The Chinese food and beverage company started building books on Wednesday (November 4), offering investors 1.69bn primary shares at a price range of HK$5.00-HK$6.15 each. At this level, valuations work out to a 2016 P/E multiple of 16.2x-20.2x before a greenshoe option of up to 15% of the base deal.
So far so normal, but the execution approach for Dali is starkly different from some of the recent large IPOs to grace Hong Kong’s market. For starters, the company has mandated just two banks — Bank of America Merrill Lynch and Morgan Stanley — as joint sponsors, joint global co-ordinators, joint bookrunners and joint lead managers.
By way of comparison, China International Capital Corp had a total of 11 JGCs for its HK$6.29bn float that was priced on October 30, while China Huarong Asset Management had five sponsors that were also the JGCs, JBRs and JLMs alongside three others. On top of that there were 14 other bookrunners working on the firm’s HK$17.83bn October transaction.
China Reinsurance meanwhile, which also sealed a HK$15.58bn listing last month, had three sponsors, seven JGCs/JBRs/JLMs and 12 JBRs/ JLMs.
“Mandating just two banks [on Dali] was a very deliberate move,” said a source close to the trade. “It is a situation where the two banks are in control and gives a message to the market that it’s a real deal that is targeting institutional investors and not just every random investor that a big syndicate can find.”
Conscious cornerstones
The leads on Dali have deployed the same logic towards the make-up of the cornerstone group. The snacks-maker has placed out $305m, or 23%, worth of stock to just three cornerstones — Arisaig Asia, Arisaig Global and Arisaig Global Ucits ($80m), JIC Dessert Laboratory ($150m) and Longbow Securities ($75m).
This again puts it in stark contrast to recent listings. CICC allocated half of its IPO to 10 cornerstones, Huarong put 70% with 10 accounts, while China Re put around 60% also with 10 investors. In all these cases, the majority of the buyers were backed by the Chinese government.
“We didn’t want a case where Dali’s stock is simply moving from the hands of one Chinese SOE to another,” added the source. “We took a conscious decision to have a small cornerstone group. There was no point crowding out institutional accounts by bringing in random cornerstones, especially as Dali is not state owned.”
A source away from the transaction highlighted the credentials of the cornerstones. Arisaig and Longbow are independent investors, while JIC is the only investor with any link to the state via the sovereign wealth fund.
“People are expecting it to be the first institutional bookbuilt deal in a long time and I don’t expect it to get too much SOE support,” said the source. “So it’s a very good sign for the market as it’s finally moving away from the typical SOE and cornerstone driven IPOs, which are not a good benchmark of the market as they are fuelled by China demand.”
Interest is already strong for Dali, thanks to plenty of investor education ahead of launch. The leads determined the best price range to go out with based on that feedback.
No direct comps
Dali is being compared to other Hong Kong-listed food and beverage firms, but the source close to the deal warned they were not direct benchmarks as Dali is growing very fast, while the others are developing at a more stable pace.
The comparables include Uni-President China Holdings, which is trading at about 22.2 times 2016 P/E, Want Want China Holdings with a forward-looking P/E of 16.1 times, and Tingyi Holding Corp, which is trading around 19.8 times. This means that in some cases, Dali would be valued at a premium to comparables, and in other instances it would be sold at a discount.
But investors “have been waiting for Dali” as there has been a scarcity of supply from the sector after a string of financial names stole the spotlight in Hong Kong in recent months.
“Everything this year seems to have been FIG,” said a second source away from Dali’s listing. “So the company is giving investors a big chance of diversification. The fact that comps are everywhere can confuse investors and they might struggle to find the right valuation, but it still seems like a decent deal and I’ve heard lots of good things about it.”
Despite the positive sentiment around Dali, there are some underlying concerns among investors, said a third source away from the IPO. While its growth story is attractive, those same figures are also being treated with some scepticism.
From 2012 to 2014, its revenues grew at a compounded annual rate of 17.4% from Rmb10.81bn ($1.7bn) in 2012 to Rmb14.89bn in 2014, while profits jumped an impressive 73.1% during the same period, according to its preliminary prospectus.
“There is a lot of interest around Dali and the structure of the IPO is sensible,” said the third source. “But the fundamental metrics of the company seem too good to be true. It has good revenue and profit growth and it’s completely dominating in its sector, but there is some genuine concern about corporate governance and the numbers we’re seeing.”
Bookbuilding will go on until November 13, with the Hong Kong public offering to take place from November 10-13. Pricing is expected the same day with listing tentatively scheduled for November 20.
Dali, which started life as a biscuit manufacturer in 1989 in China's Fujian province, today has retail sales of Rmb1.5bn ($245.9m), giving it a lead over rivals in the snack food industry, according to Frost & Sullivan.