Global Economics

Chinese Snack Maker Plans HK IPO


Want Want which was delisted from the Singapore exchange last year, plans to raise $1.4 billion with the help of eight key investors

Want Want China Holdings has decided to go ahead with an initial public offering of up to $1.4 billion in Hong Kong, which aims to re-list the snack food producer only six months after the chairman took it private.

Previously listed in Singapore, the company's core food and beverage operations were viewed to be trading below potential as the non-core hospital and hotel operations were loss-making and dragging down its overall valuation. After buying out the minority shareholders, chairman and CEO Tsai Eng-Meng, restructured the company by stripping out the non-core assets and repackaged it as a pure China-focused food and beverage business. The decision to list in Hong Kong this time was made in the hope that it will attract higher valuations and more wide-spread research coverage as most other Chinese food and beverage companies trade in Hong Kong.

In its new form, Want Want—like the other Chinese consumption plays - is attracting attention as a proxy on the continued strength of China's domestic economy. The company is also the market leader in China within rice crackers, flavoured milk and soft candy, which make up its three main products and contribute a fairly equal share of revenues. This makes it a more diversified play than instant noodle makers Tingyi and Uni-President China, which generate the majority of their revenues from just one product. According to sources, Want Want also sports a projected growth rate above the sector average and has higher margins than Tingyi and Uni-President China, which are viewed as its closest comparables.

One of the key challenges will be the overall sector valuation, with Tingyi having lost 20% of its market value since the beginning of this year and Uni-President China having slid 35% from its closing high of HK$6.68 on January 7. The latter is still slightly above its mid-December IPO price of HK$4.22, however, having closed at HK$4.32 on Friday.

Sources say Want Want's indicated price range values it at about 20 to 27.4 times this year's projected earnings, which puts it at a discount to Tingyi's 29 times. Based on syndicate estimates at the time of its IPO, Uni-President China, which is significantly smaller than the other two with a market cap of only $1.9 billion, trades at 22.9 times this year's earnings. However, over the past four days alone, Tingyi's 2008 P/E ratio has fallen from 32 times and if that downtrend continues the valuation gap between it and Want Want could shrink quite quickly.

And given the 2.5% drop on Wall Street on Friday, it seems likely that Asian markets are in for another tough session today and that trading patterns will remain volatile in the coming weeks. US markets fell on weak economic data and concerns about more write-downs in the financial sector after US insurer American International Group reported a record loss for the fourth quarter. Investors will also likely be watching the trading debut of Chinese oil and gas rig manufacturer Honghua Group on Friday to gauge the interest for new listings in the secondary market. Honghua, which priced its $409 million IPO at the mid-point of the indicated range, will be the first company of size to list in Hong Kong this year. (See separate story)

Want Want, which started operations in Taiwan in 1962 and broke into the Chinese market with its Want Want-branded rice crackers in 1992, is seeking to raise between HK$8.15 billion and HK$11.14 billion ($1.04 billion to $1.4 billion). It is offering 20.5% of its share capital, or 2.72 billion shares, which will give it a market capitalisation of between $5.1 billion and $6.8 billion at the time of listing—slightly below Tingyi's $7.8 billion.

Of the total number of shares on offer, 85% are secondary shares that will be sold by chairman Tsai who controls the company together with other family entities. The 15% greenshoe is also made up of all secondary shares, which means the company itself will raise a maximum of $214 million from the offering. One source says part of that money will be used to expand its product offerings and to improve the distribution network which currently comprises just over 300 sales offices and over 15,000 wholesalers.

As usual, 10% of the offering has been earmarked for retail investors, although standard clawback triggers apply that could boost the size of the retail tranche to as much as 50% in case of strong demand. The final price will be determined after the institutional offering closes on March 14, while the trading debut is scheduled to take place just after Easter on March 25.

To help support the deal, sources say joint bookrunners BNP Paribas, Goldman Sachs and UBS have signed up eight cornerstone investors who have committed to buy a combined $167 million worth of shares in return for a six-month lock-up. Depending on the final price, this will give them between 12% and 16% of the total deal size. Uni-President China, which is regarded as a comparable rather than a competitor because of the different products it sells, is the largest cornerstone investor with a commitment of $30 million, followed by Rabobank with $17 million. Boutique investment management firm Arisaig Partners, Bank of China, China Construction Bank, US-based Chimera Investment Corporation, Chinese Estates chairman Joseph Lau and Abu Dhabi-based First Gulf Bank will each buy $20 million worth of shares.

Syndicate research suggests Want Want will grow at a compound annual growth rate of 30% plus both at the top and bottom line over the next couple of years. In 2007 it posted a profit of $194 million on revenues of $1.01 billion. In 2004-2006, Want Want reported a 29% revenue CAGR, while Uni-President China and Tingyi achieved 21% and 26% respectively. The latter two operate in a more competitive market (instant noodles), however, which was obvious from the fact that their net earnings growth contracted over the three years to 2006, while Want Want generated a profit CAGR of 37%. In 2007 the company displayed an Ebit margin of 20% and syndicate analysts expect it to maintain a margin of 19% for the coming two years.

One research report notes that Want Want's "higher sales and well diversified product mix have helped brand penetration and strengthened its bargaining power when signing contracts with distributors". In the first half of 2007, it had a market share of 68% for rice crackers, 40% for flavoured milk and 28.5% for soft candy.

Aside from the fact that China's food and beverage market is highly competitive, the company may face risks from rising prices on raw material such as rice, milk powder, sugar and packaging materials—although in the past sources say it has been able to pass on a large portion of cost increases to its customers—and rising taxes, as Want Want paid an effective tax rate of only about 11.5% in 2006 thanks to its status as a foreign-invested manufacturing company.

Chairman Tsai paid $797 million to buy back the 26.6% of the company that wasn't already owned by himself, members of his family or long-term Japanese partner Iwatsuka Confectionery, which held about 5%. The cash price of $2.35 per share represented a 15% premium to the last traded price before the buyout was announced in May last year and valued the company at $3 billion.


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