Liquid soap lubricates Chinese IPO gold rush

Nongfu Spring

09/12/2020 02:03

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Yawen Chen
    HONG KONG, Dec 9 (Reuters Breakingviews) - Following booze
and bottled water, liquid detergent is the latest consumer
initial public offering poured onto Hong Kong's foamy market.
Hillhouse-backed Blue Moon  6993.HK  is seeking to raise $1.3
billion, touting market dominance and high margins. Competition
and rising material costs will put pressure on both.
    The float is will-timed. Blue Moon cut its teeth during the
SARS outbreak in 2003, producing hand sanitiser. Now another
respiratory epidemic is in town, and makers of anything
associated with cleanliness are thematic favourites. Blue Moon
now focuses on liquid detergent, having cashed in as Chinese
consumers switched from soap and powder. It now derives nearly
90% of revenue from that business, with nearly a quarter of the
Chinese market. 
    Investors have reason to be excited. The company’s gross
profit margin rose to 64% in 2019. That, plus the pandemic
atmosphere, helped it price at the top of its targeted range.
This values the firm at around somewhere between 24 and 31 times
2021 earnings, according to estimates cited by Refinitiv IFR, on
rough par with rival Procter & Gamble  PG.N . A recent history
of sharp first day pops in Hong Kong has some investors
wondering if there might be more upside. Bottled water maker
Nongfu Spring  9633.HK , for example, rose 85% on its first day
of trade in September. 
    On the other hand, sales growth has moderated lately,
slowing from 20% in 2018 to just 4% last year. Its profit margin
has been supported by lower raw material costs, in particular
palm oil and packaging material LDPE. But company expects
material prices to recover this year.    
    Slower growth reflects an increasingly crowded detergent
market, where Blue Moon contends with Zhejiang-based Nice Group,
which has a similar market share, according to a Frost &
Sullivan report. Half of the IPO proceeds will be spent on
marketing.
    A final worrying note: Blue Moon’s major shareholders have
been extracting cash from the company, paying themselves a
dividend of $300 million in June, equivalent to the last three
years’ net profit. That’s an odd way to show confidence in the
company’s future. Investors must hope governance stays clean.  
    On Twitter https://twitter.com/ywchen1
    
    CONTEXT NEWS
    - Blue Moon is planning to price its HK$9.8 billion ($1.3
billion) Hong Kong initial public offering at the top end of the
indicative price range, according to people close to the deal,
IFR reported on Dec. 9. That would put the company’s market
capitalisation at HK$75.6 billion.
    - Blue Moon is selling 747 million shares, or about 13% of
the enlarged share capital.  
    - In 2019, Blue Moon’s revenue was HK$7 billion while its
net profit was HK$1.1 billion, according to its prospectus.     
  
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SCMP article    https://www.scmp.com/business/banking-finance/article/3112523/hillhouse-backed-detergent-maker-blue-moon-seeks-us127
Blue Moon new listing information    https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1204/2020120400009.pdf
Blue Moon prospectus    https://www1.hkexnews.hk/app/sehk/2020/102083/documents/sehk20062900360.pdf
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 (Editing by Pete Sweeney and Katrina Hamlin)
 ((yawen.chen@thomsonreuters.com; Reuters Messaging:
yawen.chen.thomsonreuters.com@reuters.net))