Hong Kong's next hot IPO banks on China funeral growth

HONG KONG Tue Dec 3, 2013 4:50pm EST

Floor traders work during afternoon trading at the Hong Kong Stock Exchange November 6, 2013. REUTERS/Bobby Yip

Floor traders work during afternoon trading at the Hong Kong Stock Exchange November 6, 2013.

Credit: Reuters/Bobby Yip

HONG KONG (Reuters) - When it comes to making a killing on the Hong Kong IPO market, buying into a cemetery custodian is not the first strategy which springs to mind.

But in China where tending to the dead can involve vast sums of money depending on the family's circumstances and appetite for pomp, one such share sale has piqued the interest of investors big and small.

According to a term sheet seen by Reuters, Fu Shou Yuan International Group Ltd is seeking to raise about $200 million through a listing in Hong Kong as the Shanghai-based death care company builds more cemeteries in an economy with a rapidly graying population.

The initial public offering is a chance for investors to bet on a rise in the value of graves and in revenue from funerals and burials, in a country where average income per person in urban areas has soared in recent years.

Fu Shou Yuan estimates that 180 million of China's 1.4 billion people are over the age of 60, rising to 200 million in two years' time, said a person familiar with the IPO who declined to be identified because details are not yet public.

The IPO pales in comparison to Hong Kong's biggest of the year - the $2.5 billion IPO of China Cinda Asset Management Co Ltd, to be priced later this week - but has attracted the attention of global private equity firm Carlyle Group LP (CG.O).

Carlyle has held talks with Fu Shou Yuan, a Carlyle spokesman said, declining to comment on whether the U.S. firm will invest.

"The (IPO) market is now focusing on companies with a special business model," said Jasper Chan, corporate finance officer at Phillip Securities, which offers margin loans for small investors looking to buy into new listings in Hong Kong.

"This is probably going to be the hot one of the coming IPOs," said Chan, referring to Fu Shou Yuan.

The company began gauging demand for the IPO on Monday, with a launch date set for December 9.

Privately owned Fu Shou Yuan will join a small group of listed companies in the Asia-Pacific region that offer funeral services or own cemeteries, such as Anxian Yuan China Holdings Ltd (0922.HK) and Midas International Holdings Ltd (1172.HK) in Hong Kong, Lung Yen Life Service Corp (5530.TWO) in Taiwan and InvoCare Ltd (IVC.AX) in Australia.

REAL ESTATE PLAY

China's death care industry was worth 46.5 billion yuan ($7.63 billion) last year and will grow 18 percent a year through 2017, according to a report by market researcher Euromonitor. Burial services accounted for about half, product sales and services covered 25 percent, and funeral and disposal services made up 20 percent.

Anxian Yuan, in its interim report last month, pointed to burials as pushing profit. "As the population of China continues to age and per capita income to increase, the board believes that there is an upward trend in the demand for cemetery services."

China's funeral services industry suffers from a limited supply of new city cemetery land as well as complex regulations. For investors, Fu Shou Yuan could be a real estate play too, with the value of grave sites rising 10 percent every year for the past decade, according local media estimates.

A six-by-six meter plot at Fu Shou Yuan's Shanghai cemetery can cost as much as 500,000 yuan at the top end, including the tombstone and other services.

Fu Shou Yuan has six cemeteries, conducts nearly 60 percent of its business in Shanghai, and is in the process of obtaining licenses in Beijing and Shenzhen, said a separate person familiar with the IPO.

The company plans to use 52 percent of the proceeds to develop new cemeteries, according to the term sheet. It will use 20 percent to buy funeral facilities and cemeteries, 15 percent to set up new funeral facilities, and 10 percent for working capital.

Citigroup Inc (C.N) is the sole sponsor and global coordinator of the offer, the term sheet showed.

($1 = 6.0929 Chinese yuan)

(Additional reporting by Stephen Aldred and Grace Li in HONG KONG and Huang Yan in BEIJING; Editing by Denny Thomas and Christopher Cushing)

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