Hong Kong's mom and pop investors are clamouring for rare shares in a bite-sized Chinese pork supplier this week, heralding a potential stampede when industry giant WH Group comes to market in April with what could be a $6 billion listing.
With fresh Chinese meat sector listings few, the chance to buy into a vast, steadily growing industry has made little-known Huisheng International Holdings Ltd popular. Its initial public offering, due to be priced later on Friday, generated retail demand 20 times the $37 million shares on offer in the first day of subscription.
As shoppers in China, the world's biggest pork consumer, grew more affluent, per capita spending on meat, poultry and processed products more than doubled to 1,184 yuan ($190) by 2012 compared with 2006, Huisheng said in its IPO prospectus. The company cited Chinese government statistics and a report prepared by research firm Ipsos.
Strong demand for Huisheng, raising funds for freezer facilities and new farms, bodes well for WH Group. Its upcoming IPO is expected to be Hong Kong's biggest listing since 2010 - and the seventh-biggest on record - in a banner year for the city's investment bankers.
Previously known as Shuanghui International Holding, WH Group is a powerhouse of China's meat trade and last year acquired U.S. pork producer Smithfield Foods Inc, which had sales of $13.2 billion in the fiscal year ended April 2013.
"The fundamentals, the company and the business factors are better (for WH Group)," said Alvin Cheung, associate director at Prudential Brokerage in Hong Kong. "It's a quite different and much more diversified company."
When the retail portion of Huisheng's offer closed on Thursday, demand for shares had soared to a value of $1.34 billion, according to brokerage Phillip Securities, which provides margin loans to retail investors looking to buy into IPOs.
GROSS MARGINS
Based in the city of Changde in China's southern Hunan province, Huisheng's prospectus casts a spotlight on a pork industry that supplies China's most popular meat and has had to deal with recurring food safety scares in its growth.
Pork sales in China rose to 51.8 million tonnes in 2012, 18 percent higher than in 2007, and are forecast to reach 58.5 million tonnes in 2017, according to research firm Euromonitor International. Pork accounts for nearly two-thirds of China's meat sales, with poultry a distant second with 20 percent.
According to Huisheng's prospectus, its most profitable products include hogs' internal organs, heads, tongues, hooves, tails and blood, where it gets gross profit margins of 60 percent. Revenue rose 1.8 percent to 803.9 million yuan in the first nine months of 2013 compared with a year earlier, while profits climbed 3.4 percent over the same period to 69.9 million yuan.
Huisheng is offering 100 million new shares in the IPO, while its chairman, Ding Biyan, is offering 20 million shares in a range of HK$1.45-HK$2.00 per each. The company plans to use 47 percent of proceeds from the IPO to buy freezer storage facilities, with another 53 percent set aside to develop new breeding farms - a move to help it keep tighter control of its supplies and avert potential food scares.
"Investors like the concept of vertically integrated producers, which they think can ensure food safety, a top concern in China right now," said Pan Chenjun, a senior analyst at Rabobank in Beijing.
"Without vertical integration, producers need to outsource from many suppliers including small farmers, and this gap in the supply chain means food safety issues can occur."
Cinda International Securities Ltd. was hired as sole global coordinator and bookrunner for the Huisheng IPO, with five other brokerages also helping to underwrite the deal. The banks stand to earn $1.11 million in underwriting commissions, equivalent to 3 percent of the total IPO.
WH Group's planned April listing will be backed by Chinese private equity firm CDH Investments. The company named BOC International, Citic Securities International, DBS , Goldman Sachs, Morgan Stanley, Standard Chartered and UBS as sponsors of the IPO.
