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Should Investors Buy into China Feihe Shares After Its IPO?

It hasn’t been the best year for IPOs in Hong Kong, with many companies opting to wait out civil unrest and the ongoing US-China trade war. 

That said, recently things have started looking better as large companies return to the Hong Kong market with listings in mind. One such company is China-based baby formula producer China Feihe Ltd.

The company aims to raise US$1.14 billion through its IPO on the Hang Seng index. Nearly 90% of the offering will go to global investors, with 10% going to retail investors. Those shares will begin trading on 13 November. Various news outlets have said that Feihe has ended up pricing its shares at the low end of its proposed range, meaning it could end up raising US$855 million.

Regardless of the eventual pricing, the important question for investors remains; is Feihe worth buying after it lists? Here are a few things for investors to consider before thinking about putting money into China Feihe.

China’s declining birth rate not bad news

Feihe is a dominant market player in China, holding over 15% of the total market. This heavy reliance on the Chinese market has some investors worried, especially considering that Chinese consumers are having fewer children. 

In 2018, new births in China declined to 15.23 million, marking the lowest birth rate China has seen since the rollback of the one-child policy in 2014. Rising living costs and an uncertain economic situation have caused many young Chinese families to put aside the idea of having children for now. 

At first, this looks like it could spell disaster for a baby milk producer like Feihe. But the truth is, it’s not as bad as it looks. 

While the overall birth rate in China has dropped, the amount the middle class is spending on their children is increasing. The Chinese baby milk market is expected to be worth RMB 19 billion (US$2.7 billion) by 2023. Consumers in China are willing to spend more on higher-end products. 

Feihe is in a unique position to capitalise on this trend given the company’s products are considered high-end. Its leading spokesperson, Chinese actress Zhang Ziyi, allows it to appeal to the upper- and middle-class markets. 

This is feeding through to its financials. Feihe saw revenue grow by 60% year-on-year in 2017 while the sales of its high-end products jumped by 10%. 

Feihe best bet versus foreign brands 

The Chinese baby milk market hit a considerable bump in 2008 when melamine was found in baby formula produced by domestic companies. After the scandal, Chinese parents turned to international baby milk producers. Feihe weathered this scandal remarkably well. 

The company never produced products with melamine and restructured many of its facilities to boost efficiency and transparency. The company has unique processes in place to ensure that all milk products are tightly regulated and processed promptly. 

This has helped it gain the trust of Chinese consumers and more importantly has positioned it to compete against international baby milk producers on the Chinese market. Dominant international baby formula makers have seen their market share fall from 70% to 50%. 

Looking strong 

Considering the ongoing US-China trade war and China’s focus on growing its domestic companies, investing in a China-based baby milk producer that focuses on the local market seems like a given.  

Feihe is a unique company in that it has already positioned itself to compete with international companies. Beyond that, catering to the middle-class and upper-class Chinese market has allowed the company to thrive even with China’s declining birth rate. 

All of these factors considered, Feihe looks like a solid long-term play for any investor interested in China’s rapidly-growing domestic infant-milk market.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alex Perry doesn't own shares in any companies mentioned.