China Stock Turmoil 2015

Mainland Chinese companies race to list publicly on Hong Kong’s stock market, giving the locals a shake up

Dali Foods turns the market’s appetite for non-SOE, new growth stories in China

PUBLISHED : Wednesday, 11 November, 2015, 9:55am
UPDATED : Wednesday, 11 November, 2015, 10:45am

Undeterred by analysts’ warnings the Hong Kong market is heading into choppy waters the last two months of 2015, many Chinese companies are racing to hop onto the last boat for going public before Christmas.

While competing with a bunch of traditional state-owned financial stalwarts such as banks, brokerage companies, property developers, privately owned firms like Dali Foods are spicing up the city’s investment climate, analysts said.

“It is very difficult for the private companies to find big corner stones, given it has limited political and economic resources. But Dali is attractive because it will be the only Chinese mainland based food and drink producer available on the Hong Kong stock market, and is marketing its shares with an attractive valuation,” said a fund official who is closely monitoring Dali’s listing in the market.

“The major risk comes from China’s deflation pressures,” he added.

Market sources said Dali Foods would finish taking subscription this week while raising up to HK$10.4 billion, assuming the over-allotment is not exercised, and would then list on the Hong Kong stock exchange next week. The indicative share price range was set at HK$5 to HK$6.15, making the companies capitalisation at 16 to 20 times its consensus 2016 earnings.

Dali would stand in contrast to the giant IPOs from China’s state-owned finance groups such as China Huarong and China Reinsuarance that went public last month. They were heavily pre-subscribed by corner stone investors, while Dali brought in just three cornerstone investors to take up less than a quarter of the listing.

Although absent from the powerful state-owned financial groups’ endorsement, a knowledgeable buy side source said he was particularly interested in Dali’s IPO.

“Dali has a solid line of operations and healthy financials. It has an attractive growth profile especially in the context of China’s economic rebalancing.”

Another unnamed fund manager said Dali’s case made a classic self-made business success story.

Keith Pogson, a senior partner at Ernst & Young, said: “International investors are clearly more interested in exposure to China’s new growth stories now, which is closely connected to the nation’s 1.4 billion population.”

Companies riding on China’s escalated consumer trends, engaged in the real economy, and provide solid business returns are given the love by punters, especially those looking for long-term exposure to the economy, rather than financial firms which are easily and heavily exposed to volatilities as China embarks on wide-ranging reforms, he added.

Dali’s competitors include Tingyi, which is trading at about 23 times 12 months earnings and Want Want China, which is trading at 17 times 12 months earnings. Both were founded in Taiwan, although most of their revenue comes from the mainland.

Gordon Tsui, executive director of Hong Kong’s Hantec Group, a local financial market veteran, said November and December usually see more IPO deals come up.

“But currently the market sentiment is still soft with the US Fed ready to pull the trigger for a rate hike and investors are staying risk off. It makes companies polarised in the after-IPO performance,” he said, noting both China Huarong and China Reinsurance are trading nearly flat after listing on the Hong Kong stock exchange.

Bad bank Huarong raised more than 70 per cent of its planned US$2.26 billion Hong Kong initial public offering from cornerstone investors, but the stock has underperformed the Hang Sang Index shortly after the listing. On Tuesday, its share price closed at HK$3.13, barely above its IPO price at HK$3.09.

China Reinsuarance, which sold half of its initial public offering shares to cornerstone investors, closed on Tuesday at HK$2.72, also barely above its IPO price at HK$2.70.

Controlled by the family of its Chairman Xu Shihui, with private equity firm CDH Investments Holding with a 3 per cent stake, according to its preliminary prospectus, Dali is a privately owned snack food manufacturer with a long product line from pastries to herbal tea, and is a leader in a snack food market that Frost & Sullivan predicts will grow 72 per cent to US$84 billion in 2019.

Dali took the biggest market share by the end of 2014 in the pastries section, second largest in the biscuits section, and third biggest in chips, herbal tea and energetic drinks, according to the Frost & Sullivan’s figures.

Other interesting IPOs in the pipeline include Wenzhou based Kangning Hospital, the largest private psychiatric health care group in China, which has nine health care facilities in operation, with a total of 2,210 beds across its network, and trying to tap the potential of China’s underserved psychiatric market.

The company said in a press release on Tuesday it would receive net proceeds of approximately HK$555.2 million, if priced at the mid point of its price range between HK$32.1 and HK$38.7.