May 19, 2004

 

 

Mengniu Dairy May Raise $150 Million in IPO; 25% Less Than Targeted

 

China's Mengniu Dairy Co., the nation's largest milk supplier, may raise $150 million in a share sale, 25 percent less than it had sought after Chinese stocks traded in Hong Kong tumbled, bankers involved said.

 

The Inner Mongolia-based company started gauging investor demand for its Hong Kong initial public offering this week, the bankers said, asking not to be identified. Mengniu may need to offer the stock for less than 15 times this year's forecast profit of 310 million yuan ($37.5 million), down from a target of 20 times earnings, they said.

 

Mengniu is the second Chinese company in a week to scale back its plans. Shanda Interactive Entertainment Ltd., China's biggest online games operator, slumped 7.9 percent on its debut last week after cutting its IPO price because of weak demand. Chinese companies raised $7.5 billion in first time overseas share sales in the six months to March 31, when the Hang Seng China Enterprises Index rose 42 percent. Since then, it has fallen 22 percent.

 

"None of the IPOs have gone well this year and I don't expect a huge upside even though they're selling below 15 times,'' said Andrew Chan, an investment analyst at Pacific Sun Investment Management. "It's not worth the risk given the market conditions.''

 

Hong Kong's benchmark Hang Seng Index fell to its lowest in almost eight months yesterday as China steps up measures to slow economic growth.

 

Mengniu may sell 25 percent of its stock as new shares. Existing shareholders, including Morgan Stanley, may sell an additional 10 percent of the company.

 

Morgan Stanley invested $26 million in Mengniu, together with two partners, including CGU-CDC China Capital Partners Ltd., a venture partly owned by U.K. insurer Aviva Plc. China Capital Partners paid $3 million for its stake in Mengniu, the dairy producer said on its Web site.

 

The company needs funds to build new factories it is planning in the provinces of Shandong, Henan, Liaoning, Hebei and other regions by the end of 2005, boosting capacity to more than 2.75 million tons of dairy products.

 

The reduced size of the share sale comes after the China Enterprises Index, which measures the performance of state-owned companies listed in Hong Kong, lost more than a fifth of its value since April 1 as China increased efforts to cool an economy that grew 9.1 percent last year, and as the nation's inflation rate rose to a seven-year high of 3.8 percent.

 

Mengniu was ranked as the biggest liquid milk producer by volume in January by AC Nielsen, surpassing Inner Mongolia Yili Industrial Group Co. for the first time. Yili shares trade in Shanghai for 20 times its projected 2004 profit, according to Bloomberg data.

 

BNP Paribas SA and Morgan Stanley are managing the Mengniu share sale. Connie Chung, a spokeswoman at BNP, did not return calls seeking comment. Nick Footitt, a spokesman at Morgan Stanley in Hong Kong, declined to comment. Lei Yong-sheng, Mengniu's company secretary, was not available to comment.

 

Shanda last week cut the minimum price it had sought for its shares by 15 percent as it raised $152.4 million in the U.S. The Nasdaq stock market has fallen 6.9 percent since April on concern rising interest rates will stunt economic growth.

 

Mengniu, which derives 86 percent of its sales from liquid milk products, may increase profit 37 percent this year to 310 million yuan, according to research by Daiwa Securities Group Inc., which will assist with the sale.

 

"Mengniu has quite a good brand in China because of its marketing efforts,'' Chan said. "My concern is whether it can always secure raw milk supplies at a good price and with few interruptions.''

 

The company gets its fresh milk from more than 1,000 collection centers in China, with supply agreements ranging from three to 10 years. The cost of supply may also increase because of weather conditions in Inner Mongolia, which has a history of natural disasters including droughts and snowstorms, Daiwa's research report said.

 

Mengniu, which sold 21 percent of China's liquid milk in January, will raise its production capacity to 1.8 million tons in 2004 from 1.1 million tons at the end of last year, Daiwa's research report said. Capital expenditure will reach about 2.5 billion yuan in the next three years as the company aims to achieve 60 percent sales growth in the future, the report said.