* IPO priced below mid-point of marketing range
* YST Dairy to use proceeds to build five new dairy farms
* Shares to debut on Nov. 26 in Hong Kong
HONG KONG, Nov 21 (Reuters) - YuanShengTai Dairy Farm, China's fourth biggest raw milk producer, priced its $425 million Hong Kong IPO near the low end of expectations, leaving some room for gains in its debut, sources familiar with the deal said on Thursday.
The IPO was the second in Hong Kong in two months from a dairy company and comes amid a surge in capital markets activity in the dairy industry in Greater China, with $4.6 billion of mergers and acquisitions and equity deals in 2013.
The year is shaping up to be the busiest ever for both M&A and equity issuance in the Asia ex-Japan region, according to Thomson Reuters data, as investors bet on booming demand in China.
Huishan Dairy, the country's second-biggest raw milk producer, raised $1.5 billion in an IPO in September, with other large transactions including China Mengniu Dairy Co's $1.6 billion takeover of Yashili International Holdings Ltd in June.
Growing demand for milk and other dairy products has spurred other deals around the world, including a $1.1 billion IPO last month by Mexico's largest dairy producer, Grupo Lala SAB de CV , and an ongoing takeover battle for Warrnambool Cheese and Butter Factory Co in Australia.
"There are many positive drivers for the industry," said Anson Chan, an analyst at KGI Securities in Hong Kong.
The IPO got a last minute boost after the Chinese government unveiled major economic reforms last week, including allowing millions of families to have two children in the country's most significant liberalization of its strict one-child policy in about three decades.
The move helped stoke a rally in companies that make baby products and infant milk formula makers.
YuanShengTai, also known as YST Dairy, ranks fourth among raw milk producers in China, with nearly one-third of the output of China Modern Dairy and less than half the production of Huishan Dairy.
YST Dairy priced the IPO at HK$2.70 per share, compared with the indicative range of HK$2.49-HK$3.18, said the sources, who were not authorized to speak publicly on the matter. It offered 1.22 billion shares in the IPO, putting the deal value at HK$3.29 billion ($425 million).
The deal was priced at a 2014 price-to-earnings ratio of 17 times, compared with a 20 times P/E for Huishan Dairy and 19 times P/E for Modern Dairy.
"Given that it's a smaller scale, it has higher execution risk, so it's understandable why investors would demand a lower price to give them more upside and give them a safety cushion," KGI's Chan said.
YST sells all of its raw milk to five companies, including China's three largest dairy processors, China Mengniu Dairy Co Ltd, Inner Mongolia Yili Industrial Group Co Ltd and Bright Dairy & Food Co.
Mengniu, China's largest dairy company, agreed to buy $60 million worth of YST Dairy as a cornerstone investor in the IPO.
The YST Dairy deal received strong demand towards the top end of the range on positive sentiment for China's dairy sector in recent months, people familiar with the matter told Reuters previously. Huishan Dairy has gained 16 percent since going public in late September after a disappointing start.
Huishan fell about 10 percent on its debut and that probably encouraged underwriters to price the YST Dairy IPO more reasonably so as to leave some room for a first-day pop, the people added. The deal was slated to be priced on Wednesday, but it took a bit longer to convince the company on the pricing, they said.
YST said it plans to use 75 percent of proceeds from the IPO build five new farms, which it expects to be completed by the end of 2015. Another 15 percent will be set aside to develop a so-called upstream business, or feed farms, to secure a stable supply of corn for its cattle, while 10 percent will be used for working capital.
The company expects to spend 1.38 billion yuan ($226.5 million) through the end of 2015 on investments in the new farms and plans to increase its herd of dairy cows to 100,000 by 2017 from nearly 39,000 in June 2013.
YST Dairy said revenue jumped to 689.1 million yuan ($113 million) in 2012 from 148.8 million yuan the previous year, while profits rose to 209.7 million yuan from 189.9 million yuan over the same period.
In the first half of 2013, revenue rose 18 percent to 385.1 million yuan from a year earlier, while profit dropped 6.1 percent to 99.6 million yuan, it added.
Credit Suisse and Macquarie Group acted as joint global coordinators of the IPO.
The banks stand to earn as much as $14.9 million, equivalent to up to 3.5 percent of the proceeds, in commissions and incentive fees.