Chinese food and beverage manufacturer Dali Foods priced an initial public offering in Hong Kong on Friday at the lower half of the indicative price range amid strong price sensitivity shown by institutional investors.
The final price was settled at HK$5.25 per share against an indicative price range of HK$5.00-HK$6.15, generating total proceeds of HK$8.9 billion ($1.1 billion), a source familiar with the situation told FinanceAsia.
Overall, the institutional tranche was multiple-times covered but orders were heavily concentrated in the lower half of the price range. Pricing in the upper half was not possible as there has not been sufficient demand to cover the book at that level.
Based on final demand, joint bookrunners Bank of America Merrill Lynch and Morgan Stanley could have priced around the mid-point of the range at HK$5.575 but the duo advised the company to price slightly more conservatively to ensure higher quality of investors in the final book.
The conservative pricing strategy was also partially due to a downturn in market sentiment in Asia on Friday amid growing expectation that the Federal Reserve will raise interest rates in December.
On Friday, Hong Kong’s Hang Seng Index tumbled 2.15%, erasing all the gains from the previous day and extending a five-day losing streak. Food and beverage groups such as Tingyi and Want Want were not immune to the broader market decline, losing 0.8% and 2.4% respectively.
While allocations were still being finalised on Sunday afternoon, it is expected they will be skewed towards long-only investors and the top 10 accounts will be allocated roughly 50% of the deal, the source told FinanceAsia.
Despite showing strong price sensitivity, investors are clearly showing support at the bottom half of the price range as evidenced by a total of 150 lines in the final book.
At the HK$5.25 final price, the Fujian-based snack and drinks manufacturer will have a market capitalisation of $9.2 billion, or about 17 times estimate earnings on a rolling twelve-month basis.
The retail offering was slightly oversubscribed but was unable to trigger a clawback, leaving allocations in a 90:10 split between institutional and retail investors.
One source said Dali Foods could have priced higher if it had included more business partners and related parties as cornerstone investors but the company opted to limit the cornerstone tranche in order to facilitate a price discovery process to determine its fair value.
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.
Cornerstone investment totaling $305 million accounted for 27% of the IPO.
“I think [limiting cornerstone investment] is a wise move because in that case you will not be pricing at a level far off from market expectations,” a second source familiar with the situation said. “They might have raised less but they have also reduced the possibility of a lacklustre performance at secondary trading.”
Dali Foods’ final valuation is largely in line with Hong Kong-listed food and beverage companies such as Tingyi and Want Want, which have seen their shares slip over the course of Dali’s bookbuild. They ended on Friday at 15.9 times and 16.8 times earnings respectively.
“Want Want and Tingyi have relatively slower earnings growth but that is offset by their well-established brand values,” one investor said. “Products from Dali Foods have yet to establish a profile that is comparable to Tingyi and Want Want, as most of its brands are popular only in second- or third-tier cities.”
Notwithstanding the weaker branding, Dali Foods has a more diversified product offering than its main competitors in China, which spans bread and cakes, chips and fries, biscuits, herbal tea, milk beverages and energy drinks.
It is also planning to roll out 16 new food products and six beverage products in the future.
