CHINA Youran Dairy Group raised about HK$5 billion (US$643 million) in its Hong Kong initial public offering (IPO) by pricing its shares at the bottom of an indicated price range at HK$6.98 each, according to two sources with direct knowledge of the matter.

The company had flagged its shares would be priced between HK$6.98 to HK$8.66 each, according to regulatory filings when the deal launched Monday last week.

At the top of that range, Youran Dairy would have raised US$800m.

The demand from investors was weaker than anticipated because the dairy industry was not seen as a hot sector, according to one source with direct knowledge of the matter.

Investors were also concerned about the risk of a potential stock overhang that could be created if US$460 million worth of convertible notes issued in November to pre-IPO investors are swapped into shares over the next two years.

Those investors were led by PAG, Bain Capital, Bank of China and Industrial and Commercial Bank of China, according to Youran Dairy’s prospectus.

“Hard to pitch to investors in Youran Dairy knowing that down the road there will be another chunk of shares coming up,” said Toh Zhen Zhou, analyst at Aequitas Securities, who publishes on the Smartkarma platform.

“So even if I really liked the company and valuation was reasonable, I would scale back your position in the IPO bookbuilding. The book runners are obviously aware of this, hence the bottom-end pricing to entice investors.”

The share sale attracted two cornerstone investors, Citic Prudential and Harvest Private Wealth. The firms agreed to subscribe for a combined US$50 million worth of the offered shares, based on the mid-point of the price range.

Youran Dairy, backed by private equity firm PAG, was spun off from Inner Mongolia Yili Industrial Group. (SD-Agencies)