A Rmb15bn (US$2.35bn) Shanghai IPO of the animal feed and pig breeding unit of Thailand’s Charoen Pokphand Group has given a boost to foreign banks’ ambitions in China's onshore equity capital markets.
Chia Tai Investment, wholly owned by family-backed agro-industrial conglomerate CP Group, has picked JP Morgan and HSBC Qianhai as bookrunners for the planned float alongside sponsor Citic Securities.
The combination is rare for an A-share IPO of such size, which is normally led entirely by top-tier Chinese investment banks such as Citic, CICC and China Securities.
For instance, the Rmb13.9bn ChiNext IPO of Yihai Kerry Arawana last October, the largest IPO on the Shenzhen start-up board, was arranged by sponsor China Securities and joint bookrunner CICC even though the agricultural and food processing company is owned by Singaporean agribusiness Wilmar International.
The Chia Tai float is also a landmark onshore mandate for both HSBC and JP Morgan, and comes at a time when global banks are ramping up their investment in China's domestic capital markets.
HSBC Qianhai, the securities joint venture between HSBC and Qianhai Financial Holdings, opened its doors in December 2017 after HSBC became the first foreign bank to receive approval for a majority-owned joint venture on the mainland. It has run several convertible bonds and private placements but has not yet led an IPO.
JP Morgan Securities (China) opened for business in March 2020. The US parent has already raised its stake in the fully licensed venture to 71% and has recently applied to increase it to 100%.
Both HSBC and JP Morgan have a long relationship with the CP Group. In 2013, HSBC financed CP All’s US$6.6bn purchase of Thai wholesaler Siam Makro. Last year, JP Morgan acted as financial advisor and committed financing to CP Group, CP All and CP Foods on its US$10.6bn acquisition of Tesco’s Thailand and Malaysia businesses.
JP Morgan is eager to take a leading position in domestic equity offerings for international and Chinese clients as it now has a full licence, said a person familiar with the situation. As more international investors participate in the A-share market, the bank sees an opportunity to work with companies – especially those with an international background – that would like to bring overseas investors and sophisticated institutions that can understand their real value, said a second person.
HSBC is also keen to expand its role in the onshore IPO market and build on the CP mandate.
“HSBC is definitely excited about this opportunity. The bank is keen to kick off its IPO franchise with such a big deal,” said a person with knowledge of the matter.
Falling prices
CP Group established the first foreign-funded feed company in China back in 1979. Chia Tai’s main businesses include animal feed production, pig breeding and pig slaughter products.
China’s hog herd was devastated by African swine fever in 2018 but has recovered since. The average price of live pigs surged from Rmb10–Rmb15/kg in 2018 to over Rmb40/kg in 2019 before falling back to Rmb30/kg in 2020.
As a result, Chia Tai’s net profit almost quadrupled to Rmb7.8bn in 2020 on revenue up 43% to Rmb45.7bn.
However, slower demand, increased imports and panic selling by farmers after fresh outbreaks of African swine fever have dragged wholesale pork prices down more than 40% since mid-January.
As of Thursday, shares in Muyuan Foods, China’s biggest pig breeder, had lost 29% since hitting an all-time high in February. Jiangxi Zhengbang Technology, the country’s second-biggest breeder, has fallen 24% this year while New Hope Liuhe, another major feedstock producer, has dropped 32%.
Chia Tai Investment said in the IPO filings that it was seeking a listing to expand the fundraising channels for its pig breeding and feed production business beyond its own resources and bank loans.
At the end of 2020, Chia Tai had 90 feed factories, 97 pig breeding farms, and nearly 1,800 large commercial pig-fattening farms in 29 Chinese provinces. It plans to use the proceeds from the IPO for pig breeding in 17 Chinese cities (Rmb10.8bn) and working capital (Rmb4.2bn).
The company plans to offer up to 567.1m shares, or 12% of the enlarged capital, in the IPO.