Chicken supplier DaChan Food to test investor appetite for IPOs
DaChan Food will have the distinction of being the first chicken meat supplier to go public in Hong Kong, but analysts fear there may be limited appetite for the offering.
Dalian-based DaChan - a joint venture between Taiwan's DaChan Greatwall Group and Japan's Marubeni Corp on the mainland - will debut on October 4 at HK$2.20 to HK$3 per share, seeking to raise as much as HK$930 million.
The company is the chicken meat supplier to global fast-food chains such as KFC on the mainland. It is also the largest processed chicken supplier in the country to general merchandiser Ito-Yokado and convenience store operator 7-Eleven Japan.
The problem, analysts say, is that the company relies essentially on only one product, chickens. Not only are the birds susceptible to avian influenza but feed stock prices are extremely volatile.
The company plans to spend 415 million yuan building six feed production facilities in the mainland, Vietnam and Malaysia and three domestic processed-food operations by the end of 2010.
DaChan now has 30 production facilities concentrated in the northeastern region, the country's corn belt. Among these are 12 feed plants, four hatcheries, seven chicken meat factories and four processed-food facilities.
DaChan opened its order book to institutional investors last Friday and starts taking retail orders in Hong Kong tomorrow.
The offer will close on September 25 and the price will be determined on September 27.
Analysts say the key risk for the company is its reliance on chickens for its earnings. They worry that a sudden outbreak of bird flu could seriously harm company sales and profits.
'Avian influenza could be a great risk factor for the company,' said a consumer analyst at a European investment bank.
'It is never easy to access the risk brought on by uncontrollable factors like disease. However, observing the big chicken meat export suppliers in Brazil and Thailand, avian influenza did pose [a threat to] their sales.'
The company's preliminary prospectus said bird flu did not significantly damage the company's livestock in 2004 and 2005.
However, it did lead to a temporary drop in both sales volume and prices.
During the outbreak of bird flu in the first quarter of 2004, the average price of chicken meat declined 3.6 per cent while sales volume fell 14.1 per cent from a year earlier.
When the outbreak returned in November and December 2005, the average price of chicken meat dropped 20.9 per cent compared with the first 10 months of the year.
'Steady demand is not a problem because Chinese like to have chicken in their cuisine,' the analyst said. 'But if there is an outbreak of bird flu, then stable supply could really be a problem.'
Despite the growing demand for chicken meat, DaChan's reliance on one product makes it less attractive than other listing candidates such as Global Sweeteners and China Starch.
'DaChan focuses more on the upstream business, such as feeding and processing, which has lower profit margins than the downstream business of retailing and branding,' said Kenny Tang Sing-hing, an associate director at Tung Tai Securities.
'But the company has rather low marketing costs because the industry is not that competitive, relatively speaking.'
In addition to a lack of value-added businesses, which can bring higher net profits, the company also faces the fluctuating cost of feed corn.
According to company figures, corn and soyabean are the key raw materials for feed production and together accounted for 59 per cent of the total cost of sales last year.
DaChan said any significant increase in the price of these materials would have a potential adverse impact on its profit margin, especially if the company is not able to pass on the costs to its customers.
Last year, for instance, the price of corn rose 22 per cent from 1,260 yuan per tonne in January to 1,540 yuan per tonne in March.
The company's net profit margin was at a mere 0.4 per cent in 2004, 1.7 per cent in 2005, 2.6 per cent last year and 5.1 per cent in the first five months of this year.
After the country's entry into the World Trade Organisation, the more open market brought in competitors from Vietnam and Malaysia.
The company does not rule out the possibility of a price war, although chicken consumption in the mainland has had a compound annual growth rate of 6 per cent from 1996 to 2005.
The global co-ordinator, sole bookrunner, sponsor and lead manager of the share sale is Cazenove Asia.
What the analysts think
Kenny Tang, associate director, Tung Tai Securities
Pros: DaChan Food has few competitors, and marketing costs are low
Cons: The business is susceptible to avian flu
Michael Wong, research director, Hantec Investment International
Pros: Steady growth on demand for chicken
Cons: Without a value-added business, profit margins will remain low
Analyst, European investment bank
Pros: The products are likely to be of good quality since the company has big clients such as KFC
Cons: Sales will be seriously hurt if there is an outbreak of avian flu because chicken is its core business