Trinity shows IPO fatigue doesn't extend to all deals

Trinity Limited yesterday priced it initial public offering near the top end of the offering range at HK$1.65 per share, which allowed it to raise HK$745.7 million ($96 million) ahead of its Hong Kong listing on November 3.

With strong demand from both retail and institutional investors, the small-cap retailer of high-end and luxury menswear in Greater China showed no symptoms of the IPO fatigue that appears to have affected the property IPOs that are in the market and which resulted in one of those four deals being withdrawn yesterday and another one hanging in limbo as of last night (see separate story on our website today).

In stark contrast, the Trinity IPO was 14 times covered overall, while the retail tranche was more than 50 times subscribed, triggering a clawback that increased the size of the retail tranche to 40% from 10% initially.

While small, Trinity offered a welcome alternative to the deluge of Chinese property developers in the market. The company manages six international menswear brands, including Cerruti 1881, Gieves & Hawkes and its self-owned Kent & Curwen brand, and is a direct play on the expected growth of domestic retail spending in China and the general economic growth story. The 8.9% GDP growth in China in the third quarter (up from 7.9% in the second quarter) that was reported last Thursday served as a reminder of the potential that lies in that market.

Euromonitor estimates that the overall 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.

However, the fact that the company is controlled by the brothers behind Hong Kong-listed supply-chain manager and sourcing agent Li & Fung may have been just as important in attracting investors to the deal. Victor and William Fung will hold 40.9% of Trinity at the time of listing, while pre-IPO investors, including management shareholders, will hold about 29.1%. And on top of that, the listing also had the backing of another top name -- Temasek -- that acts a bit like a magnet in terms of pulling other investors into the deal. The Singapore investment fund came into the offering as a cornerstone investor, taking $15 million worth of shares.

Trinity offered 451.9 million shares, or 30% of its total outstanding share capital at a price between HK$1.30 and HK$1.71. Some 67% of the shares were new, while the remainder were sold by a vehicle owned in equal parts by the Fung brothers. There is also a 15% greenshoe, made up of all new shares, which could increase the maximum proceeds to as much as $115 million. Sources say the deal could have priced at the top, but in light of the poor trading in the secondary market for many of the recent Hong Kong IPOs, the management chose to leave a little bit on the table for investors. The final pricing of HK$1.65 was still close to the top end though, and values the company at 12.7 times next year's earnings.

That compares with an IPO valuation of 12 times forward earnings, post shoe, for China Lilang, another Chinese menswear company that listed in Hong Kong in September. The latter focuses on the mass market, especially in second-, third- and fourth-tier cities, but having come to market so recently it was still looked at as something of a comparable. Since its listing on September 25, Lilang has fallen 10% and is now trading at a 2010 price-to-earnings multiple of 10.8 times.

Trinity is, however, coming to market at a significant discount versus Ports International, a women's designer and retailer with a strong brand that 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 forward earnings.

The order book was covered on the first day and significant orders were received from both investors attending one-on-one meetings during the seven-day roadshow and from investors already holding stakes in other companies within the Li & Fung group. Asian investors were responsible for about 93% of demand, with the remaining 7% generated from Europe.

Citi and J.P. Morgan acted as joint bookrunners.

Trinity currently has 353 retail stores in Greater China, as well as 37 retail stores in Korea and Southeast Asia under a joint venture with Ferragamo. 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. The company 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 control the quality.