Flogging pork to the Chi- nese should be an easy sell. Demand for the nation’s favorite meat is so strong that it has reshaped the global pork trade over the past decade. So why did investors in Hong Kong squeal when asked to buy into the IPO of the biggest pork producer in China？
In April， WH Group pulled the plug on its listing. Before it was canceled， the IPO had already been postponed and discounted over a disastrous period of a single month. WH Group representatives were left to embarrassedly mumble of“deteriorating market conditions”and “excessive market volatility”. The smokescreen of nebulous jargon could do little to hide that the botched offering was largely of the company’s own making.
It wasn’t supposed to turn out like that. When the predecessor to WH Group， Shuanghui International Holdings， bought US meat giant Smithfield Group last autumn the Chinese firm and its private equity backers were thrilled to be getting control of a big pork producer to fill Chinese bellies. So much so that they loaded Shuanghui International with huge debts to finance the US$5 billion deal， helping to push its debtto-equity ratio to 236.8% by the end of 2013 from 7.6% a year earlier. Since then WH Group has been in a race to strengthen its finances.
The company came up with an initial goal of raising US$5.3 billion in the offering. Unfortunately investors didn’t value the group anywhere near that. A few days before the scheduled debut amid tepid demand from investors the firm slashed the number of shares up for sale and lowered its target to US$1.9 billion. Few people expressed an interest： Only one-third of the shares allocated to the public， or 5% of the firm， were taken up.
Fund managers and investors have said in interviews with various media that WH Group failed to listen to the market. A common complaint， aside from the levels of debt， was the price. The price range of HK$8 to HK$11.25 （US$1.03 to US$1.45） per share gave the firm a valuation of about 15-20 times forward earnings. By comparison the Shenzhen-listed stock of WH Group’s Henan Shuanghui Investment & Development unit is currently trading around 17 times earnings. Even at the very end， when management were preparing to reduce the number of shares on offer， they were unwilling to countenance lowering the price range.
Others felt the company had rushed the IPO and were unconvinced of the cost-saving benefits from the merger that management was touting. “It looked like the whole thing rested on a very shaky foundation was a reasonable conclusion for anyone who took the time to read the SEC filings，” said Peter Fuhrmann， CEO of China First Capital. WH Group’s management and its private equity partners did not have the experience or knowledge to turn Smithfield， a domestic US pork producer， into a pork exporter， Fuhrmann wrote in a post on his blog. Signs of uncertainty built up as the debut came closer. In a rare vote of no confidence for a big Hong Kong listing， cornerstone investors did not sign on to the deal. A common feature， such investors agree to hold onto a firm’s stock for at least six months after a debut in exchange for preferential prices. Instead， some big foreign funds reportedly agreed to come on board as anchor investors that would be able to sell shares immediately after the IPO.
The pork manufacturer also allowed too many underwriters to cut into the deal. Having the Who’s Who of finance as your book runners won’t necessarily secure orders. The few investors interested in buying the WH Group’s shares were swamped by calls from the different underwriters. In the end many of them did not know which of the 29 investment banks （a record） to place an order from， putting them off altogether. With so many people selling， investment bankers may also have been less active in pushing the stock to investors.
Concerns over corporate governance didn’t help. This area is a huge red flag for investors in Chinese stocks following a string of scandals in recent years. WH Group has been under fire for awarding two of its senior executives with a US$600 million payout in stock options for negotiating the acquisition of Smithfield.
In fairness， the company hasn’t been helped by external conditions.
US pork is typically cheaper than Chinese produce because of more efficient production methods and lower feed costs. WH Group had intended to use this price gap to sell imported pork at a premium to Chinese consumers willing to pay. But this trade has become less attractive as US pork prices have surged in light of an ongoing porcine epidemic in the US that has led to temporary restrictions of exports of live hogs to China.
There are also limits on how much more meat China will consume. As China Economic Review reported previously， Chinese consumers will eventually reach a peak in terms of eating meat - the upward trend is not infinite and might plateau sooner than many are expecting.
Growth in pork consumption in China last year fell by nearly a half to 1.55 million metric tons from 2.81 million tons in 2012， WH Group said in its IPO prospectus， citing estimates from consultancy Frost & Sullivan. Sentiment on the sector is currently weak； shares in Chinese pork supplier Huisheng International have fallen about 29% since its debut in February.
Bearish feelings on the Hong Kong stock exchange did little to excite investors. The Hang Seng Index is down almost 6.5% from the start of the year.
The bourse missed out on Alibaba Group’s massive planned listing and saw Hong Kong Electric slash the size of its offering amid investor disinterest in January， hardly a bustling marketplace in which to offer a new stock.
WH Group’s failed IPO has left executives， bankers and stock market regulators cursing. But the company will need to come back and try again soon. It can’t afford to hold such debts indefinitely. Before it does， it should take into account what went wrong the first time around.