Modern Dairy suffers from sector's troubles

PUBLISHED : Saturday, 27 November, 2010, 12:00am
UPDATED : Saturday, 27 November, 2010, 12:00am

China Modern Dairy was one of the worst-performing stocks in the Hong Kong market yesterday as its trading debut was spoiled by concerns about mainland food safety and overall market malaise.

The raw milk producer tumbled as much as 16.6 per cent in the afternoon before finishing down 13.2 per cent at HK$2.51. More than HK$750 million worth of its shares changed hands on the day.

China Modern Dairy raised about HK$2.2 billion by selling 800 million new shares at HK$2.89 apiece. The offering price was at the low-end of an indicated range.

'People usually avoid this sector,' said Patrick Yiu Ho-yin, managing director at CASH Asset Management. 'Investors are worried that there may be some negative impact from so many of the issues coming out from the dairy industry.'

Other mainland-based dairy companies have not fared well either with their new listings recently. Yashili International Holdings, a milk formula maker, listed on November 1 and is down 22.4 per cent from its offering price. Global Dairy Holdings came to market at the end of last month and is down 33.7 per cent from its IPO price.

The mainland dairy market came under intense scrutiny in 2008 when half a dozen children died and a reported 300,000 became ill after consuming milk and formula later found to be contaminated with an added chemical called melamine. Dairy product makers have since taken steps to improve oversight of the milk they are using by consolidating procurement around large-scale farms.

This trend stands to benefit China Modern Dairy, which sold over 95 per cent of its milk in the latest fiscal year to leading mainland dairy products maker Mengniu Group.

China Modern Dairy said in a prelisting document that since its commencement of business it has produced high-quality raw milk which has never contained melamine.

The dairy farmer has earmarked proceeds from its IPO to improve its production scale. It set aside about HK$882 million for importing dairy heifers from Australia or New Zealand and over HK$1 billion for building new farms and production facilities.

China Modern Dairy was the 12th new listing this month on Hong Kong's main board and 85th so far this year. There were 68 new listings last year and 47 in 2008, according to data from Hong Kong Exchanges and Clearing.

The IPO pipeline has showed signs of a slowdown, however, amid waning investor sentiment. China Datang Corp Renewable Power and two other listing candidates aiming to take in over a combined US$3 billion through separate deals pushed back their fund raising plans because of poor market conditions, according to people familiar with the deals.

The Hang Seng Index is down 0.95 per cent so far this month, headed for just its second monthly decline since June. 'If the overall market is not so good and the current market still has attractive stocks to buy, it will drive out some of the capital from the IPO market,' Yiu said.