s 14.4%, Tingyi’s 4.5% and Orion’s 5.5%.
Dali Food’s 2014 net profit margin of 13.9% is in line with global F&B companies.
Analysts expect higher profit margins from its energy drink business, which began operations two years ago and accounted for only 8% of its revenues in the first half of the year.
This business segment is forecast to be the main driver for earnings growth alongside potential new products.
As such, the company plans to spend 20% of IPO proceeds to develop new products and another 30% for potential acquisitions. The rest will be used for expanding production facilities, sales and marketing as well as for general corporate purposes.
Dali Foods is scheduled to close institutional subscription on November 13 and is targeting to list on November 20.
In the pipeline
Shortly behind Dali Foods, three smaller companies are also in the middle of premarketing Hong Kong flotations, which could raise about $100 million each.
They include Wenzhou Kangning Hospital, the largest private psychiatric hospital operator in China by revenues last year. It is 29.14% owned by Shenzhen-based asset management company Defu Fund and 12.32% by Chinese private-equity firm CDH Investments.
At the end of 2014, Kangning operated 2,010 beds in five self-owned three managed hospitals. It is the second largest psychiatric specialty hospital operator after government-run Shanghai Mental Health Centre, which operated 2,149 beds last year.
Flat Glass Group, the largest Chinese solar glass manufacturer by revenues last year, is also gearing up for an IPO as it plans to expand its overseas production capacity and establish low-emissivity glass production facilities.
The Shanghai-based company operates a total of 45 processing lines for photovoltaic glass, household glass and architectural glass.
Meanwhile, property management company Zhong Ao Home Group has also started premarketing its deal this week. The company provides general cleaning pest control and landscape maintenance service to non-residential properties such as schools and commercial buildings.
Citi and Citic CLSA are joint sponsors of Wenzhou Kangning Hospital’s IPO while Flat Glass Group is sponsored by BOCI. Macquarie is the sole sponsor for Zhong Ao’s floatation.
