Tianyi Fruit Holdings, a supplier of orange juice to Coca-Cola that aims to raise as much as HK$182.5 million in a Hong Kong initial public offering, may find the going tough given its not so famous brand name. With markets slumping and investors reluctant to bet on anything but the bluest of blue chips, most new offerings have performed badly and Tianyi faces a similar fate. 'Against the backdrop of such a bad market, some existing fruit stocks have fallen a lot,' said Matthew Kwok, the head of research at Tanrich Financial Holdings. 'Why would investors risk buying the stock of a new company they don't know much about, rather than [buying] some well-recognised companies with a track record of profit growth?' Some recently listed firms have fallen about 20 per cent since their debut, dampening investor interest in new offerings. 'Almost every listing candidate is not attractive under the circumstances,' Mr Kwok said. The Fujian maker of frozen concentrated orange juice and supplier of fresh oranges plans to sell 250 million new shares at 63 to 73 HK cents each. The proceeds will go to boosting production to meet growing demand on the mainland for healthy beverages. Evolution Watterson Securities is the sole arranger of the deal. Pricing is expected to be fixed next Monday and the stock will start trading next Thursday. Based on the price range's midpoint of 68 HK cents, the trailing price-earnings ratio would be 6.7 times, the company said. And the high end of 73 HK cents, it would be 11.6 times Tianyi's earnings last year, CASH Asset Management Securities calculated in a report. By comparison, China Haisheng Juice Holdings, an apple juice concentrate maker, is trading at 10.7 times earnings this year, while Yantai North Andre Juice is at 13.1 times, according to the report. Founded in 1993, Tianyi initially focused on orange juice production but since 2004 has engaged in wholesale marketing of fresh oranges to fully utilise produce from its orchards. Last year, it produced 7,222 tonnes of frozen orange juice concentrate, or 36.11 per cent of the mainland's total output, the company said in its prospectus. By the end of last year, the business contributed 46.8 per cent of Tianyi's total revenue, with fresh orange sales accounting for 47.9 per cent. Last year, sales to top customer Coca-Cola accounted for 14.3 per cent of Tianyi's total turnover. Unlike most juice makers, which rely on imported fruit, Tianyi grows its oranges in leased orchards and also sources the fruit from farmers nearby to ensure consistent supply at a relatively stable cost. This vertically integrated approach has won praise from analysts. 'The business model is good for long-term development although the initial investment could be much larger than importing [produce],' said Li Leiyu at CASH Asset Management. Tianyi has 23 leased orchards in Fujian province with a total area of 2,053 hectares that produced 98,033 tonnes of oranges last year. First Shanghai Securities analyst Fila Xu said the lease for the orchards was sometimes as short as five years, which could mean higher costs when the contract is renewed. Tianyi said it would use 73.1 per cent of proceeds from the public offering to buy land-use rights as well as to purchase and install production and processing equipment. It will allot about 16 per cent of the fund to expanding its orchards by 32.47 per cent, or 667 hectares. 'We plan to look for suitable land in Chongqing and Hunan province and lease approximately 667 hectares of orange farms by the end of 2008,' the company said. The mainland's frozen orange juice concentrate industry is still relatively small compared with the world's major producing countries such as Brazil and the United States. 'We would like to spend more than 70 per cent of the proceeds on capacity expansion to meet the strong demand for concentrated orange juice,' said financial controller Hu Xu. With growing disposable incomes and awareness of health and nutrition, mainlanders' demand for healthy drinks is becoming stronger. There is a supply shortfall in the market, with imported orange juice doubling to 74,222 tonnes last year from 37,112 tonnes five years ago, the company said, citing data from the China Chamber of Commerce for Import and Export of Foodstuffs, Native Produce & Animal By-Products. Tianyi's net profit increased 12.38 per cent to 62.82 million yuan (HK$71.6 million) last year. Turnover jumped 51.39 per cent to 265.6 million yuan. The company expects net earnings for the first half of this year will not be less than 21.5 million yuan. It intends to recommend an annual dividend payout of about 15 per cent of its net profit. What the analysts say Matthew Kwok, head of research, Tanrich Financial Holdings Pro: Tianyi grows oranges in leased orchards, which could control raw material costs while benefiting from an increase in agriculture product prices Con: The company is not attractive to investors when the market is so bad Fila Xu, analyst, First Shanghai Securities Pros: The juice market is huge and has room to develop. The company aims to double production capacity by 2009, which can capitalise on the strong demand Con: The lease period for its orange orchards is only five years, which will bring uncertainty over future rental costs Li Leiyu, analyst, CASH Asset Management Pro: Tianyi's integration into the upstream growing business is a good model Con: Market conditions are poor
