Sumpo Food Holdings Ltd, a Fujian province-based chicken meat products supplier, expects to triple its production capacity with fresh capital raised from an initial public offering in Hong Kong to meet the growing demand of consumers and clients.

An official source in China reports that Sumpo Food, one of the suppliers to Kentucky Fried Chicken (KFC) and Dicos Fried Chicken on the mainland, said it is current capacity of slaughtering and processing up to 18 million broilers per year has already fallen short of demand from the fast-food restaurants as well as retailers.

"By raising funds from the Hong Kong listing, we are going to establish new breeder farms, hatching facilities as well as new broiler breeding farms to add another 36 million broilers in capacity each year," Sumpo Chairman, Lin Qinglin, said at a press conference yesterday, 29 December.

Sumpo Food is offering 400 million shares, 10 per cent of which will be through a public offering to individual investors with the remaining portion via placement to institutional investors, at a price of HK$0.60 to HK$0.80 per share. Assuming the over-allotment option is not exercised and based on the median offer price of HK$0.70 per share, net proceeds from the shares offer are estimated to be about HK$258 million, according to the term sheet.

Driven by improving living standards and growing income, the mainland market for meat consumption has grown steadily over the years, which leaves great room for the company to tap new business opportunities, said Mr Lin, who noted that the company's major clients such as KFC have been asking the company to increase the supply of chicken for some time now.

The mainland ranked number one in the world in terms of meat production during the period between 1990 and 2007, according to the China Animal Agriculture Association. In 2008, it imported 799,600 metric tons of chicken products from overseas markets.

Though the market potential is huge, Louis Wong, director of Phillip Securities, said it is not easy for chicken breeders to maintain steady profits as the business is prone to factors out of its control such as feed prices, bird flu and pork prices.

Mr Wong cited the example of Hong Kong-based DaChan Food (Asia) Ltd, KFC's biggest supplier on the mainland, which is in a similar line of business as Sumpo Food and has seen its profit slip since it went public in 2007.

DaChan earned $26.2 million in 2007 but profits shrank to $19.7 million in 2008 and $15.8 million in 2009. According to its interim result this year, profit of the company for the first half further contracted to $6 million. Mr Wong added that it is likely to post another profit decline this year.

According to the track record provided by Sumpo Food, the company's net profit stood at CNY44 million, CNY46 million and CNY59 million for the three years to 2009. The company earned CNY22.9 million in the first six months of this year.