Chinese mass-market apparel designer and manufacturer, Shanghai La Chapelle Fashion, has raised HK$1.69 billion ($219 million) after pricing its Hong Kong initial public offering at the bottom of its indicative range on Tuesday.
The deal comprised 121.579 million primary shares at HK$13.98 per share, with an additional 17.62 million shares, or 14.5% of the greenshoe also allocated. CICC is global co-ordinator, with CLSA as joint bookrunner.
Despite having a strong growth story, the deal struggled against the backdrop of difficult market conditions in Hong Kong, with the Hang Seng Index down every day bar three over the past three weeks. As a result, the retail order book closed undersubscribed and was allocated 9.5% of the deal.
The remainder of the deal was taken up by two cornerstone investors and a large number of high net worth accounts and corporates. There were over 100 accounts in the book as per Hong Kong regulations, but very little institutional participation.
The two cornerstones comprise Chow Tai Fook and Senda International. Together, they took $50 million of the deal and are subject to a six-month lock-up.
Trading will begin on October 9.
Pricing benchmarks
A second factor influencing demand was the deal's valuation and a lack of much water between syndicate fair value forecasts and the actual price range. On a 2014 basis, the deal was marketed at about 9.5 times to 12.5 times earnings compared to fair value estimates of 10 to 14 times.
On a 2015 basis, it has been priced at about 8.2 times. This puts the company at a steep discount to global comps active in China as well as local comps.
Spain's Inditex and Japan's Fast Retailing (Uniqlo) are both trading in the high double digits. The former is currently valued at 26.6 times 2015 earnings and is down roughly 17% so far this year.
Fast Retailing, which is also listed in Hong Kong is currently valued at 39.7 times 2015 earnings and has been fairly range-bound since June.
There are no direct Chinese comparables, although shoe manufacturer and retailer Daphne International and casualwear manufacturer Shenzhou International are good proxies. The former is currently trading at 13.5 times 2015 earnings and has been on a rising trend since late June.
Shenzhou International is also trading in the mid-teens at 13.3 times 2015 earnings and has been on an uptrend since the beginning of August.
Pre-IPO investors
Existing pre-IPO investors Goldman Sachs and Legend Capital did not sell down through the IPO, a potentially strong indicator of their belief in the company's continued earnings momentum.
Goldman paid Rmb300 million ($48.78 million) for a 5% stake in 2010. Legend Capital, a second subsidiary of Lenovo's parent Legend Holdings, held 23.75% pre-IPO.
Both bought into the company just as it was on the cusp of extremely strong growth. This has propelled it up the charts of China's largest mass-market retailers over the past three years, leapfrogging local rivals.
Revenue doubled between 2011 and 2012 and almost performed the same feat again between 2012 and 2013. However, in the first six months to June 2014, this showed signs of slowing, with revenues up 25.4% year-on-year to Rmb3.5 billion ($570 million).
Likewise, profits were up 36.4% year-on-year to Rmb230.6 million ($37.5 million), compared to 83.6% in the 2013 financial year.
Much of La Chapelle's growth has been generated through the opening of new concessions in department stores across China. The number of retail points has tripled since 2011, rising from 1,841 to 5,672 in 1,900 locations as of June.
The company plans to open a further 1,000 retail points over the next three years. This also marks a slowdown and as it moves further down the value chain, La Chapelle may face similar problems to previous fast-growing consumer brands, which have had to restructure underperforming stores.
Yet, La Chapelle has been able to maintain high gross profit margins around the 69% to 70% mark over the past three years. Euromonitor also says Chinese mass-market retail ladieswear sales should continue to notch up a CAGR of 12% through to 2018.
The research group further argues that local brands are far better placed to increase their market share given their local knowledge and expanding distribution networks. And La Chapelle's impact on the league tables has been undeniable in this respect.
In 2011, it ranked as China's seventh largest mass-market retailer with a market share of 1.4%. By the end of 2013, this had grown to 3.8%, placing it third behind Denmark's Bestseller group on 15.1% and Korea's E.Land Group on 4.6%.
In the process, La Chapelle overtook foreign rivals such as Spain's Inditex and Japan's Fast Retailing (Uniqlo), as well as local firms such as Trendy Group and Ningbo Peacebird.
La Chapelle has historically been strongest in ladies apparel and in this sector it currently has a 5.7% market share, again behind Bestseller and E.Land. In 2013, the company moved into menswear and childrenswear for the first time and hopes the two new sectors will provide further growth momentum over the next few years.
One cloud hanging over the entire Chinese apparel sector is domestic wage inflation. Currently running in the low double digits, it is outpacing reductions in raw materials costs.
Local manufacturers that produce clothes for export markets have increasingly moved factories offshore to lower cost countries such as Vietnam and Bangladesh. La Chapelle does not produce clothes fo export and during roadshows its management said this will not change as the company intends to concentrate on improving its brand awareness and retail distribution network in China.
Other China-oriented companies in a similar position have responded to rising input costs by improving their speed to market and production efficiency to keep margins at current levels.
