• Yihai Kerry Arawana (YKA) rose 118% to Rmb56 per share yesterday (IPO price: Rmb25.7/share).
• This is not reflected in Wilmar's share price, which fell 6.4%, suggesting that the holding company is underappreciated with its trailing market cap.
• We continue to think Wilmar represents a cheaper and more liquid entry into YKA and the gap will likely narrow — favouring Wilmar. Reiterate ADD.

YKA Share Price More Than Doubled on First Day of Listing

• Wilmar (SGX:F34)’s 90%-owned subsidiary Yihai Kerry Arawana (YKA, 益海嘉里金龙鱼粮油食品股份有限公司)’s share price more than doubled in its first day on the ChiNext board. YKA’s shares closed up 118% yesterday, at Rmb56 per share, compared with its IPO price of Rmb25.7 per share, after spiking to Rmb62.65 in the last half hour of trade.
• YKA’s share sale surpassed CGN Power Co.’s RMB12.6bn yuan listing in 2019 to be the largest IPO ever in Shenzhen, according to data compiled by Bloomberg. To recap, YKA’s IPO raised RMB13.9bn yuan (US$2.06bn) via issuance of 10% new shares.

Possible Reasons for Contrasting Performance in Wilmar’s Price

• However, this is not reflected in Wilmar's share price which slumped 6.44% yesterday, although Yihai Kerry Arawana’s (YKA) share price exceeded our blue-skies scenario analysis for Wilmar prior to the listing. This came as a surprise to us as, in most instances, the share price of the holding company tends to react positively to a successful listing of its key subsidiary as the exercise helps unlock the value of its key businesses.
• We are of the view that the contrasting performance between Wilmar and YKA’s share prices could be due to a share overhang from the earlier placement of 2.68% of Wilmar’s total shares by one of its largest shareholders, Archers Daniels Midland (ADM), at S$4.40 per share in Aug. Investors who took the placement may have sold Wilmar’s shares to lock in quick trading gains when Wilmar's share price recently surged to as high as S$4.74 per share on the news of the China IPO.
• Also, some investors may have taken the view that the YKA IPO was the sole catalyst driving the re-rating of Wilmar, following which, the interest in Wilmar’s shares may subside.

Wilmar Offers a Cheaper Entry Into YKA, as Well as Higher Liquidity

• We think the negative share price reaction could be temporary and the listing of YKA is a long-term positive as it allows investors to better appreciate the true value of Wilmar’s businesses in China. At the same time, it will allow YKA to grow at a faster rate in China.
• To put things in perspective, the market capitalisation of YKA is Rmb303.6bn (US$45.5bn) against Wilmar’s current market capitalisation of US$20.3bn. Stripping out Wilmar’s 90% stake in YKA (post-listing) at the IPO price, it suggests that investors are paying -US$20.6bn for the rest of Wilmar’s assets (ex-YKA), which generated a net profit of US$593m in 2019 — suggesting an underappreciation of Wilmar’s businesses.
• From a valuation perspective, Wilmar trades at a forward P/E of 16x against YKA’s 68x. We think the valuation gap will narrow, favouring Wilmar, and reiterate our ADD call with an SOP-based Target Price which values YKA at a P/E of 26x.
• Key catalysts are better-than-expected 3Q earnings, due to strong CPO prices and crushing activities, a potential special dividend payout and rising interest in Wilmar as a cheaper and more liquid entry into YKA.

Source: CGS-CIMB Research - 16 Oct 2020