Last week, Youran Dairy and its private equity owner PAG fell $156 million short of its goal to raise $799 million in the IPO.

The dairy company’s tepid trading start prolongs a subdued stretch for Hong Kong’s IPO market, following a red-hot first quarter and a blockbuster 2020.

By the end of May, the city’s bourse had raised nearly $15 billion, surpassing the $11.2 billion raised in the first half of 2020. But signs of a market slowdown are beginning to show. With the dairy firm’s listing, ten companies have gone public in the second quarter of this year, compared to 59 new listings during the same period last year.

Investors viewed Youran Dairy as a listing that could reinvigorate the Hong Kong bourse this quarter, but interest in the firm has been lukewarm at best.

IPO cooldown

Previous dairy IPOs in Hong Kong experienced weak debuts too, despite offering huge growth potential, says Oshadhi Kumarasiri, equity analyst at LightStream Research who publishes on Smartkarma. From 2010 to 2015, four dairy firms listed in Hong Kong with an average downside of 5% on their first trading day, he says.

Investors have shown a “lack of interest…towards the dairy sector in general,” says Kumarasiri. Compared to high-growth tech firms, dairy companies are relatively less attractive; digital enterprises generally have had much higher rates of return, a trend set to continue, says Edward Au, southern region managing partner at Deloitte China.

Bruce Pang, head of macro and strategy research at China Renaissance Securities, says it’s difficult to compare debut performances of companies in different sectors, but “there [are] concerns on recently-listed dairy firms’ profit visibility and sustainability, amid fiercer competition and consolidation in a sector with slowing revenue growth.”

The company declined to comment.

In addition to Youran Dairy, a string of Hong Kong debuts this quarter have failed to meet expectations.

Including Youran Dairy, half of Hong Kong’s ten Q2 listings saw their shares drop lower than their listing prices. Earlier in May, property management firm China Central Management raised $126.8 million, but its shares sunk 12% in its trading debut. In April, Zhaoke Opthamology’s shares fell nearly 15% on its first day of trading, while shares of SF Real Estate plunged 16.5% on day one.

The late May IPO of JD Logistics—the delivery arm of JD.com, a Chinese e-commerce and tech giant—raised $3.2 billion. But as a highly-anticipated blockbuster, its debut was weaker than expected, with its stock closing 3.3% higher on its first trading day.

Investors have tread more carefully in the last few months. Many have rebalanced their portfolios in terms of traditional companies versus high-growth, tech-focused firms in light of the risks associated with the sky-high valuations of the latter, says Au.

Valuations of high-growth, digital firms are expected to return to a “more reasonable level,” meaning valuations may fall, he wrote in an April Deloitte report.

Au added that the market was also evaluating the impact of China’s Big Tech antitrust crackdown, which also contributed to the quieter second quarter.

But on Wednesday, the Hong Kong listing of a niche company, a mainland China orthodontics firm, became this quarter’s top debut, showing initial signs of a re-warming market and positive investor sentiment towards smaller listings. Angelalign Technology, which manufactures ‘invisible’ braces, raised $374 million, and its shares skyrocketed 131% on the first day of trading.

Analysts had expected a strong debut from the braces manufacturer, given an “under-penetrated market, strong growth and solid financials. [It] also has a long track record with more than ten years in the market,” said Ke Yan, an analyst at Aequitas Research.

Even with the second quarter blip, Hong Kong’s IPO pipeline remains strong. Pang says he expects activity to “re-gather steam in the next several months, with the help of several eye-catching IPOs [ahead].” Wanda Light Asset Commercial Management, a unit of Chinese conglomerate Dalian Wanda, is expected to raise $3 billion and list later this year.

In the mood for dairy

Despite a less-than-scintillating debut, some analysts are taking note of Youran Dairy’s long-term, upside potential, given China’s growing dairy demand and supply shortfalls.

China’s raw milk production has increased by 2,000% since 1980. Production grew to 34 million tonnes in 2020, according to a 2020 PwC report, but that still left the country 30% short of meeting domestic demand. And the government is targeting a 50% increase in domestic production by 2025.

Founded in 1984, Inner Monglia-based Youran Dairy is already one of the top players in China’s upstream dairy market, producing raw milk and cattle feed. In 2015, it spun off from former parent firm Yili Group after PAG’s private equity investment. Yili is one of the top dairy processing companies in China.

The funds raised by Youran Dairy in its IPO will be used to increase its stake in production. It will spend three-quarters of its IPO proceeds to build and buy new farms. It currently operates 67 dairy farms with 308,195 cows. Another 15% will be used to increase its herd. The firm will import 20,000 black-and-white Holstein dairy cows from Australia and New Zealand over two years.

“We think Youran will go on to dominate the consolidated upstream dairy market. [This] could be an opportunity to buy Youran… at a bargain,” says Kumarasiri.