DANOY Danone (QX)

By Joanne Chiu 

Shares in China's top bottled-water company surged in gray-market trading ahead of its Hong Kong debut, after investors thirsty for new stock sales placed nearly $150 billion of orders for a $1.1 billion deal.

The warm reception for Nongfu Spring Co. shows Hong Kong investors remain eager for ways to bet on China's increasingly affluent consumers. That is a good omen for Yum China Holdings Inc., the operator of KFC and Pizza Hut in China, whose new Hong Kong stock starts trading on Thursday.

The initial public offering price gave Nongfu Spring a market value of $31 billion, making it roughly two-thirds as big as Danone SA, the French company behind Evian and Volvic.

Gray-market pricing from two Hong Kong brokers suggested Nongfu Spring could surge in value after it starts trading officially on Tuesday, potentially overtaking Danone. Nongfu Spring shares were quoted at 44.05 Hong Kong dollars ($5.68), more than double its IPO offer price of 21.50 Hong Kong dollars, on a platform operated by Futu Securities. The stock was quoted up 92% on a platform run by Bright Smart Securities.

Based in the eastern province of Zhejiang, Nongfu Spring was founded in 1996 by businessman Zhong Shanshan, and uses the slogan "Nongfu Spring tastes a bit sweet."

The company ranked top in China's packaged drinking-water market last year, with nearly 21% market share, according to Frost & Sullivan research cited in its prospectus. It also sells tea-based drinks, juices and energy drinks.

Net profit rose 37% to 4.9 billion yuan ($716 million) last year, although sales and profit suffered in early 2020 as the pandemic disrupted supply chains and everyday life.

Hong Kong's IPO market lures many mom-and-pop investors, who often rush to subscribe to offerings before flipping shares for short-term gains, but in this case big institutions also laid out huge orders for Nongfu Spring.

Individuals placed nearly $87 billion of orders, or nearly 1,050 times the small portion of the deal reserved for them, according to a filing. That triggered an adjustment boosting their slice of the deal to 27% from 7%. Institutional buyers made 60 times more orders than shares on offer, implying they placed about $61 billion of orders.

Five cornerstone investors, including Singapore sovereign-wealth fund GIC Private Ltd., Fidelity International and U.S.-based hedge-fund manager Coatue Management LLC, had endorsed the deal by committing to buy a total $320 million of stock wherever the deal priced.

The IPO valued Nongfu Spring at nearly 29 times next year's forecast earnings, according to Arun George, an analyst who publishes on the independent research platform Smartkarma. That is nearly twice Danone's equivalent price-to-earnings multiple of 15 times and above Coca-Cola Co.'s roughly 23 times.

The IPO was led by China International Capital Corp. and Morgan Stanley. The deal's size could increase by 15% if underwriters exercise what is called a greenshoe option.

Write to Joanne Chiu at joanne.chiu@wsj.com

(END) Dow Jones Newswires

September 07, 2020 09:25 ET (13:25 GMT)

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