Big names back small Trinity listing

Trinity Limited, a small-cap retailer of high-end and luxury menswear in Greater China that is controlled by the brothers behind Hong Kong-listed supply-chain manager Li & Fung, yesterday kicked off the roadshow for a Hong Kong listing of its own. Marketing will gather pace today with an investor luncheon in Hong Kong.

Offering an alternative to the deluge of Chinese property developers currently seeking a listing, Trinity is aiming to raise between HK$587.5 million and HK$772.8 million ($76 million to $100 million).

The company manages six international menswear brands in the Greater China region: Altea, Cerruti 1881, D'urban, Gieves & Hawkes and Intermezzo, which are all licensed (through long-term renewable contracts) from their respective brand owners; and its self-owned Kent & Curwen brand. By its own account, this gives it one of the largest high-to-luxury end menswear retail networks in Greater China. The group also has a number of joint ventures with Salvatore Ferragamo in South Korea, Malaysia, Singapore and Thailand.

Trinity is an obvious play on the expected growth of domestic retail spending in China, which is driven by macro themes like economic growth in general, urbanisation, a growing middle class and improving disposable income. But, on top of that, menswear is also the fastest growing sector of the apparel market in China, according to business intelligence and data provider Euromonitor, with its share of the overall apparel market increasing to 46.1% in 2008 from 42.7% in 2006.

Euromonitor estimates that the overall market size of the men's high-to-luxury apparel market will grow at an annual rate of approximately 15% to 20% over the next few years.

One investor that has taken such views on board is Temasek. The investment firm owned by the Singapore government has agreed to invest $15 million in Trinity's initial public offering, which will account for between 15% and 20% of the total deal depending on the final price. Temasek has committed to keep the shares for at least six months.

Trinity is offering 451.938 million shares, or 30% of its total outstanding share capital. Some 67% of those shares are new, while the remainder will be sold by parent company LiFung Trinity, which is wholly owned by a vehicle owned in equal parts by Victor and William Fung. Sources say the primary reason why the Fung's are selling down their stake is to help improve the liquidity in the stock after listing. LiFung Trinity will hold about 40.9% of Trinity after the IPO (before a potential exercise of the greenshoe), while pre-IPO investors, including management shareholders will hold about 29.1%.

The 15% greenshoe, which is made up of all new shares, could increase maximum proceeds to $115 million. Citi and J.P. Morgan are the joint bookrunners.

The shares are offered at a price ranging from HK$1.30 to HK$1.71, which translates into a 2010 price-to-earnings multiple of 10 to 13.2 times, based on the bookrunner consensus.

This compares very favourable to Ports International, a women's designer and retailer with a strong brand that currently trades at about 20 times its projected earnings for 2010. According to sources, Ports is considered the closest comparable, but investors are also looking at other multi-brand managers like shoe manufacturer and retailer Belle International Holdings, which trades at about 21 times its forward earnings.

However, coming only a couple of weeks after another menswear company, China Lilang, listed in Hong Kong, Lilang will inevitably serve as a comparable of sorts, even though it focuses on the mass market, especially in second-, third- and fourth-tier cities.

Lilang priced its IPO just below the top end of the range at HK$3.90 per share, which allowed it to raise $151 million and valued it at a 2010 P/E ratio of 12 times post-shoe. If Trinity were to price its deal in the bottom half of its price range, it would come at a cheaper valuation than Lilang.

Since its listing on September 25, Lilang has traded mostly below its IPO price, however. Yesterday it closed at HK$3.79, which values it at 11.7 times next year's earnings.

According to its preliminary listing document, Trinity is projecting a net profit of at least HK$125.9 million, which represents a modest 8.7% increase from 2008 -- although, it does suggest that the company is on the right track after the second half of 2008 and first half of 2009 were negatively impacted by the global financial turmoil. Same-store sales slowed and a number of its stores suffered losses during this period, which prompted the company to close eight of its stores and slow the pace of new store openings in the first half of this year. Margins were also significantly affected with the operating margin narrowing to 12.7% in 2008 and 13% in the first half of 2009 from 18.8% in 2007 as the company offered discounts to its retail customers that were both deeper and lasted longer than normal. It was also forced to make higher provisions for inventories from previous seasons.

Still, the bottom line fell by only 3.0% in 2008 and in the July to September period this year, the same-store sales growth was up 13.9% for the group as a whole and 14.7% in mainland China alone, which suggests a turnaround is underway. The operating margin widened to 13.6% in the third quarter.

The company currently has 353 retail stores in Greater China, as well as 37 retail stores in Korea and Southeast Asia under the Ferragamo joint venture. All its stores are self-operated and located in high-end shopping malls and department stores. Because of its diversified brand portfolio, Trinity is typically viewed as an anchor tenant at these facilities, which among other things gives it good deals on rent. It intends to expand its retail network both by consolidating its market presence in China's first-tier cities and by increasing its presence in provincial capital cities and second- and third-tier cities to take advantage of growing disposable income levels and increasing urbanisation.

Aside from the retail stores, Trinity also manages the entire supply chain for all its brands, which helps to improve margins, although it does outsource the production of part of its clothing. However, the assembly and finishing of core products like suits, blazers, jackets, overcoats and pants are still done in-house so that it can keep control of the quality.

Of the net IPO proceeds, about 20% will go towards this retail network expansion, while 40% will be used for future acquisitions of additional brands or for set-up costs associated with the licensing of additional brands. Thirty percent will be used to repay parts of a bank loan and the remaining 10% will go towards general working capital.

Trinity's history as a retailer of licensed brands dates back to the 1970s, but it became part of the Li & Fung group only in 2006 when Victor and William acquired DDL Group and Green Group, together with certain manufacturing operations, from their respective shareholders and combined them into Trinity.

The IPO price will be determined on October 27 and the trading debut is scheduled for November 3.