Tuesday, May 10, 2011

Sour Milk on the Market

By Isabella Steger

The sour trading debut of a?large Chinese milk producer is the latest sign of?trouble in the Hong Kong market for new share offerings.

China Modern Dairy Holdings Ltd., backed by private-equity?firm KKR & Co., sank 13% on its debut Friday, to 2.51 Hong Kong dollars, or 32 U.S. cents. That’s?down from its offer price of HK$2.89.

The retail?portion was only three times oversubscribed and the offer was set at the bottom of the indicative price range.

This is the second Chinese dairy company with foreign private-equity support to list in Hong Kong in recent months, and the second to founder after listing.?Infant-formula maker Yashili International Holdings Ltd. is backed by Carlyle Group, which helped the company clean up its act?following a tainted-milk scandal in which it was heavily embroiled, though that didn’t stop the company from dropping in its debut in?early November. It’s down?12% since listing.

Foreign investors have bet that efforts they’ve made to introduce quality control to China’s milk industry will help revive confidence and business after a major tainted-milk scandal in 2008 that sickened thousands of Chinese children and killed six.

China Modern Dairy’s fundamentals may merit a closer look, however. KGI Securities tells Dow Jones Market Talk that the company relies too heavily on one customer, China Mengniu Dairy Co. Nearly all of Modern Dairy’s raw milk – 95% — goes to Mengniu,?constituting 5% of?its supply. Nonetheless, the brokerage says the private-equity stakes might make the stock a good speculative investment.

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