IPOs: Tepid Market Greets IPO From Snack Maker Dali

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Bottom line: Weak pricing for Dali Foods’ Hong Kong IPO reflects investor uncertainty about China’s economy and stock markets, though the shares could briefly rise on their debut due to support from state-backed investors.

IPO for snack maker Dali draws tepid demand

A lukewarm reception for an upcoming IPO from snack maker Dali Foods is providing the latest evidence that global appetite for Chinese offerings is still quite wobbly. Dali has cut the size of its fund-raising plan by about 20 percent, following in the footsteps of China’s oldest investment bank CICC (HKEx: 3908), which made a similar reduction for its IPO whose shares made their trading debut last week.

The weak sentiment reflects uncertainty about China’s domestic stock markets, which reflects uncertainty about the nation’s broader economy that is showing signs of slowing. Hong Kong’s stock markets have become increasingly synced with far more volatile mainland stock markets, which soared in the first half of this year, only to come crashing back to earth during a massive summer sell-off.

Following major intervention by Beijing to avoid a meltdown, Chinese markets have stabilized in the last couple of months. After a recent smaller rally, they are still nearly 50 percent higher than where they were this time last year when the bigger rise began. That’s probably leading some to believe that China’s stock markets could be due for more correction in the first half of next year, leading to the current weak sentiment towards IPOs.

According to the latest reports, Dali has priced shares for its IPO at HK$5.25 apiece, near the lower end of its previously set range of HK$5 to HK$6.15. (English article) That allowed the company to ultimately raise about HK$8.9 billion ($1.1 billion), or about 18 percent less than the maximum of $1.34 billion that it was hoping for. The shares will start trading on Friday.

Like CICC, Dali had to rely on lesser-known names as its cornerstone investors, companies that buy big blocks of shares before an IPO to boost market sentiment. The signing of big-name global institutions as cornerstone investors is usually a positive sign, since it means big sophisticated buyers are bullish on the company. But in this case Dali had to rely on names like Arisaig Partners, which I’ve never heard of, and Central Huijin, an investor closely linked to Beijing and big backer of major state-run companies.

State-Run Backers

Like Dali, CICC also had to rely on a field of mostly big, state-owned entities as its cornerstone investors, with names like steel maker Baosteel and leading wireless carrier China Mobile (HKEx: 941; NYSE: CHL) buying big blocks of its pre-IPO shares. CICC had to pare back its original fund-raising plan by about 20 percent, but its shares ultimately priced quite strongly, most likely due to support from state-backed entities.

CICC’s shares rose modestly after a 12 percent jump i their trading debut last week (previous post). But a late-week sell-off pushed them to their lowest close since the IPO, though the shares still up by about 10 percent from their offering price.

A more worrisome sign comes from Legend Group (HKEx: 3369), parent of global PC leader Lenovo (HKEx: 992), which made one of the year’s biggest IPOs when it raised nearly $2 billion in a June offering. The company’s shares have tanked since then, losing about a third of their value. Of course every company faces specific issues, and Legend is probably being hurt by recent headwinds at Lenovo.

Still, the bigger picture doesn’t look too encouraging for IPOs by Chinese companies, especially from more traditional industries like food and financial services. Accordingly, we probably shouldn’t expect too much from Dali, though its shares could enjoy a brief rise on their trading debut similar to CICC’s, as state-run investors show their support for the company.

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