As with most Mainland-based consumer sector stocks, the initial interest is said to be strong. Huiyuan is marketing itself as ChinaÆs leading brand in the high end of the market with a 42% market share for 100% juices and 40% for nectar, which is usually a good recipe for success with international investors. The consumption of juice drinks is also much lower in China than in the rest of Asia û 3.4 litre per capita, compared with an Asian average of about 16 litres - which suggests ample room for growth.
The value of ChinaÆs juice sector expanded at a compound annual growth rate of more than 12% in 2000-2005 and syndicate analysts project that this will be sustainable in the next five years as well. Sales are expected to increase as producers extend their presence from high- to low-tier cities and customers upgrade to drinks with a higher juice content, they say.
The same analysts also believe that Huiyuan will be able to grow significantly faster than the industry as a whole û projections are for a sales revenue CAGR of 25.4% and a net profit CAGR of 31% between 2006 and 2008 û due to capacity expansion, product mix upgrades and more effective cost controls from improving economies of scale.
Given its brand recognition, the company and its sole bookrunner UBS argue that Huiyuan should trade at a significant premium to Hong Kong-listed Yantai North Andre Juice and China Haisheng Juice Holdings, which both produce juice concentrates that they supply to other juice makers in China and abroad. North Andre Juice trades at a 2007 price to earnings multiple of about 13, while Haisheng is quoted at eight times.
A better comparison, they argue, is other leading food and beverage producers in China, such as China Mengniu Dairy, instant noodle and beverage producer Tingyi (Cayman Islands) Holdings, or even Tsingtao Brewery, which all enjoy much higher PE multiples.
Based on consensus forecasts, Mengniu trades at 55 times this yearÆs earnings, Tingyi at 36 times and Tsingtao at 45 times.
A syndicate research report notes, though, that while a leader in its sector, HuiyuanÆs brand awareness isnÆt as strong as that of Mengniu, Tingyi or Tsingtao and the company also lacks a direct sales network. At present it sells all its products through about 1,800 distributors.
ôHowever, HuiyuanÆs ability to shuffle its product mix and defend its profit margin when raw material prices rose substantially in 2006 reflected emerging consumer brand recognitionàTherefore, in terms of PE, we believe Huiyuan deserves a premium compared with juice concentrate suppliers, but a discount to other branded beverage sector leaders,ö the report states.
At the indicated price range of HK$4.80 to HK$6.00, Huiyuan would be valued at about 25 to 30 times its 2007 earnings, sources familiar with the company says.
ôAt the top end of the (price) range it isnÆt cheap,ö says one local broker, who argues that it is difficult to compare Huiyuan to companies in completely different industries because of the different growth stories. ôBut sentiment is so strong at the moment that the IPO is likely to do well nevertheless,ö he adds.
Deeming from the accelerated time table, the bookrunners appear to agree. Pre-marketing was limited to one week compared with the usual two, as UBS was able to take advantage of an investor conference it held in Shanghai last week to reach the desired number of investors over just a few days. The institutional bookbuilding, will also be halved to just one week in order to complete the deal before the Chinese New Year holidays.
As a result, the Hong Kong retail offering, which will account for 10% of the total, will open tomorrow (February 8) and the books will close on February 13. The price is expected to be determined at the end of New York trading that same day and the trading debut is scheduled for February 23.
The company is offering 400 million new shares as well as a 60 million share greenshoe that could boost total proceeds to $354 million. Even at the base size though, this could be the largest Hong Kong IPO year to date, ahead of printed circuit board maker Meadville TechnologiesÆ $162 million offering last month. And if priced towards the top end of the range it will exceed China Properties' up to $271 million offering, which was also launched on Monday.
The public float will range from 25.6% to 26.3%, depending on the final price. The difference relates to the conversion of a pre-IPO convertible bond issue in connection with the listing and the fact that strategic investor Danone Asia has agreed to buy enough shares to maintain its stake in the company at 22.2%. According to a source, Danone will buy about $100 million worth of shares as a result of this top-up option, which will be settled outside the global share offer. It paid $137.25 million for its stake in June 2006
The other pre-IPO investors include Warburg Pincus, Value Partners and Development Partners Investors, which collectively invested $85 million into the company through convertible bonds in July last year. The trio has the right to convert the bonds into shares at 85% of the IPO price and assuming this is done in full at the time of listing, Warburg Pincus will have a 6.6%-8.0% stake in the company, while Value Partners and Development Partners will hold a combined 2.0%-2.5%.
Huiyuan has an annual designed production capacity of 1.46 million tonnes of juice and other beverages (such as ready-to-drink tea and bottled water) split on 10 production facilities. In the nine months to September it derived 18.6% of its sales from 100% juices, with apple, orange and peach being the top sellers, and 41.1% from nectars, which have a lower juice content between 25% and 99%.
It also produces juice drinks, from which it generates 34.7% of its sales. Juice drinks, which have a juice content of no more than 5%-24%, is the fastest growing juice segment in China and accounted for half the total juice market in 2005, according to Euromonitor. It is however also more competitive and HuiyuanÆs market share in this part of the market is no more than 6.5% even though it ranks as the fourth largest producer.
One of the companyÆs key aims going forward will be to expand its distribution network by adding new production facilities close to its target markets. The company is also open to further acquisitions û it bought six fruit juice production units in 2003-2004 û to fuel its production growth.
About 35% of the net proceeds will go towards the construction of new facilities, while another 35% will be used for expanding and upgrading its sales and distribution network and for marketing and promotions. 15% will be used to settle outstanding debt.
Among the potential concerns, observers say, is the cost of buying juice concentrates and fruit puree, which increased by more than 50% in the first nine months last year. The company buys about 56% of this raw material from abroad, making it vulnerable to swings in international prices, particularly for oranges. It buys another 34% from its parent company which is controlled by HuiyuanÆs chairman Zhu Xinli.
Including packaging materials, raw materials accounted for more than 80% of its cost of goods sold in the nine months to September 2006 û costs which it has limited control over. In the nine-month period its gross margin fell to 32% from about 34% in the full year 2005.
The company projects a net profit of at least Rmb200 million ($25.6 million) in 2006, according to the preliminary listing document, but sources say that based on the Rmb185.2 million profit in the first nine months, it is likely to be slightly higher than that. The syndicate analysts project a profit of Rmb222 million for last year û a doubling from the previous year - and a further increase to Rmb300 million this year when preferential tax treatments will be phased out.
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