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Nongfu Spring IPO turns owner into China's third-richest

Zhong Shanshan hits jackpot as water bottler's shares gain 54% in Hong Kong debut

HONG KONG -- Chinese water bottler Nongfu Spring's shares soared as much as 85% on their debut on Tuesday after the company's $1.1 billion initial public offering in Hong Kong attracted a record level of retail orders, bolstering the hopes of other Chinese companies waiting to sell shares.

Shares in the Hangzhou-based company ended the day up 54% at HK$33.10. The IPO was priced at HK$21.50 and the shares jumped to HK$39.80 at the opening of trade. The Hang Seng Index rose 0.1%.

The strong performance lifted the fortunes of founder Zhong Shanshan to the top ranks of China's wealthiest.

Based on Nongfu's closing price, Zhong's 84.3% stake in the company was worth 312.6 billion Hong Kong dollars ($40.33 billion). He also controls drug company Beijing Wantai Biological Pharmaceutical Enterprise which went public in Shanghai earlier this year. His stake in Wantai, whose shares have climbed quickly, was worth 64.04 billion yuan ($8.26 billion) at Tuesday's closing price of 196.51 yuan.

According to the Forbes Real-Time Billionaires List and the Bloomberg Billionaires Index, the only Asians with a higher net worth are Reliance Industries boss Mukesh Ambani, Alibaba Group Holding founder Jack Ma and Pony Ma, chairman and CEO of Tencent Holdings.

While Nongfu's IPO attracted orders for 60 times the shares on offer to institutional investors, the allotment for retail investors was increased after their portion of the offering was oversubscribed 1,147 times, according to listing documents. The retail subscriptions amounted to HK$677 billion, a record for the Hong Kong Stock Exchange.

"Key here is that there are good profits in water," said Andrew Sullivan, a director at Hong Kong brokerage Pearl Bridge Partners. "For other IPOs, it shows that retail has money to invest, so that is positive. The brokers still have plenty of margin finance to offer, so that helps, too."

The previous record for retail subscriptions was set by China Railway Construction Corp. in 2008. Its IPO drew HK$540 billion in orders.

The overwhelming retail interest in Nongfu soaked up so much cash that the cost of short-term funds, as represented by the one-month Hong Kong Interbank Offered Rate, or HIBOR, surged to a two-month high on Sept. 1.

HIBOR has since eased as investors begin to get refunds on the unfilled portion of their orders. Nongfu had initially set aside 27 million shares, or 7%, of its 388.2 million share IPO for retail investors but their allotment was raised to 27% of the offering. Retail investors will each get from 0.14% to 12% of the shares they ordered.

Nongfu's opening will likely embolden companies gearing up to sell shares in Hong Kong, especially after KFC operator Yum China's secondary listing drew fewer bids than expected.

Twenty-four companies, including Alibaba Group Holding affiliate Ant Group, have filed for listings in Hong Kong since Aug. 1, and an equal number have made their debut on the Hong Kong Stock Exchange in the past two weeks.

Already 80 companies, including online retailer JD.com and game developer NetEase, have raised a combined $22.5 billion through new listings on the Hong Kong exchange this year, according to Dealogic. The exchange lags only the New York Stock Exchange, the Nasdaq and Shanghai's Nasdaq-style STAR Market in total offerings this year.

Nongfu's net profit declined 18% in the first five months of the year, hurt by China closing broad swathes of its economy to contain the coronavirus pandemic. The company said its net profit margin for the year ended Dec. 31 stood at 20.6% more than double the water and soft beverage industry average in the mainland, according to its prospectus.

While the company trades at a 49% premium based on 2021 forward earnings to the median of its global peer group, which includes Coca-Cola and Campbell Soup, Nongfu's valuation becomes attractive when growth is factored, said Arun George, an analyst at Global Equity Research, which publishes on the Smartkarma platform.

On a 2021 price/earnings to growth ratio, Nongfu's IPO price places it a 63% discount to the group, he said. The PEG ratio determines the relative trade-off between the price of a stock, the earnings generated per share and the company's expected growth.

Nongfu's IPO had the support of five cornerstone investors who agreed to buy shares valued at a combined $320 million.

Fidelity International committed to purchasing $100 million worth of shares, Coatue Management put in $80 million, and GIC, the sovereign wealth fund of Singapore, agreed to buy shares worth $70 million. China Structural Reform Fund and Cct-CITIC Agricultural Fund together subscribed for $50 million of shares, while Japanese financial-services group Orix chipped in $20 million.

"Having good cornerstone investors means that the key institutions are not going to be early sellers," Sullivan said. "That gives retail more confidence."

All the cornerstone investors have agreed to not sell their shares for at least six months, the prospectus showed.

Nongfu, founded in 1996, has been the largest packaged drinking-water supplier in China since 2012, according to its prospectus, which cited research by consulting company Frost & Sullivan. Nongfu also makes bottled tea and juices.

The company plans to use proceeds from the offering for brand building, purchasing equipment and building production facilities, among other things, it said.

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