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Avian Influenza
on July 1, 2009

Web Exclusive: Avian flu blunts China's DaChan share sale

Avian influenza affects initial public offering of shares of leading Chinese poultry company.

Mid-September saw DaChan Food, Far East-based manufacturer of poultrymeat, animal feeds and processed food, launch an international road show for the initial public offering (IPO) in Hong Kong, where it hoped to raise up to HK$930 million (US$119 million). The listing candidate was a Mainland-based subsidiary of Taiwan-listed DaChan Great Wall Enterprise and ranked the largest chicken slaughterer in China in 2005.

In the event, the IPO was somewhat inhibited by an outbreak of avian influenza (AI) a few days later in adjacent Guangdong province of southern mainland China, causing a cull of 153,000 birds, mainly ducks. DaChan Food was consequently unable to get maximum benefit from the current frenzied demand for IPOs in Hong Kong, leaving the offering priced just below top of the indicative range, according to reports from FinanceAsia.Com.

Sources said demand level was well above the number of shares being offered but the company wished to leave a little bit extra to ensure an improved aftermarket performance. Share price was thus fixed at HK$2.90, just 10 cents below the top of the range allowing DaChan to raise HK$899 (US$116 million).

DaChan Food derives much of its revenue from chicken meat production. Although no broilers were actually infected in the outbreak, the whole episode did focus on current problems facing this kind of business, especially in Asia. Sources claimed retail investors in particular had been reserved about this ‘offering’ and turned attention to the many other Hong Kong IPOs on currently on offer.

Seasoned observers said investors believed the company’s management was sound with clear objectives and good comprehension of future strategies to achieve maximum growth. With Kentucky Fried Chicken (KFC) and McDonald’s as clients they have every reason to feel confidence in DaChan. Nevertheless, investors are clearly concerned about AI and rising feed costs.

DaChan Food is the exclusive sourcing agent for McDonald’s in China, and supplies 33% of chicken used by KFC in China. In addition, it is the biggest processed food exporter for Ito-Yokado and 7-Eleven in Japan.

The company is in the top 10 animal feed producers for China, is the  second largest supplier of animal feed in Malaysia and the third largest in Vietnam.

For 2006, 59% of DaChan’s revenue was sourced from production of chicken meat with another 35% from animal feed. Processed food only accounted for 6% of income but this is expected to rise over the coming years. DaChan Food is looking to invest preferentially in the processed food division due to superior profit margins there, compared with production of raw materials such as livestock feed and poultrymeat. DaChan hopes to achieve this goal by investing over 50% of net IPO proceeds for increasing production capacity, particularly in its processed food division. 
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