ZJLD launches year’s largest Hong Kong IPO but investors not ready for 'bottoms up'

Data InsightECM Explorer 19 April

ZJLD launches year’s largest Hong Kong IPO but investors not ready for 'bottoms up'

Baijiu, or white liquor, especially the top-tier brands, used to be a popular form of gifts given by corporates to government agencies so as to establish guanxi, or relationships.

Long gone are the golden days for China's white-liquor producers like ZJLD Group ever since President Xi Jinping launched a series of anti-corruption crackdown, also known as “alcohol bans”, in 2017.

While that has forced the likes of ZJLD, one of China's top five white-liquor producers, to focus more on sales to corporates for business gatherings, and as most parts of the world have gradually returned to the pre-COVID norms, the company seems to haven't got the right aroma that plays to the taste bud of investors following its Hong Kong listing.

ZJLD's up to USD 933m initial public offering - Hong Kong's largest in seven months should the deal get priced at the top end - would be a Buy only at the cheap end nonetheless, according to an investor.

"At the cheap end, if you use a typical A- to H-share discount of around 20%, you still have some upside," he said. Investors were guided toward cheap-end pricing on Tuesday (18 April), he added.

Bottoms up?

Hong Kong's IPO market is still slowly finding its way out of a long drought, as witnessed by growing IPO filings in the past few months, which point to a possible revival of the city's new listing activity in the second half of the year.

Among the potential listing candidates is industry peer Chongqing Jiangxiaobai Liquor, a Chinese sorghum liquor producer, which is looking to resuscitate a long-delayed Hong Kong IPO this year at a targeted valuation of USD 2bn, as this news service reported.

ZJLD, 16.2%-owned by KKR, is offering 490.7m shares at HKD 10.78-HKD 12.98 each in the base offering, according to a term sheet seen by this news service. The IPO comes with an over-allotment option of up to 73.6m shares.

Should the greenshoe be exercised in full, the deal would fetch USD 775m-USD 933m, the term sheet shows.

According to a second investor, the books, which opened on 17 April, has been "single-digit times" covered, with half of the orders targeting the cheap end, a quarter at the midpoint and the rest at strike.

The books were skewed toward hedge funds at this point even though some long-only funds have placed strike orders, the second investor said.

No cornerstone or anchor investors are involved, he added.

According to the second investor, the offer price range translates into a multiple of 19.3x-23x 2023 earnings. At the midpoint, the deal would be valued at 21.1x earnings.

Its China-listed peers Kweichow Moutai [SHA:600519] trades at 29.9x 2023 earnings, while Luzhou Laojiao [SHE:000568] at a 26.7x multiple, and Wuliangye Yibin [SHE:000858] at 21.8x.

Kweichow Maotai has gained nearly 10% year to date, while Luzhou Laojiao up 3%, and Wuliangye down 2.4%. Hong Kong-listed Tsingtao Brewery [HKG:168] has gained 9% year to date.

The first investor opined that with a 1.8% market share in China and a growing average selling price, ZJLD has a decent equity story to offer.

But as investors just recovered from banking system shocks in Europe and the US, many remain price-sensitive.

Indeed, a third and a fourth investor decided to skip the deal, while many haven't made up their mind.

CICC, Goldman Sachs, and CSCI are running the deal. 

ZJLD did not respond to a request for comment by the time of publication.

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