Chinese state-owned food conglomerate Cofco Group started gauging market demand for the spinoff of its meat processing business through an initial public offering in Hong Kong last week, paving the way for its private equity backers to monetise their shares.
These private equity firms bought about 45% of Cofco Meat through a consortium for about $270 million in 2014, valuing the company at $600 million at that time.
KKR and Baring were the two biggest buyers in the consortium, taking 20% and 9% stake respectively. Singaporean sovereign fund Temasek and Hong Kong-based Boyu Capital also bought 8.2% and 7.8%.
These backers have invested as strategic investors and have agreed not to sell their shareholding before January 2018, but they are allowed to sell the shares if the company opts for a public listing, according to the investment terms.
Still, sources familiar with the situation said the deal structure of Cofco Meat has not been finalised and it is uncertain whether any of the PE backers will sell their shares through the IPO.
In any case, the IPO will likely consist of mostly primary shares, since these private equity funds are not permitted to sell shares bigger than one-third of the IPO under the investment terms.
Apart from these PE firms, Japan’s Mitsubishi also owns an indirect 10.4% stake through a joint venture with Cofco subsidiary China Foods.
Sources said pre-deal investor meetings will run through October 14, but there has not been any timetable for an official deal launch.
Morgan Stanley and JP Morgan are joint sponsors of the IPO.
Changing fortunes
Cofco Meat is a meat processor and trader. It claims to be the fourth largest hog producer, with annual capacity of 2.3 million as of the end of last year.
The firm has two main business lines. It produces pork products through its 47 hog farms across six Chinese provinces and also imports and sells fresh and processed meat products under its Joycome and Maverick brands.
Its fortunes have, at times, struggled in recent years. The company accumulated losses of nearly Rmb1 billion ($150 million) at the end of 2014, according to its preliminary prospectus. But in 2015 it returned to profit, reporting a net income of $22.5 million.
However, its gross profit margin contracted from 5% in 2013 to 2.3% to 2015. That was lower than other major pork companies like WH Group and China Yurun, which reported profit margins of 7.3% and 3.2% by the end of last year.
This is partly because Cofco Meat had a bigger upstream hog farming business compared to its peers, which have a larger exposure to slaughtering, processing and pork sales – the downstream of the pork industry value chain.
Still, Cofco Meat appears to be focusing on achieving economies of scale by continuing to expand its upstream business. It has been investing in new hog farms, aiming to increase its capacity to 4 million in 2017 and 5.5 million by 2020.
The inflation question
Cofco Meat is listing at a time when onshore pork prices reached a record high of nearly Rmb21 per kilogram earlier this year.
That is by and large the result of a large-scale reduction of hog herds in 2014 when the industry suffered from oversupply. In addition, the supply of pigs dropped drastically since the beginning of the year when heavy rains devastated various pig feed production regions in northern China.
As a result, prices of pig feed ingredients such as corn and soybeans soared, pushing up prices for pork products.
There is a debate among industry experts on whether pork prices will continue to surge.
China’s Ministry of Commerce and Ministry of Agriculture both expect prices to remain high throughout the year. Rabobank analysts said prices could even rise further because stricter environmental policies are forcing small producers to move away from coastal areas, thus increasing transportation costs.
But others are hopeful that prices could come down as the government introduces measures — including selling pork reserves and giving subsidies to producers — to contain pork prices.
Beijing is keen to control pork prices at a reasonable level because it is an important element of China’s consumer price index, the key measure of inflation.
