China Mengniu Dairy, the mainland's third-biggest milk producer, wants to price its $1.2 billion initial public offering at 20 times this year's net income even though increased competition is expected to sour profitability, sources familiar with the deal say.
The prospective price-to-earnings ratio (PE), based on a net income forecast of 309 million yuan this year, is on par with Hong Kong-listed Chinese consumer plays, according to pre-marketing material prepared by the IPO's co-sponsor Morgan Stanley.
Fund managers and brokers have voiced concerns over Mengniu's latest valuation after the recent stock-market slump forced the firm to scale back its IPO size to about $1.2 billion from $1.6 billion.
'A 20-times PE is on the very high end compared with the PE of blue chips, even though friends of mine in Hokkaido love Mengniu milk,' said Steve Cheng Ka-wah of Shenyin Wanguo Securities.
Mr Cheng said Mengniu's aggressive valuation was related to strategic investors' support before its IPO.
Founded in 1999, the Inner Mongolia firm was established by a group of former employees from rival Inner Mongolia Yili Industrial. Sales rose from 37 million yuan in 1999 to 4.07 billion yuan last year.